Employees versus Independent Contractors - Part 1

Posted on 23 May 2013

Part 1 – when is a contractor an employee?

Previously, on 10 January 2012 we published a blog in regard to the risks of contractors being deemed to be employees under the Fair Work Act 2009 potentially leaving business owners liable to payments of Award wages, overtime and penalties, superannuation and other statutory entitlements.

Part 1 of our blog on 'employees versus independent contractors' will focus on the key criteria the courts have used to define the employment and independent contractors relationship and what potential risks a business may be liable for if an independent contractor is deemed to be an employee.

Employee versus independent contractors

It is regularly said that employment is a contract of service whereas an independent contracts engages in a contract for services.

When hiring contractors businesses need to evaluate the business relationship in its entirety ensure that they are not actually employing a person under the false pretence that they are actually independent contractors. The distinction between employee and independent contractor is not always easy to make. The determining factor used to be based solely on the degree of control exercised by the principal over the people carrying out the work. However, recent cases have confirmed that other factors such as whether the worker is an integral part of the business can impact on the determination of their status.

In the often quoted High Court case of Hollis v Vabu, the Court described several key indicators which help to determine whether a worker is an independent contractor or an employee. However, the criteria relied upon in Hollis v Vabu can only act as a guide to answering the 'employee versus independent contractor' question. It is necessary in each case to examine all the terms of the contract and what the person is doing on a day to day basis to determine whether, on balance, the person is acting as an employee of the business or a contractor to the business.

The features discussed below have traditionally been regarded by the courts as key indicators of whether a contract is one an “Employment Relationship” or an “Engagement as an Independent Contractor” and include:

  • Control – who has the right of control the operation of the work and the law authority to direct work flow? The greater control the ‘person’ has the more likely they will be an independent contractor.
  • Results based contracts - Where the substance of a contract is to achieve a specified result there is a strong indication that the contract is one for services;
  • Power To Delegate -An unlimited power to delegate work is an important indication that the worker is an independent contractor. Delegation is generally implied in a contract for services where the emphasis is on the result rather than the person;
  • Risk - Where the worker bears little or no risk of the costs arising out of defect in carrying out their work, they are more likely to be an employee. The higher the degree to which a worker is exposed to the risk of commercial loss (and the chance of commercial profit) the more they are likely to be seen as independent; and
  • Conditions of Engagement – how the work is performed is likely to help indicate whether the relationship is to be defined as employee or independent contractor. A worker is likely to be deemed an independent contractor where they enter into a contract for a specific task or series of tasks and the contractor maintains a high level of discretion and flexibility as to how the work is to be performed