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The employment vs contractor agreement distinction

employment-agreementUnder law in Australia and most countries whether A is B’s employee or, alternatively an independent contractor, is critical for ownership and protection of intellectual property. And that's just the beginning.

In Australia, if A is an employee numerous legal consequences follow. Superannuation must be paid, income tax must be taken out, and workers compensation insurance put in place.

To answer the question of whether A is an employee involves considering layers of law, facts and circumstances. There are variations for employees working in the private or public sector, under awards or enterprise agreements, or Common Law contracts and so forth.

On considering these variations it may be that Common Law (ie precedents, court decisions, judge made law) indicates A is B’s employee.

Why do we say the law just "indicates"? That's because Statutory Law (ie legislation, law made by parliaments) may in a particular situation (say, long service leave or occupational health and safety) over-ride Common Law and stipulate that A is B’s employee.

Law in Australia does not have a singular, simple, clear or unequivocal criteria for determination of when a person is an "employee" versus when a person is an independent contractor. Some cases leave little doubt. In other cases the distinction is less clear.

Peter Punch, a leading practitioner and author on Australian employment law has recently called for intervention by Government, ie the legislature, to stop tinkering with the law, and instead solve problems with this messy state for the critical legal distinction between employees and independent contractors. I suspect Punch would readily admit intervention is unlikely for some time.

contractor-agreementMeanwhile, we're left with the variable (sometimes conflicting) perspectives of Common Law and Statutory Law on the relevant range of factors. In difficult cases there's a long shopping list of factors to consider before taking a view on whether at law A is an employee or an independent contractor.

With the above cautions, here are some simplifications. Before settling arrangements for employment contracts or arrangements with contractors, all businesses should consider the applicable contracts very carefully. Ideally they should take and state a position in a professionally prepared employment contract or contractor agreement.

We've drafted these types of agreements for hundreds of clients. With that in mind here are some more simplifications.

The distinction between an employee legal relationship and a contractor legal relationship can be seen as being two ends of a spectrum.

At the employee end, if A contributes only his or her labour, A is likely to be an employee.

At the contractor end, if A and B are each contributing money or other resources, each has a say in what work is done and how it is done and A is paid according to results (not just by turning up to work and carrying out assigned tasks), then all this points to A being an independent contractor, not an employee.

Between these two clear ends of the spectrum, courts consider factors such as those below.

  • What degree of control does A have (versus B) over the work done? If B can direct A about the significant aspects of how A works, this is evidence that A is an employee.
  • Does A have the right to sub-contract or delegate the work to others? If A can employ other people to do the work, A is likely to be an independent contractor.
  • Do the following facts exist, if so each adds weight to the view that A is at law an employee:
    • A works exclusively for B.
    • A is paid a wage (fixed by hours worked) or salary (fixed periodical sum). In contrast, contractors tend to be paid on the basis of output.
    • A performs work at B’s place of business.
    • A performs work at regular hours set by B.
    • A receives superannuation from B or has the usual leave entitlements (eg annual leave and sickness and bereavement leave).
  • Do the following facts exist, if so each adds weight to the view that A is at law an independent contractor:
    • A advertises his or her services or tenders for work.
    • A provides similar services to others (eg the general public).
    • A issues tax invoices, hence with GST added.
    • A makes a significant capital contribution (such as by using his or her own motor vehicle, and carrying the maintenance and running costs) to B's enterprise. If all A brings, on the other hand, is the ordinary tools of his or her trade, this is not likely to be a significant factor.

employee-contractor-distinctionAlas, the above factors while indicative (there's that word again), are neither definitive, nor comprehensive.

Practical considerations drive decisions by people in business as to whether they prefer an employee or independent contractor relationship. If the legal position is not considered carefully the practical arrangements put into place may be unwound unexpectedly and with dire consequences if employee entitlements have not been paid.

It seems increasingly clear that the business benefits of employee relationships are lost where there is an undue fixation on purely financial considerations and a scramble to talk up outsourcing and other contractor arrangements.

garage_victa_adWe've often discussed the benefits of having employees, see for example the articles below.

Ultimately, the above points are general information about the law. For legal advice a lawyer needs instructions on the details of the specific case.


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