Employees vs Independent Contractors – Who is an “Employee” and who is an “Independent Contractor

Posted on 05 July 2011

There are a number of ways in which businesses can engage personnel to have work performed for them. Of those, Employees and Independent Contractors are the most commonly utilised. Unfortunately, the engagement of Independent Contractors is also commonly misused and misunderstood, creating significant (and often undetected) liabilities for the businesses who engage them.

The use of Independent Contractors is on the rise as a result of a number of factors including demands for workplace flexibility, significant improvements in affordable business based technologies and increasing skill shortages across a number of professions and industries. Businesses can also seek to engage Independent Contractors where they require project specific personnel, short term personnel, or in an attempt to reduce their perceived exposure to workplace laws such as unfair dismissal.

Most people operate on the assumption that if they have agreed to something with somebody else then all that matters between them are the terms of that agreement. Unfortunately this is not always so. Ironically, in the current age of our ‘rights savvy’ society and people becoming increasingly litigious, many businesses still engage a range of personnel and services providers without anything being reduced to writing. However, even when things are reduced to writing the contract is not the be all and end all of the business world as many believe that is it.

Whilst helpful, a written contract which states that your personnel are contractors and not employees may not be sufficient to confirm the nature of the relationship if the day to day activities of the person indicate otherwise. The contract is simply evidence of what the two parties agreed. It is not conclusive as to the proper status of the relationship.

It is possible that although you have agreed with the person that they are a contractor, that the relationship may be deemed by legislation, a government authority or alternatively challenged by one of your personnel in a Court, to be one of employer and employee rather than that of an Independent Contract between Principle Contractor and Sub Contractor.

The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service (or, in the past, as a master/servant relationship). Such a relationship is typically contrasted with the Independent Contractor/principal relationship which, at law, is referred to as a contract for services.

No single objective test gives a specific and simple answer to the question “who is an employee”. It is necessary in each case to examine all the terms of the contract, to determine if the person is acting as an employee of another or is acting on his or her own behalf.

A clause in a contract that purports to characterise the relationship between the parties as that of principal and Independent Contactor and not that of employer and employee must be considered with all the other terms of the contract, and such a clause in itself does not automatically determine the nature of the relationship. The parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label. Such a clause however, may be used to overcome any ambiguity as to the true nature of the relationship.

Unfortunately it is very common that people are engaged based on verbal exchanges between the parties, rather than a detailed written agreement. Confusion and uncertainty can be the result and often this does not become apparent until the termination of the contract. Having a detailed written agreement in place can assist to show the intention of the parties at the time of his formation, and make clearer the obligations of all parties involved.

If you are interested in receiving more information or attending a seminar or workshop to learn more about employment contracts and employee v. contractor, please contact us.