Independent Contractor and an Employee - Know the Difference

Under the new Fair Work Act a company that is employing an employee disguised as an Independent Contractor may be subject to a $33,000 fine per instance. Companies should therefore be very careful that the appointment of an independent contractor is exactly that and not, inadvertantly, an employee. There are a number of ways in which you can tell the difference.

  1. A worker who’s an employee will have a contract of employment,
  2. An employee will work under the control of, be dependent on or in a subordinate relationship, i.e. control factors, who is in control of the employee's work activities or is the independent contractor free to undertake the task on their own terms.
  3. An Independent Contractor will supply you with an invoice for the worker’s services via another company.
  4. A Independent Contractor will have their own public liability, professional indemnity and worker's compensation insurance and will not be reliant on their client's policies.
  5. An Independent Contractor will provide services regularly to a number of other clients
  6. The independent contractor does not receive leave of any kind.
  7. Independent Contractors do not have tax deductions taken from payments made to them.
  8. The independent worker derives less than 80% of their income from the services provided to you.
  9. The independent worker is free to deliver the service according to a flexible work schedule.
  10. The independent contractor receives milestone payments and is only paid for the work when completed, and
  11. The independent contractor will advertise their services to the world at large.

What Does the ATO Say?

'Contract of Service' verses 'Contract for Service'
The ATO has issued a Taxation Ruling (TR1999/13) which makes the following distinctions between the forms of contractual relationships:
"The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service (or in the past, as a master/servant relationship). Such a relationship is typically contrasted with the independent contractor/principal relationship that, at law, is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide his or her labour (typically to enable the employer to achieve a result)…"
"A user of labour or service requirer may contract with a labour hire firm for the provision of labour of a specified kind. The labour hire firm does not contract to perform the work; it merely contracts to provide labour to work under the direction of the user.
The labour hire firm then ascertains the availability of suitable workers on its books. Contacted workers may accept or reject the work offer. On acceptance, a contract is formed between the labour hire firm and each worker."
If in doubt, have an expert check the arrangement as well as the wording of your agreements to ensure your business is not unwittingly falling into the ‘sham’ contract trap.
Remember the Fair Work Inspector can enter your workplace at anytime, without notice, to inspect your arrangements so do take the time to make sure you've got it right.