If you engage individual workers as contractors, it’s important to make sure they’re not employees in the eyes of the law.
Improperly characterising employees as contractors exposes businesses to backpay claims for employment entitlements such as leave, allowances and overtime as well as breaches of any applicable Modern Award. It may also mean investigation by regulators such as the Fair Work Ombudsman or the ATO for failing to withhold tax or pay superannuation.
The Fair Work Act requires an examination of both the written contract and what happens in practice to determine whether a worker is a contractor or employee.
This article outlines the test and the sorts of clauses that should be included in independent contractor agreements to avoid an employment relationship.
Examine the contract and the conduct
The Fair Work Act requires a consideration of:
- the real substance, practical reality and true nature of the working relationship
- all parts of the working relationship between the parties, including the terms of the contract and how the contract is performed in practice.
This is often described as the ‘multi-factor’ approach to determining whether an individual is a contractor or an employee. It involves looking beyond the written terms of the contract to see what happens in practice.
The level of control
A key question is how much control is exercised over the worker both in the contract and in practice. The more control exercised over how and when work is performed, the more likely they are to be deemed an employee.
Courts have been quick to find a contractor relationship where the worker is required to comply with any direction or instruction by the principal.
Other indicators of a contractor relationship due to a high degree of control include:
- Direction over how and when the worker is to perform their work
- Prohibition on the delegation of work to others
- Required to comply with the company’s internal policies that apply to employees
- Required to use company tools vehicle/tools/equipment
If the contract gives the individual the right to control how and when the work is performed, and that is reflected in practice, that will be an indicator of a contractor arrangement.
Is the individual working in their own business, or your business?
Another key question is whose business is the individual working in?
A contractor works in their business whereas an employee works for a business.
Factors that tend to demonstrate a worker is working in their own business include where the worker:
- operates through an incorporated entity, rather than just as an ABN holder
- supplies their (or their company’s) own equipment, tools or vehicle
- can delegate the performance of the work
- is free to perform work for others
- is paid to achieve a result, rather than for their time
Clauses for contractor agreements
Clauses that will help demonstrate an individual worker you engage as an independent contractor isn’t an employee are those that give control to the individuals over how they perform work, and demonstrate the contractor is working in their own business.
This is not necessary for a labour hire agreement, or traditional head contractor and subcontractor agreement, where the supplier supplies more than one worker. But these sorts of clauses are recommended when you engage a single person to provide their skills or labour.
Clauses may include:
- “The contractor has control over how and when they perform the services, but must provide regular reports to the company.”
- “The contractor may engage and provide other personnel to perform the services.”
- “The contractor will provide all necessary tools, vehicles and equipment, at the contractor’s expense.”
- “The contractor may offer services to other clients.”
- “The contractor is responsible for any insurances required at law to carry out the work”
These are the types of clauses that will assist but will obviously need to be tailored to work for your business. They must also be adhered to in practice in light of the Fair Work Act test.
Contractors and superannuation
Regardless of what your contract says, superannuation legislation will deem a contractor to be an employee if they are an individual (not a company) engaged wholly or principally for their own labour.
Ensuring you engage incorporated contractors (who can in turn employ/engage the individual who does the work) is the best way to ensure you do not have to pay superannuation to the contractor. Engaging contractors to achieve results, rather than for their labour, also generally means they are not entitled to super.
If your contractor is deemed to be an employee using this test, you must pay the minimum superannuation contribution to the individual’s superannuation fund (not directly to the individual).
Takeaways for businesses
To avoid your workers who you engage as independent contractors from being found to be employees, you should have a comprehensive written contract which:
- engages them as an incorporated entity, rather than as an individual (this will also mean you don’t have to pay them super);
- affords them control over how they perform work; and
- demonstrates that the contractor is working in their own business, rather than in the principal’s business.
This must then be reflected in practice.
Batch Mewing lawyers drafts independent contractor agreements to reduce the risk of a finding that a contractor is an employee and advises businesses on their risk in relation to their current contractor agreements – and how to fix them.
