An independent contractor may work side-by-side with permanent employees but not access the same legal entitlements. The High Court of Australia recently heard several cases on the distinction between independent contractors and employees. This article explains the difference in light of recent developments in common law.
What Is An Independent Contractor?
Independent contractors (or subcontractors) provide services to employers under a contract. Contractors can negotiate their own fees and working arrangements and can work for multiple clients at one time. As a service provider, independent contractors do not have the same obligations and legal rights as a company employee.
Difference Between Employees And Contractors
There is a minimum level of mutual obligation in an employment relationship. One party (employee) performs the work, and the other party (employer) pays for that work.
Courts have historically examined the entire employment relationship to determine whether a worker is an employee or an independent contractor. In Hollis v Vabu Pty Ltd (2001), the High Court underscored the need to look beyond the terms of a contract to examine the actual working arrangements. The High Court found that there are multiple indicators relevant to whether there is an employment or contractor relationship:
Intention of the parties
The intention of the parties when they agreed to work together will be considered. An employee signs an employment contract and provides a Tax File Number, whereas an independent contractor negotiates terms, signs an independent contractor agreement and provides an Australian Business Number.
The degree of autonomy with which the work is carried out is also relevant. Employees complete their assigned work themselves under the direction and control of their employer. Permanent employees work standard hours with an ongoing expectation of work.
In contrast, independent contractors have a high level of control over their own work. They typically arrange their own hours and are engaged for a specific task. They can delegate or subcontract the work to another person.
Financial Responsibility and Risk
The degree of financial responsibility and risk taken by the worker will also be considered. Employees bear no financial risk as the employer assumes all responsibility. By contrast, independent contractors bear the risk of not making a profit on a task. They are personally responsible for any poor work or injury they sustain while on the job. As such, contractors typically have their own liability insurance.
Tools and Equipment
An employer provides everything that an employee requires. An independent contractor brings their own tools and equipment.
An employer deducts income tax for its employees and pays superannuation contributions to a nominated fund. Employers have employee entitlements, such as paid annual leave, personal leave and long service leave. Casual workers receive a higher wage in lieu of these entitlements.
An independent contractor typically issues invoices for payment instead of receiving a wage. They pay their own superannuation contributions, GST and tax to the Australian Taxation Office. They do not receive some employee entitlements, such as paid leave.
Traditionally, the classification of a worker as an employee depends on the nature of the employment relationship. However, recent case law has implications for the status of workers.
In ZG Operations Australia Pty Ltd v Jamsek , the High Court heard from two truck drivers who worked at the same company between 1977 and 2017. During that time, the company was restructured several times and changed ownership. The two men began work as employees, but around 1986 the company said they would only continue their employment if they purchased their own trucks and contracted to carry goods for the company.
The men signed agreements to provide ongoing delivery services, updating the contract periodically to reflect rising costs. The men invoiced for their services. They had no other clients apart from the company. They worked fairly regular hours and were sometimes asked to perform tasks other than their delivery duties, such as cleaning up behind the company warehouse. They were also sometimes asked to display the company logo on their trucks. They were provided with uniforms with a company logo but not told to wear the uniform.
In 2017, the contracts between the parties were terminated. The two men filed with the Federal Court seeking retrospective employee entitlements. The High Court ruled that even though they had worked for the same company for decades, they were engaged as independent contractors and were not employees. The court emphasised the written terms of the contracts over the substance of their daily work routine. It noted that there was no exclusivity clause in their contract, so the drivers could have contracted to work for other companies in their free hours.
In contrast, the High Court found that a worker was an employee and not a contractor in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd . This case involved a young British backpacker (Mr McCourt) in Australia on a working holiday visa. In 2016, he obtained a white card to work on construction sites, bought basic equipment and contacted a Perth labour-hire company (Construct). He signed paperwork with the company, including an Administrative Services Agreement that described him as a self-employed contractor.
Mr McCourt worked for Hanssen, a major building company, under the supervision of a Hanssen employee for three or four months. He was paid hourly for basic labour tasks such as cleaning workspaces and emptying bins. He left the Hanssen site and Perth but returned the next year and restarted in the same position before moving to another Hanssen project with nearly identical duties. Ultimately, he was told not to return to the Hanssen site and received no further work from the labour-hire company. He and the Construction, Forestry, Maritime, Mining and Energy Union brought proceedings against Construct for compensation and penalties.
The basis of the claim was that Construct had failed to pay him his entitlements as an employee under the Building and Construction General On-site Award 2010. The court found that Mr McCourt was an employee of Construct, not an independent contractor. It emphasised that under the contract, Construct directed Mr McCourt’s labour, and once he was assigned to work for a client, he had no choice but to follow the client’s instructions. The judge concluded that as Construct’s key asset was compliant labour, Mr McCourt could not control his own labour. As such, the court found that it was a contract of service (employee) instead of a contract for services (independent contractor).
These recent High Court rulings demonstrate the importance of written contracts in employment law. In these rulings, the court concentrated on the terms of the contract. This is a significant shift away from previous case law, where the realities of the working arrangement were paramount to establishing the existence of an employment relationship. If you have any questions about your rights as an employee or independent contractor, please contact or call Armstrong Legal on 1300 038 223.