It is often a complex question to determine whether an individual undertaking services or work is doing so as an “independent contractor” or whether, in truth, the individual is an “employee” of the organisation to whom work or services are provided.
Clearly there many truly independent contractors undertaking work daily. The tradesman plumber with his own equipment undertaking plumbing services for any number of customers, for example. Increasingly however employers are seeking to sever an employment relationship with an employee and encourage the employee to hold themselves out as an independent contractor. This is often done for reasons such as to avoid industrial relations legislation; to reduce the cost to the employer, etc. The question then arises as to whether the person is truly an independent contractor or an employee. If the latter, then the individual will be entitled to all of the rights and protections granted to an employee.
This has become even more important with the introduction of the Fair Work Act 2009. An employer who gets it wrong and is wrongly characterising an employee as an independent contractor faces significant penalties under the Fair Work Act including where they have misrepresented to the person their status or are coercing the person to become a contractor rather than an employee and thus failing to pay the person in accordance with their employee entitlements. If proven, those breaches can attract penalties, not only for the employer, but also for the HR professionals working for that employer.
Why is it difficult to determine the true status of the individual?
Courts over many years have had this issue before them for decision and it is not always easy for a court to determine whether an individual is truly an independent contractor or an employee. This is because such arrangements are unique and require close analysis. There is thus not a single “definition” that answers the question – am I an independent contractor or am I an employee? In attempting to answer that question, courts have set down a number of indicators to help determine the distinction. First and foremost the court will look at precedents from previous cases but will look at all of the circumstances of the relationship between the parties, that is the “totality” of the relationship is examined.
Important indicators that a court would consider include:
- The degree and level of control that the “employer” has over the way the work is undertaken, e.g. the greater the control, the more likely the relationship is that of employer/employee.
- Does the individual carry the risk of loss themselves in carrying out the work? If they do then they are more likely to be a contractor.
- Does the individual have to provide their own equipment? If yes, then they are more likely to be a contractor.
- Is the individual entitled to undertake work for others? If not, they are more likely to be an employee.
Employers need to exercise considerable care in their characterisation of an individual and, where seeking to classify them as an independent contractor rather than an employee, will need to proceed with extreme caution and take advice as the consequences of getting it wrong are significant.