contractor

The Importance Of Knowing The Difference Between

An Employee And A Contractor

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Posted by Esha Kumar on 1 April 2019

Do you know the difference between an employee and a contractor?

As the owner of a small business or startup, it is really important for you to know the difference between an employee and contractor, as getting this wrong might have huge consequences for your company.

An ongoing Federal Court case involving Foodora is a good example of this issue.

The Fair Work Ombudsman has launched a case against Foodora for “sham-contracting”. Basically, the Fair Work Ombudsman is arguing that Foodora had wrongly classified some of its employees as “contractors”.

If the court agrees, then it means that Foodora hasn’t paid their workers the minimum wage, super contributions or penalty rates that they are entitled to.

Although Foodora is still fighting these legal proceedings, they no longer have a presence in Australia.

To avoid these legal consequences for your small business or startup, let’s go through the factors that affect the classification, as well as the practical differences you need to be aware of the two.

Factors That Affect The Classification…

Degree Of Control Over How Work Is Performed & Hours Of Work

If your worker performs tasks under your direction on an ongoing basis, they are more likely to be classified as an employee.

If they are provided with autonomy and can control how the work is completed themselves, they are more likely to be an independent contractor.

In the Foodora case, Fair Work’s evidence points to Foodora having significant control when it came to the services performed by their workers.

The company controlled shift times, by setting start and finish times, locations for delivery and a reward system which saw workers paid more when they delivered during certain times.

This could mean that Foodora controlled how their workers performed tasks.

Unlike independent contractors, when delivery workers have little to no control over their schedules it can indicate that they are employees.  

Expectation Of Work

An employee usually has an expectation that they will have ongoing work.

Whereas, a contractor is engaged for a specific task for which they have a particular skill set for.

The company provided their workers with set shifts via an app. Though the days and times of work varied each week, Fair Work has argued that this looks like a casual employee, employed to complete work for a specific task or period.

The lesson here is that, if you want to hire people as independent contractors, you need to make it clear to your worker whether the tasks you require of them will be ongoing or just a one off.

Ignoring this might place them under the assumption that they are in fact an employee, and not an independent contractor.

Tools, Equipment And Uniform

If you are providing tools and equipment to your workers, they will be classified as an employee.

However, if the worker uses their own equipment, they are likely to be an independent contractor.

Something as simple as having your company logo printed on the equipment used by the worker, has the potential for an independent contractor being classified as your employee.

Even though most workers used their own bike when making deliveries, the storage box attached to his bike was labelled with the company’s logo.

Foodora workers also wore branded t-shirts when on the job, making it more likely that they could be considered an employee rather than an independent contractor. This is because the t-shirt could be considered as part of their uniform, associating them directly with their employer.

Method Of Payment And Leave Entitlements

Regular payments and leave entitlements may be an indicator that the person is an employee.

Independent contractors have their own ABN and will give you an invoice once the work you required of them is completed. They also don’t receive paid leave.

That being said, just not paying them regularly and giving them no leave entitlements doesn’t mean that they’re an independent contractor.

Similarly, just because you pay through an ABN, doesn’t mean the worker will be seen as an independent contractor.

These things need to be considered with the other factors mentioned above.

Practical Differences – Risk, Superannuation And Tax

As an employer, you will be held legally responsible for all the actions your employees perform under their contract.

Whereas, an independent contractor will typically be liable for inadequate work or any work related injuries.

It is for this reason that independent contractors will often have their own insurance policy.

Super is another thing to consider. You must pay superannuation contributions for employees, but this is not required for independent contractors.

A similar situation applies for tax.

As an employer, you have an obligation to withhold PAYG tax from the regular payments made to your employee.

Whereas, a contractor will manage their own tax affairs.

Foodora made no superannuation contributions and did not deduct income tax. If the Federal Court finds that their workers should be classified as employees, then Foodora would be liable to repay these contributions.

You can see how an incorrect classification can quickly add up and be a significant financial risk for your business.

What To Take Away…

Knowing the difference between an employee and contractor is essential for any small business or startup owner.

It plays an important role when hiring people and defining their obligations as well as your responsibilities to them.

If you’re unsure of whether your workers are employees or contractors, do not hesitate to get in contact with us, we are here to help!

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Esha Kumar

Esha is a legal consultant at Sprintlaw. She has experience in both the media and legal industries and is currently completing her Bachelor of Laws at the University of Sydney.
Esha Kumar

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