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Employee v Contractor
In simple terms, an ‘employee’ is one who agrees to work for and follows the instructions of an employer in exchange for payment of wages. An ‘employer’ is a body or person who engages another person to work for them and follow their instructions to perform work and pays wages to that person.
Conditions of employment are governed generally by Awards [eg Pastoral Award 2010] for a particular industry. An Award sets out the minimum conditions of employment, such as personal carers leave (“sick leave”) or hours of work for all workers in a particular industry.
Legislation can also affect an employee’s entitlements such as superannuation and public holidays.
Employers have the legal right to discipline employees, which can include the following:
1. warnings
2. counseling
3. suspension, with or without pay, depending on circumstances
4. withholding bonuses
Employees are generally not held responsible for damage to the employer’s property but contractors are.
Principals have limited control over a contractor.
For example, the following generalised test may be applied to determine if a principal has engaged a ‘contractor’ or an ‘employee’.
EMPLOYEE / CONTRACTORCannot work for a competitor / Right and freedom to work for someone else including a competitor.
Earns 80% or more from the one source. / They derive less than 80% of their income from the one source.
They charge per job.
Is given instructions to carry out a task, or is supervised or work is monitored. / They have control over their performance [they do not work under supervision and are able to choose when and how they perform their work]. Supply own tools and equipment.
Has an ongoing expectation of work. / Engaged for a specific task.
Is to be covered for WorkCover, Payroll Tax and Income Tax / Should have their own income insurance, public liability insurance an ABN or ACN.
Receives a Group Certificate. Has income tax deductions. / Production of an ABN and Tax Invoice (but that does not of itself constitute being a contractor).
Not liable for damage to employer’s property. / They are responsible for making restitution when they make mistakes. e.g. loss or damage of equipment.
The most common misunderstandingsare that if someone calls you a ‘contractor’ you are a contractor or, if they asked to be paid on a Tax Invoice or with an ABN they are contractors. Don’t be misled as the costs can easily exceed any savings.
The Courts and the Commission virtually ignore any arrangement and look beyond the title to establish if the relationship is an employment contract [of service] or a contract for service. Generally, work that has been performed and is specified by an Award, is more likely to result in the performer of that work being an employee.
In a decision handed down by the High Court on Hollis v. Vabu Pty Ltd it was found that Vabu’s whole business consisted of the delivery of documents and parcels by means of a courier. Vabu retained control of the allocation and direction of the various deliveries. The carriers had little control and their work was allocated by Vabu’s fleet controller. The couriers wore a Vabu uniform which was partly due to Vabu wishing to advertise its services. The couriers were advised that their performance and conduct in public and towards clients would result in more business and more income for all. Vabu deducted from the courier’s income money for insurance. Vabu believed that it had entered into a contract for service and treated the couriers as contractors.
As can be seen from this case, there was a reasonable amount of control exerted by Vabu which had acted as though it was the contractor but the reality was that the High Court found it to be a contract of service and the Vabu was an employer.
Put simply, if a duck is dressed as a clown, it is still a duck. To pass the “duck” test, the work can be performed under the auspices of an Award and the performer of the work earns 80% or more from one source and is under a level of control of the principal, it is most likely that this contract will be deemed to be an employment contract.
There is no clearly defined way where this definition fits all circumstances but the element of control is significant (eg can the performer of the work also work for a competitor, do they use the principal’s tools and equipment, do they derive 80% or more of their income from one sources, is the work covered by an industrial award etc.?) If the answer is “yes” in all probability the contract is a contract of employment otherwise known as a contract of service.
This information is not intended and nor should it be relied on as substitution for legal advice. Beforea member engages someone they should seek advice. If they do not, they will run the risk that if there is an injury and a worker’s compensation claim is lodged, or the arrangement is tested, they may find out after the event that the arrangement was an employment contract. This will then raise issues as to whether they did not satisfy the workers compensation levy, Payroll Tax with Income Tax and superannuation implications. In some instances penalties may also be imposed.
If you want clarification on any point please do not hesitate to contact me.