Whenever a person carries out work for someone else, it is important for both parties to be clear about the legal status of the working relationship. In some situations, when a person is engaged to carry out paid work, they have the status of an employee. In other situations, they are engaged as a contractor. The distinction between employee and contractor is crucial as it determines what rights, responsibilities and obligations the parties have towards each other.
In Australia, there is no single fixed definition of ‘employee’ and ‘contractor’. However. there are legal principles that can be used to assess the nature of a work arrangement.
What is an employee?
Employees are workers who perform work under the direction and control of an employer. Employees have an expectation of ongoing work and the right to paid leave and sick leave. They work under supervision, have income tax deducted by their employer, and are not entitled to delegate their work to someone else. They generally work fixed hours, although casual employees may work variable hours.
As employees work under the direction and control of their employer, an employment contract is often referred to as a “contract of service”.
What is a contractor?
Contractors are workers who are engaged to do a task or provide a service. Contractors run their own business, have a high level of control over the way they operate, use their own equipment and work as many hours as required to provide the service or do the task.
Contractors do not have the expectation of ongoing work, are not provided with paid leave, do not work fixed hours, and generally are entitled to delegate or subcontract the work out to other parties.
As contractors are engaged to provide a service, they are often referred to as being in a “contract for services”.
Court may determine nature of working relationship
It is important to note that, even if the parties have agreed that their working relationship is one of principal and contractor, or that it is one of employee and employer, a court or tribunal might determine otherwise.
A decision-maker will assess the nature of a working relationship with reference to all the circumstances under which the arrangement was agreed upon and how the work is carried out in practice. There is a range of factors that courts will look at to decide whether a relationship is one of employee or contractor. These include:
- how the work is performed;
- whether the worker pays their own tax;
- whether the worker has maximum hours of work;
- whether they supply their own equipment;
- whether you have an expectation of ongoing work; and
- the level of supervision provided.
Different levels of risk
Employees and contractors take on different levels of risk. As a contractor, a person generally bears the responsibility for any loss, poor quality work, and injuries sustained while working. The worker arranges their own insurance coverage (if applicable), and typically pays their own tax and superannuation. Contractors have no statutory minimum entitlements such as paid leave. They also have no guaranteed income, and provide invoices to principals.
State and territory legislation
There is both state and federal legislation that applies to employees and contractors. Different definitions of ‘employee’ and ‘contractor’ are contained in different pieces of legislation.
Some states and territories also have industrial relations legislation, such as:
- Industrial Relations Act 2016 (Qld)
- Industrial Relations Act 1979 (WA)
Consequences of engaging workers incorrectly
Whether a person is a contractor or an employee impacts issues such as:
- their entitlement to workers’ compensation in the event of injury;
- benefits; and
- leave entitlements.
It can also affect issues such as superannuation, unlawful termination, and personal liability for defects in work.
If you treat a worker as a contractor when they are in effect an employee, you run the risk of having action brought against you by the Fair Work Ombudsman or by your employee for failing to provide the minimum standards for employment.
Intellectual property issues for employees and contractors
There are other implications of a worker’s status as a contractor or an employee. One example is where a worker invents or designs something at work. This could lead to a dispute about who owns the intellectual property over the design.
The inventor of a new work generally owns the copyright, but under section 35(6) of the Copyright Act 1968, if a work is created under a contract of service (an employee/employer relationship), then the employer holds the copyright. In contrast, when a contractor invents something while performing a service for a principal, the copyright remains with the contractor.
If you require legal advice or representation in any legal matter, please contact Taylor Rose.