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If you have someone working for your business, it’s important to know whether they are an employee or contractor so that you can determine some of the following things:
- How much do I need to pay them?
- What are their leave entitlements?
- Do I need to pay their superannuation?
- How would their taxes work?
- Do I need to pay them minimum wage?
- Do the National Employment Standards apply to them?
This is a popular question that arises in Employment Law because if you don’t classify your workers correctly, you could be breaching your employer obligations. Luckily, the law has covered this area quite well.
More recently, the case of ZG Operations Australia Pty Ltd v Jamsek clarified that the terms of the contract, rather than the nature of their employment, determined whether there was an employment relationship or a mere contractor relationship.
In addition to this, the case of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd emphasised that the level of control that a person has over the work they are expected to do is a key factor in determining whether they are an employee or contractor.
What Is The Difference Between An Employee And A Contractor?
While their roles and responsibilities might appear incredibly similar, there are key differences between employees and contractors which can help you classify them. This way, you can ensure you meet your obligations to them.
Employees work directly for your business and their duties and responsibilities are dictated by the employer depending on the Employment Contract they signed. An independent contractor, on the other hand, is self-employed. This means they have their own Australian Business Number (ABN), charge the amount they wish and can either accept or refuse to do certain tasks.
Put simply, the key difference here is that a contractor has greater autonomy over their work than an employee does, but this also means they need to be responsible for their own equipment, tools, taxes and insurance.
It also means that employees have greater protections. For example, they are protected by Work Health and Safety laws, as well as Workers Compensation and the National Employment Standards.
How Do You Determine Whether Someone Is An Employee Or Contractor?
The answer to this question is one that changes with time, and requires a closer look at case law.
Generally speaking, to determine whether someone is an employee or a contractor, you’d look at some of the following things:
- How you pay them
- Control over their work
- Nature of their work arrangement
- Their leave entitlements
- Whether you provide their equipment, or if they purchase their own
- Whether they have the freedom to do work for other clients
- Whether you need to pay their superannuation and taxes
However, it isn’t always this simple. The previous position on this area of law was that to determine whether someone was a contractor or employee, you needed to look at the nature of their work arrangement (this was ruled in Hollis v Vabu Pty Ltd, however this was back in 2001).
More recent rulings in Australian courts have shown us that the contracts and written agreements between businesses and their workers are the most important things to consider when determining their classification, and not the details of the arrangement itself.
So, what do these recent cases have to say about employees vs contractors?
ZG Operations Australia Pty Ltd
This case involved 2 truck drivers who worked for ZG operations. The company told them they would terminate their arrangement, unless the drivers agreed to purchase their trucks from the company, and deliver goods only for them.
The two drivers agreed, and set up partnership structures to purchase these trucks. The following are some of the key features of their working relationship with ZG Operations:
- They only carried goods for that company, no one else
- They worked regular hours for them
- Occasionally, the men were asked to display the company logo on their trucks
- They were provided with uniforms displaying the company logo (but were not asked to wear them!)
- They were sometimes asked to perform tasks beyond their regular delivery tasks
After considering all these things, the High Court decided that the men were contractors for the company, not employees.
Why?
The court reasoned that the contract’s written terms needed to be given greater weight than the “substance and reality” of their work arrangement. More specifically, their contract did not prohibit them from performing services for other customers. So, there was no explicit statement in the contract that restricted their ability to work with others.
According to the court, this was the key determining factor in their classification as contractors.
Construction, Forestry, Maritime, Mining and Energy Union
This second case had a similar issue, but the outcome was quite different.
In 2016, a British backpacker began working for a labour-hire company known as Construct. He signed an Administrative Services Agreement, which outlined his role as a ‘self-employed contractor’.
Construct had a big client called Hanssen, and they asked the worker to work at their site under Hanssen’s supervision. The following are some of the key features of his work arrangement:
- He worked there for about 3-4 months
- He was supervised by Hanssen
- He was paid by the hour
- Hanssen would dictate his roles and responsibilities as part of the job
- He returned in 2017 to complete work on a very similar Hanssen project
However, the issue here was that they told him to stop working on this second project.
This is where the Construction, Forestry, Maritime, Mining and Energy Union initiated legal action against Construct, claiming that he did not receive his full entitlements as an employee.
Here, the High Court ruled that the backpacker was an employee of Construct. So, how did they come to this conclusion?
They reasoned that the contract included terms where Construct was allowed to control who the backpacker worked for. Also keep in mind that while he was working for Hanssen, they told him what he had to do.
These are all things that characterised his arrangement as an employment relationship.
So, the key factor here was the level of control (or in this case, the absence of control) that the backpacker had over his work, and this was set out in his agreement.
What Is The Key Takeaway Here?
The main takeaway from these two rulings is that in deciding whether someone is an employee or a contractor, more weight was given to the specific terms of the contract, rather than the nature of their working arrangement.
So, even if your working arrangement did not reflect the terms of your contract, the Court will still rely on those contractual terms to determine what your working classification is. If your contract did not allow you to have full control over your tasks and your work, this would lean more towards an employment relationship than a contractor one.
The court will usually look first to the written terms of the contract to determine the relationship. However, it is not always about what’s written. For example, courts may determine that the contract is a complete sham.
Even though it may seem straightforward, the employee and contractor distinction raises more questions as more complex situations arise. In Australia, it’s important to remain aware that this is a developing area of law, especially in the face of the growing gig economy.
Need Help?
These recent rulings are particularly important for businesses who engage workers, but are not sure as to whether they are employees or contractors. As an employer, you have a number of obligations to your employees, but these would look quite different if you had contractors instead.
It’s important to keep up to date with these cases so that you know whether you have legal standing for certain disputes or issues. If you need help figuring out someone’s employment status or general help within the area of Employment Law, don’t hesitate to chat to one of our expert lawyers.
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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