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Who is an employee? Who is an independent contractor?

There are a number of factors which may contribute to determining the difference between an employee and an independent contractor. However, it is important to note that no single indicator can determine if a person is a contractor or an employee. Each determination is based on the individual merits of the work arrangement in place. Courts always look at the totality of the relationship between the parties when determining the status of a person’s employment.

There are some common indicators when determining whether a person is an employee or independent contractor:

Degree of control over how work is performed

  • an employee performs work, under the direction and control of their employer, on an ongoing basis
  • an independent contractor has a high level of control in how the work is done.

Hours of work

  • an employee generally works standard or set hours (note: a casual employee’s hours may vary from week to week)
  • under agreement, an independent contractor decides what hours to work to complete the specific task.

Expectation of work

  • an employee usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period)
  • an independent contractor is usually engaged for a specific task.

Risk

  • an employee bears no financial risk (this is the responsibility of their employer)
  • an independent contractor bears the risk for making a profit or loss on each task. Usually bears responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy.

Superannuation

  • an employee is entitled to have superannuation contributions paid into a nominated superannuation fund by their employer
  • an independent contractor pays their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions).

Tools and equipment

  • for an employee tools and equipment are generally provided by the employer, or a tool allowance is provided
  • an independent contractor uses their own tools and equipment (note: alternative arrangements may be made within a contract for services).

Tax

  • an employee has income tax deducted by their employer
  • an independent contractor pays their own tax and GST to the Australian Taxation Office.

Method of payment

  • an employee is paid regularly (for example, weekly / fortnightly / monthly).
  • an independent contractor has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.

Leave

  • an employee is entitled to receive paid leave (for example, annual leave, personal / carers’ leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees
  • an independent contractor does not receive paid leave.

How can the Fair Work Ombudsman help independent contractors and employees?

Fair Work Inspectors can investigate alleged sham contracting arrangements and prohibited conduct.

Sham contracting arrangements

A sham contracting arrangement occurs where an employer attempts to disguise an employment relationship as an independent contracting arrangement. This is usually done for the purposes of avoiding responsibility for employee entitlements.

Under the sham contracting provisions of the Fair Work Act 2009, an employer cannot:

  • misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement
  • dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor
  • make a knowingly false statement to persuade or influence an employee to become an independent contractor.

The Fair Work Act 2009 provides serious penalties for contraventions of these provisions. Employees and independent contractors can request assistance from the Fair Work Ombudsman if they feel their rights have been contravened.