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Engaging employees and contractors – what’s the difference?

Emily Shoemark

30 Jan 2020

Topics

  • Employment Law

When you are engaging staff, it’s important to know the difference between an employee and a contractor, and the legal and financial implications of each. In this article, Emily Shoemark explains the differences, and the importance of ensuring that employees are not incorrectly classified as contractors.

Employee

An employee is part of your business – they are engaged under a contract of service to work for you, their employer. They are employed to do a certain role for a certain number of hours , and you pay them for the time spent at work. This employer/employee relationship is governed by the Fair Work Act.

Employees can work full time, part time, or on a casual basis, and the terms and conditions of employment can be set using a variety of mechanisms:

  • National Employment Standards
  • Modern award
  • Enterprise agreement
  • Individual contract.

National Employment Standards

The National Employment Standards (NES) are 10 minimum employment entitlements that must be provided to all employees – the safety net of minimum conditions. The NES apply regardless of the hours worked, position and seniority. However, for casual employees only some of the NES apply. The minimum entitlements are:

  • maximum hours of weekly work (38 + reasonable additional hours)
  • requests for flexible working arrangements
  • parental leave and related entitlements
  • annual leave
  • personal/carer’s leave, compassionate leave and unpaid family and domestic family leave
  • community service leave
  • long service leave
  • public holidays
  • notice of termination and redundancy pay
  • Fair Work Information Statement

Modern awards

A modern award is an industrial instrument established by the Fair Work Commission that sets out the minimum terms and conditions of employment for specific industries. It is mandatory under the Fair Work Act 2009 for  all employers and employees covered by an award to comply with its terms,. Awards governs more specific details on top of the NES, including position classifications, minimum pay rates, hours of work, allowances, penalty rates and overtime.

For example, the minimum pay and conditions of a plumber, is set out in the Plumbing and Fire Sprinklers Award 2010. This awards covers:

  • minimum wages
  • casual loadings
  • apprenticeship rules
  • penalty rates
  • overtime
  • allowances.

You cannot contract out of Award conditions. However, the is scope to apply certain Award conditions flexibly in certain circumstances under an Individual Flexibility Arrangement, as long as the employee is better off under the arrangement than if they were paid strictly under the award.

Enterprise agreements

Enterprise agreements are collective agreements under the Fair Work Act that apply to an organisation or group of organisations. They are negotiated between the employer and the employees (and often the relevant union).

These agreements must be approved by the Fair Work Commission (FWC) by passing the BOOT (better off overall test) – that is, the employees must be better off overall under the enterprise agreement than under the relevant award.

Enterprise agreements can be effective where an employer is regularly putting into place Individual Flexibility Arrangements for multiple employees, or where the applicable award is not entirely suited to the operational requirements of a business.

Individual contracts

An employment contract is an agreement between an employer and employee that sets out terms and conditions of employment. Contracts, which can be verbal or in writing, cannot remove the minimum conditions set out in the NES and any applicable award (except in the form of an Individual Flexibility Arrangement).

Contracts provide another layer of detail on top of the NES and Award,  and can cover issues such as:

  • expectations
  • compliance with policies
  • working hours and arrangements
  • confidentiality
  • intellectual property
  • termination
  • workplace privacy
  • social media use.

Contractor

A contractor is a person engaged by business to carry out a specific piece of work or project. Once the job is complete, the relationship ends. A contractor runs their own business and has an ABN – they are responsible for getting the job done and for their own employees. Contractors may be working for multiple businesses at the same time.

A contractor can be an individual or may be a company. A contractor is engaged under a contract for services – to provide a certain service to your business – as opposed to an employee contract of service described in the sections above.

For example, if an employee is engaged to work full-time, if there is not much work on an employer can ask the employee to do other tasks around the office as they are being paid for the hours worked. With a contractor relationship, the contractor is engaged to do a task not for hour worked, so if there is no work to do the contractor is not paid.

If you are engaging a contractor:

  • work out what the contractor is needed for
  • the contractor should provide a clear quote – often a fixed price – for a specific scope of work, rather than for the hours involved
  • have a written contract setting out terms of payment, scope of work and the obligations of both parties (including work health and safety).
  • consider what insurances you have will cover them and what insurance they will need to have themselves
  • Payment is not made to a contractor until they issue a tax invoice.
  • The contractor will generally supply their own tools and equipment
  • The contractor will pay their own tax and GST, and superannuation in some circumstances.

Sham contracting

Sham contracting occurs when an employment relationship is disguised as a contractor relationship. This means that a business calls someone a contractor, but when you look at the nature of the relationship, that person is really an employee. An employer may have done this to avoid paying employee entitlements, such as sick pay and annual leave. However, sometimes this is accidental and a business thinks someone is a contractor because they have an ABN and does not consider the issue any further.

The Fair Work Act 2009 prohibits sham contracting. If an business is found to have committed sham contracting, the business will be required to pay the employee any underpayments – including superannuation, and any wages, paid leave, allowances, overtime and penalty rates owed. There can also be serious penalties for confirmed cases of sham contracting of up to $64,000 for companies per contravention and $12,500 for individuals per contravention.

The court looks at the range of factors to determine in each case whether a worker is an employee or a contractor, such as:

  • the degree of control over how work is performed
  • hours of work
  • expectation of work
  • financial risk
  • superannuation payments
  • ownership of tools and equipment
  • whether income tax has been deducted by the employer
  • regularity of payments.

It is important to note that directors and HR managers of an employer business can be held personally liable if they knew about, ore were complicit in, the sham contracting. It is an issue that courts take very seriously, and it is recommended that employers regularly review their subcontracting relationships to identify any subcontractors that may have started looking more like employees.

How can we help?

Please contact our Employment Law team for advice on this and other issues that affect your rights and responsibilities as an employer, by email or on 02 6285 8000.

*The content of this article is provided for information purposes only, and we do not accept any liability for reliance upon the information contained in this article.  This information cannot be relied upon as legal advice.