Contractor in Employee Clothing…

- August 10, 2012 3 MIN READ


The distinction between “employee” and “contractor” is important for a number of reasons.

For the person engaging the services (let’s call them the “Principal”), it means the difference of whether or not they accrue and pay leave, make superannuation contributions, withhold income tax and make decisions about termination with relative ease or not.

For the person providing the services (let’s call them the “Worker”), they will plan their personal finances differently (including tax and other structuring), charge a premium, and view holidays and sick days as something that either costs them or the Principal money.

Both the Principal and the Worker have relied on the way they describe the relationship between themselves – and ordinarily the benefits of engaging and acting as a contractor tempt both parties to say at the outset that the Worker is a contractor and not an employee.

To back this up, the Worker normally registers a business name (and may even create a company) and diligent Principals will get a contract drawn up (or heaven forbid, download one) which clearly states the Worker is a “contractor” and not an employee. Invoices are provided for the work performed, the Principal pays (assuming that is the end of their obligations), the Worker looks after their own tax and super (in whatever way their accountant has come up with – sometimes sharing with wives and kids or a trust to get the tax down), and everyone feels pretty pleased with themselves that they have made the situation work in the best way for them.

Then, something happens. 

The something could be one of a number of things – and normally involves one person saying all of a sudden, “the Worker is an employee, which means I get …”.

We will get to what the “…” means in a bit, because at this point the Principal (usually) jumps up and down and says “hang on a minute, I’ve got a contract, the Worker has his/her own business and I’m just a client, I get invoices and don’t know what the Worker does with the rest of their time – they are not an employee!”

Alas, the answer is: the Worker might be an employee.

At least for the purposes of some taxes (like payroll tax), entitlements (like leave accrual, or unfair dismissal) or thresholds (like determining whether the Principal has less than 15 employees and so can enjoy the Small Business exemptions under the Fair Work Act).

In a recent case, Fair Work Australia held that a Worker who had their own company which had other employees and provided invoices and a range of other “contractor” like things, was to be counted as an “employee” because, amongst other things, they looked to other people like an employee and behaved like one (see Kuat Chee v Renown Business Solutions Pty Ltd [2012] FWA 5137).

This sure was a surprise for the Principal and Worker in that case, as it was claimed by an ex-employee that the Worker was an employee so that the Small Business exemption on the payment of redundancy under the Fair Work Act wouldn’t apply. The Principal all of a sudden is on the hook for redundancy payments to the ex-employee, and (though not discussed in the case) owes accrued leave and other employment entitlements to the Worker and may be in trouble with the ATO for tax and super payments. The Worker too has some potential troubles with the ATO, and might have to change everything and work quickly to do some damage control.

Not a nice surprise for anybody.

What is the lesson here? We must all be realistic about what sorts of relationships and obligations we actually have. Where we know that it is probably an employment relationship, no matter how hard we might try to squeeze something into a different shape, it will still be the same underneath. Where we think it could really honestly be a contractor relationship – get advice as you might be inviting some expensive surprises in the future (and it can come from a range of angles to get you).



Danny King Legal brings a holistic and commercial approach to the practice of employment law with relevant experience gained in Australia’s largest law firm, micro-firms and working in-house. Our clients enjoy a tailored approach that in every case meets their brief – one size does not fit all.