Contractor or employee?

Introduction

With changes to types of employment, there is often confusion surrounding whether a person is employed as a contractor or an employee. In general, 'contracting out' or engaging the services of a sub-contractor/self-employed person allows many businesses to avoid the substantial costs of entitlements owing to permanent employees (sick leave or holiday pay, for example). Contractors often provide their own insurance cover as well. If an employer engages (hires) a person solely for the supply of labour by the person (time and skills), that person is most likely an employee under employment law principles.

Why clarify the status of employees or contractors?

If an employer has made an employee a contractor, in certain situations this could be a method of avoiding entitlement such as paid holidays. Using contractors can also be done in order to avoid payroll tax or other liabilities. The most severe liability of an employer is that of vicarious liability. Vicarious liability is where an employer is held liable for the acts of an employee. A common example of vicarious liability is with the police service. When the police arrest someone illegally, the arresting police employees commit false imprisonment. The employer (here, the government) is liable for false imprisonment as well as the employees. Vicarious liability occurs when an employee acts in the course of her or his employment.

Using a contractor removes the requirements for employee (compulsory) superannuation and workers' compensation. Failure by an employer to acquire insurance for a contractor can lead to very expensive legal cases under the principles of negligence, if there are accidents on the job. Even though the contractor is not an employee, there will very often be a duty of care to provide for a safe work area. See image 1 and animation 1

The test of employment

In the first instance, contractors differ in a number of ways to employees. Most of the time, these differences are adequate to distinguish a contractor from an employee in the eyes of the law. Contractors typically: use their own tools and equipment, manage their own insurance and work-based risks, obtain profit (or loss) from their contracted services, have a high level of independence and control over their work, are legally liable for the work they complete and receive payment for work completed. Employees typically, and in contrast are paid for their time, are more reliant on direction from their employer, receive entitlements like sick leave, are not required to provide their own work tools/equipment, work set hours, make no profit from their work, are not legally liable for their work and are covered by the employer for insurance and accidents. See image 2

A key factor distinguishing employees from contractors is the degree of control that an employer has over a worker. Generally, an employer will have a large degree of control over an employee, in terms of how they work, when they work, who they work with and where they work. Contractors may be directed by employers, yet they are often not told how to work, when to work, who to work with (contractors often engage other contractors to help) and where to work. Another key factor deciding if someone is a contractor or employee concerns labour or results: contractors usually provide a service and are paid an agreed fee upon satisfactory work completion; employees are paid for their labour by the hour and by wage, not for results completed. See image 3