Employees and Contractors – Knowing the Difference
By Simon Abraham
22 July 2015
The distinction between an employee and an independent contractor stems from the fact that independent contractors provide services whilst working for their own business, whereas employees provide personal services within the employer’s business.
Understanding whether an individual is an employee or an independent contractor will have ramifications on the entitlements owing to that individual. It is improper to determine (or assume) that an individual is a contractor merely by virtue of the fact that invoices are issued or that an ABN (or ACN) is used. Care must be taken to analyse the characteristics of the employment relationship.
The term “Employee” is not a defined term in most legislation including legislation governing employment law, such as the Fair Work Act 2009. Employee is however defined in the Superannuation Guarantee (Administration) Act 1992 and can cover people that traditionally would not be regarded as employees at all.
Courts have set down factors (or tests) to determine whether a certain type of relationship is an employee or a contractor relationship. Tests include:
- Test of Control over the worker (traditional test)
- “Smell test” / Duck Test (look at the totality of the relationship)
- Economic Dependency
At the most basic level, after analysing the totality of the workplace relationship, the employment relationship will take on the ‘smell’ of either an employee or a contractor. Justice Gray, in Re Porter; Re Transport Workers Union of Australia  FCA 226; (1989), said that “The parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognises it as a duck.”
Recent decisions show that slightly different factual scenarios can mean that a worker is either an employee or a contractor – and in some cases can be both!
In summary we recommend that businesses:
- Have a very precise agreement in place between the parties that sets out the obligations of both parties (whilst not determinative in its own right, this will be important!); and
- Ensure that throughout the employment period your conduct is representative of the type of relationship that the business understands to be in place; and
- Do not assume just by having a contract and invoicing arrangement in place that stipulating that the person or entity providing the services is a ‘contractor’ will be accepted by a Court or the ATO.