Introduction and disclaimer
This information sheet is intended as a guide only to the law in Victoria. It explains the difference between employees and independent contractors and the legal requirements which apply. It is not a substitute for professional legal advice.
Why is the difference between employees and independent contractors important?
Employees have statutory entitlements to minimum wages and conditions. Employers must deduct PAYG tax from remuneration paid to employees. Employees may also have rights to challenge their dismissal. This is not the case for contractors.
In many areas, however, the obligations of a person using the services of a contractor (principal) as opposed to an employee are the same. The obligation to provide the worker with a safe workplace is the same. In some cases, the principal must ensure that the contractor is covered by a workers’ compensation policy. In other cases, the principal must make Superannuation Guarantee contributions on behalf of the contractor.
Is a worker an employee or a contractor of the principal?
If another entity is supplying the principal with a tax invoice for the worker’s services then the worker is unlikely to be an employee of the principal.
If the worker is a sole trader supplying the principal with a tax invoice for his or her services, this will be a good indication that the worker is engaged by the principal as an independent contractor. If, however, a court or tribunal is asked to verify the contractor status of the worker, it will look at a range of indicators to determine the practical reality of the relationship. The fact that the principal has made a written contract designating the worker to be an independent contractor will be important, but not conclusive.
The table below contains some of the indicators that courts and tribunals have considered to be relevant in determining whether a worker is an independent contractor or an employee.
| Indicia | Independent Contractor | Employee |
|---|---|---|
Does the 'employer' exercise, or have rights to exercise, control over the manner in which work is performed, place of work, hours of work etc? NB The absence of control is not a strong indicator that a worker is an independent contractor where there is a high degree of skill and expertise. | No | Yes |
| Does the worker perform work for others (or have a genuine and practical entitlement to do so)? | Yes | No |
| Does the worker have a separate place of work and/or advertise his or her services to the world at large? | Yes | No |
| Does the worker provide and maintain significant tools or equipment? | Yes | No |
| Can the work be delegated or sub-contracted? | Yes | No |
| Does the 'employer' have the right to suspend or dismiss the worker? | No | Yes |
| Does the 'employer' present the worker to the world at large as an emanation of the business eg is the worker required to wear the uniform of the employer? | No | Yes |
| Does the 'employer' deduct income tax from the remuneration it pays to the worker? | No | Yes |
| Does the 'employer' remunerate the worker by periodic wage or salary or by reference to completion tasks? | No | Yes |
| Does the 'employer' provide the worker with paid holidays or sick leave? | No | Yes |
| Does the work involve a profession, trade or distinct calling on the part of the person engaged? | Yes | No |
| Does the worker create goodwill or saleable assets in the course of his or her work? | Yes | No |
| Does the worker spend a significant portion of his remuneration on business expenses? | Yes | No |
• Is the worker running his or her own business or enterprise with independence in the conduct of his or her operations?
• Or is the worker operating as a representative of an ‘employer’s’ business with little or no independence in the conduct of his or her operations?
Superannuation Guarantee contributions
Even if the worker is a contractor, legislation may require that the principal make Superannuation Guarantee contributions on behalf of the worker. Again, if another entity is invoicing the principal for the worker’s services then Superannuation Guarantee obligations are unlikely to arise. The issue will generally arise only where the worker is a sole trader supplying the principal with tax invoices bearing an ABN for his or her services.
If the contract between the principal and the worker is wholly or principally for his or her labour then Superannuation Guarantee obligations will arise. A contract is wholly or principally for labour if the value of the labour component of the contract is more than 50% of the value of the whole of the contract. Labour includes mental and artistic effort.
Superannuation Guarantee obligations may arise for the following workers depending on their relationship with the person to whom they provide their services:
• people who receive payment for performing, presenting, participating or providing services in connection with any music, play, dance, entertainment, sport, display or promotional activity, or any similar activity involving the exercise of intellectual, artistic, musical or other creative talents;
• people who receive payment to perform or provide services in connection with the making of any film, tape or disk or of any television or radio broadcast.
Workers’ compensation legislation
Again, even if the worker is a contractor, legislation may require that the principal ensure that the worker is covered by a workers’ compensation policy. The issue will generally arise only where the worker is a sole trader supplying the principal with tax invoices for his or her services and the principal’s payroll is more than $7,500.
The question of whether a principal will be obliged to extend a workers’ compensation policy to a contractor is complex. If the worker is ordinarily rendering services to the public generally, it will be unlikely that such an obligation will arise. A worker will be accepted as ordinarily rendering services to the public if:
• in a given financial year the contractor provides services of that type to the same principal for an average of 10 days or less per month; or
• the payments received by the contractor from each principal in any given financial year constitute no more than 40% of the gross trading income of the contractor; or
• over 3 financial years the contractor provided services to more than 2 principals and in the current year received less than 100% of gross trading income from the principal in question and in each of the 2 prior years less than 80% of gross trading income from the principal in question.
A person engaging a contractor will not attract WorkCover obligations in respect of the contractor if the services are provided for no more than 90 days in a financial year. Any work carried out on a given day will count as a full day. The days worked do not have to be consecutive.
A person engaging a contractor will not attract WorkCover obligations in respect of the contractor if the number of days for which a particular type of service is ordinarily required by the principal in a financial year is less than 180 days. Again, services required for part of a day will count as a full day. The days for which the type of service is required do not have to be consecutive.
Further information
Victoria WorkCover Authority: Advisory service Tel (03) 9641 1444 tollfree: 1800 136 089 or email: info@workcover.vic.gov.au or website: www.workcover.vic.gov.au
Superannuation Guarantee Hotline tel: 13 1020; the Insurance or the Superannuation Commission Hotline tel: 13 1060; or the Australian Tax Office www.ato.gov.au; SuperChoice website www.superchoice.gov.au.