Employee or contractor? Get the label right.

Calling a rooster a duck won't make it quack. It's important to get the label right.

How you classify your workers matters a great deal.

It’s a thorny issue that’s caught out many employers and, as learned friends point out, calling a rooster a duck won’t make it quack.

When someone works in your business you may arrange for them to work as an employee or as an independent contractor. On the face of it that seems very straightforward. The problem is that the arrangement you have made and the way the law treats your worker may not be the same.

In a 2011 case, Justice Mordecai Bromberg of the Federal Court of Australia observed: “The absence of a simple and clear definition which explains the distinction between an employee and an independent contractor is widely recognised to be problematic.”

He pointed to the memorable Hollis case which went all the way to Australia’s High Court in 2001.

In Australia, the difference between employees and contractors is not neatly defined in a piece of legislation but is determined by the common law.

In the Hollis case a firm of couriers called Vabu had bicycle couriers who rode their own bicycles delivering documents and parcels around Sydney. The couriers were called independent contractors and Vabu never considered or treated them as employees.

Unfortunately, in 1994 one of the couriers ran into Mr Hollis, who saw the Vabu uniform and sued the firm. But it took another seven years, when the case went to the High Court, for it to be determined that the bicycle couriers were not contractors but employees and Vabu was liable for their actions.

In 2011 Bromberg noted: “Workers and those who employ or engage them require more clarity from the law.”

In Australia, the difference between employees and contractors is not neatly defined in a piece of legislation but is determined by the common law. This means that it is only by looking at the cases which have come to court and been decided that we can get some guidance on what factors indicate employment or otherwise. There’s no one determining factor, although in any given case some may carry more weight than others. Some key factors indicating that a person is likely to be an employee include:

  • the worker conducts no identifiable business apart from that of the employer
  • the employer has authority to control the way work is done
  • the worker takes no risk for work being ineffective or inadequate
  • annual leave, sick leave or long service leave is provided
  • the worker works given hours rather than produces a given result
  • the worker may not delegate the work.

Earlier cases, like the Hollis case, focused on control as a major issue in determining employment. In more recent cases, more emphasis has been placed on being able to identify a separate business being carried on by the worker. That is, if a person is working in their own business to make a profit rather than simply being paid for performing a task, they are more likely to be an independent contractor than an employee.

Generally, the benefits of a contractor relationship accrue largely to the worker while potential penalties apply principally to the employer. Employers should be aware of their risks under the laws which apply to work relationships before agreeing to what might seem an attractively simple and straightforward arrangement.

In the eyes of the law, not to mention the Australian Taxation Office, a worker may be an employee even if:
  • the agreement under which they work states they are an independent contractor
  • they provide an ABN and say they carry on their own business
  • they also work for other businesses
  • in some cases, even if they operate through a corporate entity.

Further complicating things, whether a worker is a contractor or an employee differs under different pieces of legislation.

A worker who is a common law employee is an employee under all the relevant legislation, but a person who is not a common law employee may be an employee under other legislation including the Superannuation Guarantee (Administration) Act 1992 (Commonwealth), the Payroll Tax Act 2009 (SA) and the Workers Rehabilitation and Compensation Act 1996 (SA).

A contract that states a person works as an independent contractor is not enough to make the arrangement between that worker and the employer one of independent contracting, no matter how well it is drafted. All the facts and circumstances of the arrangement need to be considered.

As the Supreme Court of South Australia’s Justice Tom Gray outlined colourfully in a case about truck drivers who supplied their own trucks: “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.”

On the job

  • The receptionist who works from 9am to 5pm each day, doing whatever office work the employer determines is needed on a given day, is almost certainly an employee.
  • The plumber whose name you got from the phone directory, who fixes your leaking tap for a set charge, is almost certainly a contractor.
  • The cleaner who has a contract saying he is paid by the hour to work three hours a day, three days a week, at your premises, using your equipment but his cleaning products — is that cleaner an employee or independent contractor?

This article is from the December 2014 issue of INTHEBLACK


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