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Determining whether a worker is an employee or contractor is possibly one of the biggest HR decisions that businesses need to make. Get it wrong and the ramifications can be massive. In this article, we cover how to determine if a worker is in fact an employee or contractor.

There is no hard and fast rule that applies, so of course, whether you’re a business owner or a worker who believes there has been an incorrect determination made, then talk with our experienced workplace lawyers at Law By Dan today.

What is the definition of independent contractors?

Workers are classified as independent contractors when they do any of the following in broad terms:

  • Determine their own employment responsibilities
  • Have the authority to delegate
  • Are compensated based on their performance
  • Have a distinct Australian Business Identification Number (ABN)
  • You have the right to refuse and accept job.

Employees are exactly what they sound like.

Alternatively, if a person is regarded to be an employee, he or she must comply with the following requirements:

  • It is necessary to be compensated on a regular basis through the payment of a salary or wages.
  • It is necessary to have paid leave benefits.
  • Has distinct tax and superannuation obligations.

To put it another way, an employee works for your company and is a part of it, but a contractor is self-employed and runs their own business.

Why do businesses choose contractors rather than full-time employees?

There are several advantages to using contractors rather than workers, including the following:

  • Contractors may be less expensive. Hiring a contractor may be less expensive than hiring an employee on a permanent basis. You may also be able to hire a contractor for a specific job that will be less expensive than hiring an employee to complete it.
  • You have the option of hiring contractors on an as-needed basis. If your company has periods of high and low activity, you can engage contractors as and when you require them.
  • It is possible that you will require particular experience or knowledge.  Sometimes a company will require a person to work on a specific project or job for which a current employee does not have the necessary skills or qualifications. An example might be a company that hires a web designer to help them with a website.

When hiring contractors, there are several things to consider.

Contracts of employment for independent contractors

In terms of financial compensation, an independent contractor is compensated on the basis of performance or upon completion of a specific job (s). Tax and Goods and Services Tax (GST) are paid by independent contractors to the Australian Taxation Office (ATO) on their own behalf (ATO). They also often hold an Australian Business Number (ABN) and submit invoices for the services they perform.

They are compensated at the conclusion of the contract or project that they have performed. You are under no obligation to make any contributions to the independent contractor’s retirement plan or to make any other contributions.

Rights and safeguards for contractors

Independent contractors’ employment rights and entitlements are protected under the Independent Contractors Act 2006 (ICA) and the Fair Work Act 2009 (FWA), which are both federal laws.

The Independent Contractors Act (ICA) was enacted in order to provide a national framework for providing independent contractors with equitable contractual rights and duties. In most states and territories, including New South Wales, the International Convention on the Prevention of Unfair Contract Terms has taken the role of local unfair contract legislation (NSW).

If you intend to hire an independent contractor, you should be aware of the following considerations:

  • The contract’s terms and conditions should be reasonable.
  • Both parties have equal negotiating power, and neither can use deceptive or unfair techniques to obtain an advantage over the other.
  • The remuneration paid to the independent contractor is in accordance with market prices.

The Industrial Relations Act (ICA) imposes severe penalties for those who violate these requirements, and any aggrieved party can seek help from the Fair Work Ombudsman if there is any breach of an employee’s employment contract.

In New South Wales, the Independent Contractors Act 1996 (ICA) overrides the deeming provisions of the New South Wales Industrial Relations Act 1996 (NSW IR Act), which consider independent contractors to be employees if they are engaged in various building and construction trades, such as carpenters, joiners, bricklayers, painters, timber suppliers, plumbers, drainers, plasterers, blinds fitters, ready mixed concrete drivers, or RTA lorry drivers.

If you’re a contractor, you should be on the lookout for fraudulent contractual arrangements.

It is important to be cautious when getting into an independent contracting agreement to avoid falling victim to fake contractual arrangements. An employer may attempt to pass off an employment connection as an independent contracting arrangement in order to avoid being responsible for employee benefits and benefits obligations.

The Fair Labor Standards Act bans an employer from doing the following:

  • Unlawfully portraying an employment contract as an independent contracting arrangement is prohibited by law.
  • Terminating or threatening to terminate employees in order to engage them as independent contractors is prohibited.
  • Inducing a person to become an independent contractor by deception is illegal.

In the event that such an act is committed, the Fair Work Act imposes severe sanctions. Do not hesitate to contact Law By Dan if you find yourself in a scenario where it is unclear whether you are an independent contractor or an employee.

Is it preferable to work as a contractor or as an employee?

In the end, it all comes down to your personal condition and circumstances. Contractors are entitled to a variety of advantages, including the following:

  • You are in charge of your own destiny.
  • Flexibility in terms of working hours and with whom you collaborate
  • You may be able to earn more money if you have the ability to determine your own prices.

However, there are certain disadvantages, which include the following:

  • You do not have access to the same perks as regular workers (personal leave, sick leave, superannuation benefits etc.)
  • Tax and superannuation obligations are solely the responsibility of the individual.

Hours of Operation

Employees, with the exception of those who work on a casual basis, normally have regular and specified working hours. However, contractors often have the flexibility to choose the hours that they work in order to achieve their assigned duties. A contractor agreement, on the other hand, may set certain working hours.

Work is under your control.

Employees are often held to the norms and guidelines established by their employers for them to follow. Contractors, on the other hand, have a great deal of influence over the way their job is completed, including the techniques they employ to perform their employment.

Commercial and financial risk are two different things.

Employees are not exposed to any commercial or financial risk as a result of their job because the final obligation rests with the employer. Contractors, on the other hand, are the ones who take the risk of making or losing money. In the same way, they will be held liable for any liabilities or problems that occur. Construction contractors frequently carry their own liability insurance as a result.

Expectations in the Workplace

Additionally, employees, including some casuals, may expect to be assigned to work on a consistent and methodical basis. Your company, on the other hand, will often hire contractors to do certain tasks and will not typically retain them for more work after that.

Payment Methods.

When it comes to paying your staff, they are normally paid on a regular basis, such as weekly, fortnightly, or monthly. This payment is in return for their time, and you are obligated to pay them regardless of how well they work. Your company, on the other hand, pays contractors to accomplish the task that you have estimated. They are paid through invoices and have an Australian Business Number to identify themselves. In the same way, money is made in exchange for successful outcomes.

Equipment and Instruments

It is generally agreed that giving tools and equipment, or at the very least an allowance for them, will be beneficial to your company’s personnel. Contractors, on the other hand, are responsible for providing their own equipment and tools in order to accomplish the task.


Employees are eligible to receive superannuation contributions (which you, as their employer, are responsible for making) to their designated retirement fund. Contractors, on the other hand, will be responsible for managing their own superannuation contributions in the majority of circumstances. There are a few exceptions to this rule, as follows.

Contractors, for example, may be entitled to superannuation payments from you if they are regarded to have been paid entirely or mostly for their labour.

A contract may be termed ‘wholly or largely for labour’ if the contractor does any of the following:

  • is compensated solely or mostly for their own personal labour and talents;
  • is compensated for each hour of work rather than for the completion of a specified project;
  • or directly does contract work on their own time.


Furthermore, most employees have their taxes deducted through pay-as-you-go agreements, which are common in the business world (PAYG). Contractors, on the other hand, are responsible for paying their own income tax to the Australian Taxation Office (ATO). In addition, a contractor may be required to pay their own Goods and Services Tax (GST) to the Australian Taxation Office (ATO) in certain cases.

Entitlements to Paid Time Off

Employees also benefit from leave entitlements, such as annual leave or carer’s leave, which are provided by their employers. In the same way, your casual employees are compensated with casual loading instead of the aforementioned rights. Contractors, on the other hand, are not entitled to any leave benefits. Because of this, it is even more critical that independent contractors consider purchasing their own insurance coverage.

Delegation of Tasks is a legal right.

Employees, in particular, are not permitted to transfer their responsibilities. They may outsource some of their responsibilities to other staff, but they are ultimately responsible for their own job. Contractors, on the other hand, have the ability to delegate their labour and may opt to outsource their employment (unless you prohibit this arrangement under the contractor agreement).

What Happens if I Make a Misclassification of a Worker?

Because of the major disparities in the entitlements you owe to employees and contractors, it is vital that you do not misclassify your employees or contractors. Likewise, if you engage in sham contracting, you should be aware of the ramifications of your actions. You and your company might both face hefty fines if you misclassify an employee as an independent contractor.

When You Get it Wrong: Sham Contracting

Employees are protected from sham contracting under the terms of the Act. Shady contracting is the practise of an employer misrepresenting to a worker the nature of the connection between the worker and the business; for example, by representing the worker as an independent contractor when the person is, in fact, an employee.

Sham contracts are often inadvertent (for example, when an employer misunderstands the employment arrangement), yet the error can have serious consequences in terms of leave accrual, penalty rates, and notice of termination.

Engaging in sham contracting is forbidden under the Fair Work Act 2009, and if you are found to be in violation of the law, you may face legal consequences.

You are not permitted to do the following under the requirements of the sham contracting provisions act:

  • Declare an employee to be an independent contractor in order to avoid a disciplinary action.
  • Make an existing employee work as an independent contractor by ordering them to do so.
  • If an employee refuses to work as an independent contractor, you can fire or threaten to fire them without cause.
  • Employers may terminate or threaten to dismiss a worker in order to hire him or her as an independent contractor to do the same tasks.
  • Use deception to persuade an employee to work as an independent contractor to accomplish the same (or substantially the same) tasks as an employee.

As an employer, it is critical that you are aware of the typical characteristics that decide whether a person is classified as an employee or an independent contractor in your organisation. Always keep in mind that there is no one decisive criteria, and that each case is addressed individually in order to determine whether or not a contract is an employment or an independent contracting arrangement.

When it comes to defining workplace relationships, the High Court has reiterated in two major employment law rulings that contractual obligations take precedence over all other considerations.

The High Court of Australia delivered its highly anticipated decisions in Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 (ZG Operations & Anor) on 9 February 2022. The Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel (Jamsek). Both verdicts bring much-needed attention to the difficult subject of defining the genuine nature of professional relationships, which has received little attention to date. It is important to determine whether or not there is an employee or independent contractor connection.

This sequence of rulings demonstrates that where parties have thoroughly and explicitly set forth the parameters of their connection in a written agreement, the description of the relationship must be assessed in light of that agreement. There is no need to take a broad approach to this problem. In contrast to the long-established approach of considering the day-to-day reality of the contractual relationship with reference to the multi-factorial test’ and the post-contractual conduct of the parties when characterising a relationship, the new approach takes into account the post-contractual conduct of the parties.