Employee or Independent Contractor? How to decide.

Recent developments in government policy and regulation have tightened up the rules relating to independent contractors.

It is most important for businesses to be able to correctly identify whether people providing services for them are independent contractors or employees. Failing to get this right can mean incurring significant costs including a requirement to backpay superannuation and other entitlements.

The Fair Work Ombudsman (FWO) has provided some guidance to assist in understanding the difference between an independent contractor and employee.

While FWO's views do not amount to legal advice, they are important to consider as FWO will often be the government agency that investigates complaints related to disputes about employment versus independent contracting.

FWO makes the important point that there is no single factor that will decide whether a person is an employee or independent contractor. A number of factors will be relevant, including:

  • Degree of control over how work is performed
  • Hours of work
  • Expectation of work
  • Risk
  • Superannuation
  • Tools and equipment
  • Tax
  • Method of payment
  • Leave

How each of these factors influence the decision about whether someone 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, while an independent contractor has a high level of control in how the work is done.

Hours of work. An employee generally works standard or agreed hours, while an independent contractor decides what hours are needed to complete the specific task.

Expectation of work. An employee usually has an ongoing expectation of work (except where specified, such as for fixed-term and casual employees), while an independent contractor is usually engaged for a specific outcome.

Risk. An employee bears no financial risk, while an independent contractor bears the financial risk associated with performing their contracted services. An independent contractor will usually be responsible for rectifying any errors or faults, as well as any liability for injury sustained while performing the task. Independent contractors generally have their own insurance policies.

Superannuation. An employee is entitled to have superannuation contributions paid into a nominated superannuation fund by their employer, while an independent contractor is generally responsible for their own superannuation obligations.

Tools and equipment. Employees' tools and equipment are generally provided by the employer, while an independent contractor usually provides their own tools and equipment.

Tax. An employee has income tax deducted by their employer, while an independent contractor is responsible for paying their own income tax and GST.

Method of payment. An employee is paid regularly through a payroll system, while an independent contractor will submit an invoice for work completed or be paid at the end of the contract or project.

Leave. An employee is entitled to receive paid leave or receive a loading in lieu of leave entitlements, while an independent contractor is not entitled to paid leave.

A copy of the Fair Work Ombudsman's fact sheet is available for download from the FWO Website.