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Employee versus Independent Contractor

Published April 2, 2015 (last updated on April 18, 2024) | Adam Wyatt - Content Writer

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Employee vs Independent Contractor

The difference between an independent contractor and an employee is not always clear cut.  The relationship between you and your employee is a contract of service, but the relationship between you and an independent contractor is a contract for service. The differences are subtle, but important.

An employee usually works as the employer directs them. A contractor runs their own business and provides a service,  usually works the hours required to do a task, and has a high level of control over the way they work. But even these factors are not necessarily enough to determine whether someone is an employee or an independent contractor.

A court or tribunal looks at the full picture (totality of the relationship) and all possible factors (a multi-factor test) including:

  • The degree of control over how and when the work is done

  • Hours of work

  • Expectation of ongoing work

  • Assumption of financial risk

  • Who provides tools and equipment

  • Method of payment

  • Leave entitlements

  • Ability to work for other companies

  • Right to delegate or subcontract

If you incorrectly represent to your worker the nature of the relationship between you and that worker, under the Fair Work Act 2009 (the Act) this could be a sham contracting arrangement.

Contractor vs Subcontractor

While the terms contractor and subcontractor are similar by name, there are key differences regarding how these roles function and the nature of their agreements.

As contactors are businesses, they generally negotiate the scope of work, which may include a project timeline, hours of work, services provided and method of payment.

Due to the wide scope of some projects, contractors often rely on subcontractors to complete specific tasks they are unable to do, but they are generally still responsible for delivering the whole completed project to their client. For example, a building contractor may hire a roofing subcontractor to restore the roof on a home renovation project.

With this situation, a subcontractor agreement exists between the subcontractor and contractor which sets out the terms of the arrangement between contractors.

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Contractor Services

Independent contractors have the freedom to negotiate prices and the terms of the engagement of their services.

Because independent contractors run their own business, they don’t get the benefits that employees do. Employees work to the directions of their employers and receive entitlements from their employer such as leave, allowances and loadings, depending on the circumstances, which an employer has to manage and record. You can manage and keep track of employee rosters, timesheets, leave and absenteeism,  and store employee profiles, wage and time records and related documents securely in the cloud with BrightHR.

Contractor Rights And Protections

Even though Independent Contractors run their own business, they still have workplace rights that are protected under the Act. The general protections protect both the independent contractor who has already been engaged and the person who has engaged them to provide services (the principal) as well as the contractor the principal proposes to engage. The independent contractor and proposed contractor are protected from coercion, adverse action, and abuses of freedom of association if they exercise a workplace right or engage in industrial activities.

Workplace rights for Contractors include any responsibilities they may have under a workplace law. Contractors can make a complaint or enquiry, or initiate a process or proceedings under a workplace law to seek compliance with it.

Adverse action is taken by the principal against a (proposed) independent contractor if the principal threatens to or takes action for exercising a protected right (for example a workplace right or the right to engage in industrial activity) by:

  • refusing to engage the independent contractor or terminating the contract

  • discriminating against the independent contractor in the terms or conditions on which the principal offers to engage the independent contractor

  • injuring the independent contractor in relation to the terms and conditions of the contract

  • changing the position of the independent contractor to the independent contractor’s disadvantage

  • refusing to make use of, or agree to make use of, services offered by the independent contractor, or

  • refusing to supply, or agree to supply, goods or services to the independent contractor.

Though bear in mind the principal is protected from the independent contractor if the principal exercises a right under a workplace law, and the independent contractor threatens to or takes action by:

  • ceasing work under the contract, or

  • taking industrial action against the principal.

Sham Contracting

The Act protects employees from sham contracting. Sham contracting is when an employer misrepresents the nature of the relationship between the worker and the business i.e. that the worker is an independent contractor when, in fact, they are an employee.

While some sham contracts are unintentional, (eg an employer misunderstands the employment arrangement), the mistake has significant ramifications insofar as it can impact leave accrual, penalty rates and notice of termination. To make it easier, BrightHR can help you keep track of employee entitlements.

Engaging in sham contracting is prohibited under the Fair Work Act 2009 and penalties may be applied in the event of contravention. Under the sham contracting provisions act you are not allowed to:

  • Claim an employee as an independent contractor

  • Force an existing employee to become an independent contractor

  • Dismiss or threaten to dismiss an employee if they refuse to become an independent contractor.

  • Dismiss or threaten to dismiss an employee in order to engage them as an independent contractor to do the same work.

  • Mislead an employee in order to persuade them to perform the same (or mostly the same) work as an independent contractor.

As an employer it is important that you understand the common factors that determine whether a person is an employee or independent contractor. Keep in mind there is no single deciding factor, and each case is approached differently to decide if a contract is one of employment or independent contracting.

Below are some of the most important factors to take into account:

  • How much control the employee has over the work they do

  • the right to delegate work to another

  • The right to perform work for other companies

  • Whether the arrangement is ongoing work or requires a specific task

  • Who provides tools and equipment

  • Payment methods

  • Leave entitlements

Please note the above list is not exhaustive.

You can call the FairWork Helpline for Employers by Employsure to help you better understand the differences between contractors or employees. Call for free initial advice on 1300 651 415.

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The information in the above article has been compiled on the basis of general information current at the time of publication. Please note that the contents of this article and website and any information provided by our Fair Work Help Line do not constitute legal advice and are not intended to be a substitute for legal or other professional advice and should not be relied upon as such. Your specific circumstances or changes in circumstances after publication may affect the completeness or accuracy of this information. You should seek legal advice or other professional advice in relation to any particular matters you or your organisation may have. To the maximum extent permitted by law, we disclaim all liability for any errors or omissions contained in this information or any failure to update or correct this information. It is your responsibility to assess and verify the accuracy, completeness, currency and reliability of the information on this website, and to seek professional advice where necessary. Nothing contained on this website is to be interpreted as a recommendation to use any product, process or formulation or any information on this website. For clarity, Employsure does not recommend any material, products or services of any third parties. 

Frequently Asked Questions

Do I Have to Pay my Contractors’ Super?

This enquiry should be directed to the Australian Taxation Office.

What Is An Independent Contractor In Australia?

Independent Contractors are different to Employees. Independent Contractors run their own business and are engaged to provide a particular service. They generally use their own tools and methods to complete the work in their own time. They are able to negotiate their own fees and working arrangements and can work for more than one client at a time, or delegate work to others.

What Is The Difference Between An Employee And An Independent Contractor?

There are many factors which contribute to determining what makes an employee and an independent contractor. Generally, an employee performs work under the direction and control of their employer on an ongoing basis. The employer determines the hours, work location and how work is done. Independent contractors run their own business and provide agreed services under a contract for those specific services. They usually negotiate their own fees and working arrangements, use their own tools and can work for more than one client at a time. 

Is It Better To Hire An Employee Or An Independent Contractor?

Whether you hire an Independent Contractor or engage an employee will depend on your particular circumstances, including the nature of your business and the task or project you want completed.

How Many Hours A Week Can An Independent Contractor Work?

An Independent Contractor can set their own hours and will generally work the necessary hours to get the job done within the agreed timeframe.

Do Independent Contractors Have Any Rights?

Independent contractors have rights under the contract for services in Contract Law, but they are protected from coercion, adverse action and abuses of freedom of association under the Fair Work Act.

Is Sham Contracting Illegal?

Yes. A sham contracting arrangement occurs where an employer attempts to disguise an employment relationship as an independent contractor arrangement. The most common reason for doing this is to avoid paying employee entitlements.

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