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Subcontractor or employee?

By CCIWA Editor 

The distinction between subcontractors and employees is important in any working relationship.

Prior to entering into a contract, it is necessary for a business to determine whether a contract is one of service or one for services. That is: an employee-employer relationship or an independent contractor-business relationship, respectively.

The Independent Contractors Act 2006 and the Fair Work Act 2009 (FW Act) protect the rights and entitlements of independent contractors and in conjunction with case law, assist in determining who is an independent contractor and who is an employee.

Tests

To determine the nature of the working relationship, the whole relationship (not just the content of the contract) should be considered. The fact that the parties agree a person is to be called a “subcontractor” is only one factor in the determination. Generally, a number of tests are applied to determine whether a person performing work is an employee or a subcontractor. These tests are summarised below.

Control test

This is the most commonly applied test. The main question posed is whether the principal exercises any degree of control over the person performing the task. An employee would be subject to direct control from the employer, a subcontractor generally has freedom in the way tasks are performed.

Risk test

Does the person performing the work bear the risks of payment or the risk of capital? An employee gets paid whether there is work to be done or not, a contractor does not.

Who owns the equipment being used by the contractor?

If a contractor uses their own equipment, vehicle etc., then they are carrying the risk of capital.

Labour v completion of job test

Is the person being paid for hours worked or for completion of a job? Employees sell their labour; a contractor is paid to produce a result.

Multi-factor test

A number of additional criteria may also assist in determining the nature of the relationship:

  • right of control - employees’ hours, work, meal breaks and duties are controlled by the employer. A subcontractor does not have to generally work to these controls and is hired to complete a job.
  • wage payments - an employee will generally receive a regular wage or salary. An independent contractor may submit invoices for their hours worked or receive payment when the job is completed.
  • arrangement in writing - is there any arrangement in writing that might suggest the type of relationship? A contractor may well have specifications, time for completion of work and contract costs.
  • refusal of work - in line with the duty to obey, employees have little opportunity to refuse directions relating to work, whereas a subcontractor will have this option.
  • use of plant and equipment - where a worker does not provide their own plant or equipment to complete work it can be considered a factor suggesting they are an employee.
  • mode of taxation - employers generally pay Pay As You Go (PAYG) tax, as opposed to subcontractors making a voluntary agreement to pay PAYG or charging GST on their services.
  • opportunity for profit - profits are available to a subcontractor. An employee usually works for a predetermined salary.
  • award entitlements - employees may have access to award provisions such as overtime, annual leave, personal leave, long service leave, while a subcontractor will not.
  • responsibility for poor workmanship or negligence - the subcontractor bears the responsibility and liability for losses, where an employer absorbs losses incurred by employees.
  • uniforms and business cars – employees may be provided with a uniform and/or business cards with the employer’s logo. A subcontractor provides their own business cards and/or uniform.

VABU decision

The High Court has overturned an earlier decision of the NSW Court of Appeal and reinstated the importance of the “control test” when determining whether a bicycle courier worked for a company as an employee or an independent contractor.

In its earlier decision, the NSW Court of Appeal shifted the weighting away from the control test and classified bicycle couriers as subcontractors for a number of reasons, including that the couriers bore the expense of maintaining their own bicycles.

The High Court, however, stated that the expense of providing and maintaining a bicycle was not so great as to indicate the couriers were independent contractors. The High Court also indicated that had the personal investment of the bicycle couriers been greater, this might have led to a different conclusion.

This decision demonstrates the extent to which the person doing the work has control over the way in which the work is done as well as who does the work, when deciding whether the person is an independent contractor or employee. The High Court’s decision leaves the door open to place greater weight on other factors depending upon the relative merits in each case.

Sham contracting

The FW Act prohibits employers from representing an individual as an independent contractor when they are in fact an employee. Based on the factors previously mentioned, employers need to ensure that they are engaging individuals in the correct manner and not misrepresenting the arrangement to avoid any of their obligations.

An employer must not dismiss or threaten to dismiss an employee who performs work for the employer in order to engage them as an independent contractor to perform the same, or substantially the same, work under a contract for services.

Similarly, the employer must not make any false statements to the individual in order to persuade them to knowingly enter into a contract for services (as an independent contractor) where they would otherwise be performing the same, or substantially the same, work for the employer as an employee.

Employers found to be breaching such provisions of the legislation could face fines of up to $63,000 per breach. Such penalties would not apply if the employer proves that at the time of the representation they were not aware and were not reckless as to whether the individual was an employee rather than an independent contractor.

Interaction with other pieces of legislation

It is important to be aware that other pieces of legislation, such as the Workers’ Compensation and Injury Management Act 1981, may have a different definition of what constitutes an independent contractor.

This means that if an individual is deemed an independent contractor for the purpose of one piece of legislation (e.g. tax or workers’ compensation laws) it does not necessarily indicate that they will be an independent contractor for other pieces of legislation (e.g. industrial relations laws).

The Australian Tax Office provides an “Employee/contractor decision tool” to assist in determining whether a worker is an employee or independent contractor for tax and superannuation purposes.

Call CCIWA’s Employee Relations Advice Centre on (08) 9365 7660 or email advice@cciwa.com for more information.

The distinction between subcontractors and employees is important in any working relationship.

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