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The inequality of seasonal or spasmodic workflows and fixed labour forces has long been a major irritant for employers around the country. Accountants, lawyers, programmers and architects just some of many industries that have felt the pain.
However while flexible work forces have generally historically been associated with building contractors and fast food providers the last 10years has seen the employment landscape evolving to embrace them in the form of contractors. Programmers providing specialist skills for short term jobs have been performing contact roles for years and other industries are following their lead. Catalysts for the change have been many and varied but the major contributors have been technology advances, increased disposable income, and pervasive media.
While supposed “independent” contractors have long been a favored ATO target, more recently contract workers have been brought into the public spotlight given the governments’ focus on rules regarding industrial relations. Given one of our primary products is the registration of companies and a percentage are for use by intending contractors, we frequently get asked the question ….
when does a contractor become an employee?
The answer to this vexatious question has determined the outcomes of many court cases from state industrial relations commissions to the High Court of Australia. Given that employing a person as a contractor can be up to 30 per cent cheaper than taking them on as a full time employee, the temptation exists to hire a contractor, rather than an employee. However, the law has a number of tests to distinguish the difference.
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Contract of Service (Employer/Employee) |
Contract for Service (Principal/Contractor) |
Control over work |
Skilled employees may have a high level of independence in the way they work, although the framework within which they work would be set with or by the employer. |
Typically, a contractor has a higher level of independence in the way the work is performed, within the limits of the contract for the work. |
Independence |
Employees have a duty to perform work for the employer as directed or in accordance with an employment contract. |
The contractor must perform duties in accordance with the contract, but not necessarily in other roles except by agreement. |
Payment |
Based on the period of time at work regardless of whether work is carried out. |
Typically payment is according to results without regard to the time taken. |
Liability |
The employer, not the employee is legally liable for the work. |
The contractor is legally liable for the work performed under the contract. |
Commercial risks |
The employee generally bears no risks in respect of the work and is not liable to remedy any defective work at their own expenses. |
The contractor bears the risks and has the potential to make a profit or loss and is responsible to remedy any defective work at their own expense. |
Integration in business |
The employee works as part and parcel of the employer's business. |
The contractor works as part of their own business and may be associated with the operations of another business. |
Ability to delegate |
Employer determines employee's freedom to delegate. |
Typically, a contractor has the ability to delegate the work by agreement or otherwise. |
Tools and equipment |
Ordinarily provided by the employer, except when specifically agreed otherwise. |
The contractor provides their own tools and equipment. |
Basis of hiring |
Hired on a continuous basis. |
Hired for a specific task. |
If all the above criteria are met, then an independent contractor is appropriate for the position. The steps required are then;
- register or have the individual register a company (while it is not essential that independent contractors are incorporated as companies can provide the protection of “limited liabilities” it is frequently recommended). Companies can be registered from only $555 at www.shelco.com.au.
- register on www.abr.gov.au for an ABN, TFN and PAYG; and finally
- create the contract or have the contract created. Keeping in mind you will need to notify your contractors of the insurances they should take out.
For further information please send us an email at info@shelco.com.au or call us at 1800 002 605.