The LEGAL differences between Employees & Contractors!

- March 21, 2012 2 MIN READ

Generally, every business venture will reach a stage in its growth cycle when it will require additional hands to provide the skill-set, staffing infrastructure and scale that are essential for further growth.

When hiring staff, the fundamental question you should ask yourself is – Will I hire these amazingly talented and skilful people as employees or independent contractors?  The outcome of your decision will have a very important legal consequence.

The law considers employees to be an inherent part of a company, such that the acts of the employee during the course of their employment will be considered to be the acts of the company, subject to gross/wilful negligence or fraud on the part of the employee.  As such, the employer may be liable for the acts of the employee – a concept known as vicarious liability.

In contrast, an independent contractor is considered to be a 3rd party service provider to the company (which is known as the principal in this relationship).  In the absence of any contractual assumptions of liability by the principal in respect of the independent contractor’s conduct, the principal has no vicarious liability for the act of the independent contractor.

The law takes a “substance over form” view in respect of whether a person is an employee or a contractor for the purposes of the Fair Work Act 2009.  Although there is no conclusive criterion, the courts have generally focused on a key set of indicia to determine whether a person is an employee or a contractor:

  • Degree of control over how work is performed:  Generally, employees have little control over how work is performed as they are under the control and direction of their employer.  However, a contractor has a high level of independence and control over the work being performed;
  • Expectation and duration of work:  Employees are required to work standard hours during a week, with an expectation that there is continuing work.  Contractors are generally appointed to complete specific tasks without any set hours or any expectation that there will be continuing work;
  • Superannuation: Employers must pay the compulsory minimum superannuation of 9% of the base salary of its employees to a nominated superannuation fund.  Contractors must pay their own superannuation;
  • Leave: Employees receive the minimum paid leave entitlements stipulated in the Fair Work Act 2009.  In contrast, if a contractor takes leave, they do not get paid;
  • Income tax: An employee has income tax deducted by their employer, whereas contractors must pay their income taxes and GST directly to the Australian Taxation Office; and
  • Tools and equipment: An employer generally provides its employees with all the tools and equipment required to complete a task.  An independent contractor is generally required to supply his/her own tools and source any materials required for the job (for which they will invoice the principal, and sometimes add on a margin).

The indicia set out above are not conclusive and merely provides a high level summary of the factual circumstances that the court takes into account when determining whether a person is an employee or a contractor.

Once you have decided whether to proceed on an employer/employee basis or principal/contractor basis, you will need to consider what terms to include in the contract governing the relationship between you (the employer/principal), and your personnel.

In my next column, I will explore the various issues to consider when drafting an employment contract and what rights you should be protecting for yourself as the employer.


by Izhar Basha, Co-Founder and Director of FireHosiery Pty Ltd (Legal, Strategy and Operations)