Independent contractor or employee? The rules explained

While there is no single factor that comprehensively differentiates an employee from an independent contractor, the nature of the relationship is looked at more holistically to determine whether an employment, or contractor’s relationship exists. Some key factors are considered below.

Arguably the most defining feature of a genuine contractor’s relationship is the level of control afforded to that independent contractor. In an employment relationship, the employer generally dictates when and how the employee works, whereas an independent contractor has the necessary experience, expertise and autonomy to be able to work in a fashion that suits them. This may include having the ability to subcontract or engage their own employees to perform work for them. Ultimately, an independent business should have the flexibility to work when and how they choose, acknowledging that the business owner will still have some bearing over this (e.g. business trading hours etc.).

Employees are usually paid a fixed rate such as a salary, or hourly/weekly rate, while independent contractors generally submit invoices for specific work performed or projects. To facilitate this, the independent contractor operates using their own ABN or ACN* (note simply having an ABN or ACN does not automatically mean the person being engaged is an independent contractor).

If a worker uses their own equipment/tools/machinery to perform certain tasks, this is more indicative of an independent contractor’s relationship. This is not to say, however, that a worker who does not provide or use their own equipment is therefore an employee, as certain industries and professions require the use of large or expensive equipment which is often provided by the proprietor for reasons of practicality.

All forms of leave, either paid or unpaid, are entitlements generally only afforded to employees. A genuine independent contractor should not be locked into such an arrangement whereby they have to request leave to ‘take time off’. Again, they should have the flexibility to decide when they are available or not available to perform work.

Determining whether a worker is truly an employee or independent contractor will come down to whether the factors, such as those mentioned above, indicate more strongly that an employment or contracting relationship exists.

Provided the nature of the relationship is consistent with a contracting arrangement, any individual may choose to work as an independent contractor.

The exception to this rule is new graduates. If you are considering engaging a new graduate, or you are a recent graduate beginning your career, you should be engaged as an employee and not as an independent contractor.

At the start of a career as a health professional, a worker’s focus should be on developing their clinical experience and refining their expertise. With minimal experience, a new graduate will benefit from tailored guidance and training – which, if engaged as an independent contractor, will be their responsibility to bear. This is not conducive to development as a health professional and is unlikely to yield positive results for the business.

In the same vein, preoccupation with running one’s own business – which is essentially the case for an independent contractor – is not ideal during the early stages of one’s career. Not only does it take the focus off developing clinical skills, it increases the possibility of exploitation as focus must also be centred on understanding financial and legal obligations with somebody who is likely to have more business acumen simply by way of experience.

After some time working as an osteopath, it may be a more realistic prospect to engage an individual as an independent contractor. However, iniitially, employment is the appropriate choice.

The Fair Work Act 2009 provides that it is prohibited to incorrectly classify an employee as an independent contractor, deeming this to be ‘sham contracting’. This protection includes dismissing an employee for the purposes of re-engaging them as a contractor, and making false or misleading statements to an employee to persuade them to enter a contract for services when the role will remain similar or the same to that of an employee.

Businesses who are found to have intentionally established a sham contracting arrangement can face penalties of up to $66,000 per contravention. At the same time, if a contractor is found to be an employee, the business may be liable for back pay, leave and other employee entitlements such as superannuation etc.

From an Australian Taxation Office (ATO) perspective, penalties can include a Pay As You Go (PAYG) withholding penalty and super guarantee charges.

It is never too late to check your arrangements with workers to ensure they are legally compliant and valid. The Osteopathy Australia HR Hotline has resources and checklists available to assist with correctly classifying your worker. Also, the ATO has developed a useful tool (available via their website) to help determine whether your worker is a contractor or an employee. For further information, it is strongly recommended to seek further professional advice. This should include:

• Guidance from an accountant regarding your tax and super obligations;
• Information from your insurer regarding your workers’ compensation obligations;
• Advice from a solicitor who is familiar with employment law regarding the contractual arrangements with your workers.