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What is the difference between an Employee and a Contractor?

Reading time: 9 mins

The distinction between whether a person is an employee of a company or a contractor is an important one and depends on various factors. These factors include whether the worker is engaged in regular, systematic work, has control over how their work is done or has access to leave.

This article explains what an independent contractor is. We also compare the definition of an independent cotractor to the definition of an employee. These concepts are explored by looking at key differences between the two, including some Australian case law examples.

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It is important to confirm whether a worker is an employee

It’s important to understand the difference between an employee and a contractor because there is a risk that employer’s may be entering into sham contract if they get it wrong.

The distinction between an employee and an independent contractor is important. This is because of the legal responsibilities that arise if someone is an employee.

If a worker is an employee, then the parties are bound by all the usual duties of the employer/employee relationship. For example, the employee will have access to leave entitlements and superannuation. And the employer must withhold tax and will be vicariously liable for the negligence of the employee.

On the other hand, if the relationship is one of principal and independent contractor, then there is no employment relationship. In that case, the law relating to independent contractors will apply.

What is the definition of an employee

An employee is a person who works for an employer in a commercial enterprise. That is, they work for a business and are part of that business.

They can be:

  • Trade assistants
  • Apprentices
  • Trainees
  • Labourers

What is the definition of a contractor

A contractor can be either an individual or a business. A contractor is engaged to carry out certain tasks. In this way, a contractor is different from an employee in the sense that they are running their own business.

According to the Independent Contractors Act 2006 (Cth), an independent contractor does not necessarily need to be a natural (individual) person. Therefore, the following types of business entities may also be considered a contractor for legal purposes:

  • Companies
  • Partnerships
  • Trusts

A workplace lawyer can advise employees and employers what the difference is between a contractor and an employee.

It is important to use a well-drafted contract to ensure an independent contractor relationship is created. This is because simply labeling a person as a contractor will not be enough to avoid them being classified as an employee.

Difference between an employee and a contractor

Key differences between contractors and employees

The table below outlines some factors that, when taken together, determine whether a worker is a contractor or an employee.

Indicates the worker may be an employeeIndicates the worker may be a contractor
The employer has a right to control the employee’s workThe contract is for a given result
The employee is serving in the business of the employerThe contractor can refuse work not agreed to in the contract
The worker receives benefits such as annual, sick and long service leaveThe worker sets their own hours of work
The remuneration is in the form of a salary or wagesThe contractor is likely to advertise their services to the public at large
The person who pays the worker has the discretion in relation to task allocation and termination of the engagementThe worker provides their own equipment and assets
The worker receives other benefits which are prescribed under an appropriate award for employees in that industryPayment to an independent contractor is based upon performance of the contrac
The person who pays the worker prescribes the times and locations for the performance of the workThe worker bears the risk of the commercial loss or profit

How Australian case law has defined who is and isn’t an employee

There have been a few landmark cases in this area of law in Australian courts, and it is worth exploring them here.

Workpac v Rossato

The High Court’s recent judgment of Workpac v Rossato is an important case in this area of the law. There, the High Court said that if the agreement is in writing, that is the total contract and terms will not ordinarily be implied.

Difference between an employee and a contractor

This case placed far more importance on the written contract than previous cases and is, to some extent, an unusual position. It will be interesting to see how this case is addressed in future decisions.

Workpac v Rossato appears to demonstrate the High Court’s shift away from looking at the substance of the client / independent contractor relationship. Instead, the court focussed on what the parties agreed in writing.

Hollis v Vabu

In Hollis v Vabu, the case concerned whether a person was an employee or a contractor. That case found that a bicycle courier driver was really an employee, even though the contract claimed that they were an independent contractor. When it comes to determining whether a worker is an employee or a contractor, the substance of the arrangement is the important part (rather than the form of the contract).

Surprisingly, it is generally tax-related cases that raise the question as to whether someone is an employee or a contractor.

French Accent v Michael Anthony Do Rozario

In Jiang Shen Cai trading as French Accent v Michael Anthony Do Rozario, the court laid down some key considerations when determining the employer or independent contractor question.

These considerations include whether they wore uniforms, whether they provided their own equipment to work, who made the decision of how long they worked, and whether they were paid wages or they invoiced the company instead.

Kaseris v Rasier Pacific Case

In 2017, the Fair Work Commission heard the Kaseris v Rasier Pacific Case. In it, Mr Michail Kaseris made an application under s 394 of the Fair Work Act 2009 (Cth) for an unfair dismissal remedy, after alleging that he had been unfairly dismissed as a driver by Rasier Pacific (trading as “Uber”).

Uber argued that Kaseris was an independent contractor, rather than an employee and therefore not protected by unfair dismissal. The Fair Work Commission agreed with Uber, stating that the relevant indicators of an employment relationship were absent.

Some of these indicators include the following:

Kaseris had significant control over how we worked and when he worked. He was able to turn on the app when we wanted to work, and off when he did not want to. This means that he dictated his own start and finish times. He could accept and ignore rides at his leisure, he could also cancel rides as he wished. Things that an employee under an employment contract could not ordinarily do.

He supplied his own equipment for the job, including the car that he drove customers around in, and the phone from which he accessed the Uber Partners Application and accepted rides. In an employment setting, equipment to complete your job is ordinarily supplied by the employer.

Employees receive benefits attached to their employment contracts, such as annual leave, sick or personal leave and a wage. Kaseris did not receive any of those benefits.

Kaseris was also responsible for registering for GST, and paying for his tax independently. He also did not receive any superannuation.

Difference between an employee and a contractor

Amita Gupta v Uber Eats

Two years later, Uber came before the Fair Work Commission again in Amita Gupta v Portier Pacific Pty Ltd, (trading as Uber Eats), to decide whether Gupta would be considered an employee or a contractor.

Ms Gupta raised several points in favour of defining herself as an employee, including that the job she did, did not require any special skill or qualification. Through Uber Eats Partner App, she was told where to collect orders from, where the customer was and the route to take to get to the customer. She was also not permitted to subcontract or delegate her work to anyone else.

However, similar to the first Uber case, it was found that the work that Ms Gupta performed as an Uber Eats delivery driver did not qualify her as an employee. This was because, again, there were factors that pointed toward her being an independent contractor, including:

  • Uber Eats did not have any control over when she worked and for how long she worked.
  • She was able to accept work from competitors of Uber Eats even when she was logged in and completing tasks from an Uber Eats delivery request – something that employees are not normally able to do.
  • She was a part of the Uber Eats business when she was performing her tasks, in the way that employees are part of their employer’s business.

Both these Uber cases reflect the considerations above. There are factors that are associated with being an employee that one must meet in order to be considered an employee.

What should you do next?

In this article, we have looked at the various indicators that distinguish an employee from a contractor under Australian law. To understand whether a worker is an employee or a contractor, you need to carefully assess the relationship between the employer and the worker, and its features.

If you own a business and are paying people, but you are unsure whether they are employees or contractors, you may have to pay charges and penalties for not meeting the employer obligations and superannuation requirements.

Similarly, if you are being paid by a business and are unsure if you are an employee or an independent contractor, you might be missing out on a lot of benefits that are owed to you.

If those situations apply to you, you should seek legal advice from an Australian employment lawyer.

ATO online decision tool

The ATO has provided helpful guidance to employers via an online decision too. The tool guides users through a series of questions to help them to determine whether a worker is an employee or contractor.

The online decision tool is available via the ATO’s website: www.ato.gov.au.

Contact us today to speak to an executive employment lawyer.

Farrah Motley | Director

PROSPER LAW – Australia’s Online Law Firm

M: 1300 003 077

E: farrah@prosperlaw.com.au

W: www.prosperlaw.com.au

A: Suite No. 99, Level 18, 324 Queen Street, Brisbane, Queensland Australia 4000

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Author: Millicent Nhepera, Law Graduate (LLB, LLM), located in Australia.

Enjoyed this article? Check out 5 Things That Should Be Included In A Partnership Agreement

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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