Who is an employee? … the current picture


Who is an employee? … the current picture

Earlier this year, the Federal Government called for submissions on its proposed changes to workplace legislation covering independent contractors and labour hire arrangements.


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Earlier this year, the Federal Government called for submissions on its proposed changes to workplace legislation covering independent contractors and labour hire arrangements. The Government has indicated it will introduce an Independent Contractors' Bill to Federal Parliament, to hopefully clarify the status of independent contractors and exclude their regulation by workplace relations laws.

The question of determining a person's employment status within an organisation has become increasingly complex over the years. While, in most instances, it may be easy to discern a difference between an employee and an independent contractor, the types of employment arrangements which have been introduced into the workplace over the last few years have resulted in increasing ambiguity between the nature of the two types of relationships.


The emergence of performance-based contracts, flexible working hours and work from home typify a trend which is blurring the traditional distinctions between an employee and an independent contractor. The issue is contentious because of the different consequences attached to each relationship, particularly from the payer's perspective. The obligation to make PAYG deductions is one consequence of having an employee.

Other consequences include workers compensation, industrial instrument minimum wage rates and conditions, superannuation, payroll tax and vicarious liability. Although this subject is very much the realm of the lawyer, workplace practitioners require, at the very least, a working knowledge of this area to identify potential problems in their workplace. However, when determining whether a person is an employee or contractor in a particular case, advice should be sought from the company's employment legal advisors.

Definition of a worker

The definition of a worker may differ depending on the legal jurisdiction. The three main areas subject to definition of a worker or employee are contained in industrial relations legislation, workers compensation and taxation law. It should be noted that this commentary is written in the context of an employment relationship and compliance with employment provisions. Similar problems arise for companies when complying with taxation law, and although there may be differences in the definition of a worker and contractor in these circumstances, the definition of a worker can differ under taxation and workers' compensation law.

Nature of the relationship

The relationship between an employer and an employee is a contractual one. It is often referred to as a contract of service or, in the past, as a master/servant relationship. Such a relationship is typically contrasted with the independent contractor/principal relationship which, at law, is referred to as a contract for services.

An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour, usually to enable the employer to achieve a result. An independent contractor works in their own business, or on their own account; an employee works in the service of the employer, ie in the employer's business.

Common law

It would appear from the various cases determined by the High Court and other courts that there is no single objective test which will answer the question of whether a person is an employee or independent contractor. While various features have been identified by the courts as indicators of the true nature of the relationship, these features are only ever a guide to answering that question. It is necessary in each case to examine all the terms of the contract and to determine whether, on balance, the person is acting as an employee of another or is acting on theirown behalf.

Features of an independent contractor relationship

In assessing a particular employment relationship to determine whether it is one of service or one for services, the courts have identified certain features which may assist in defining this issue.

These indicators, whilst not exhaustive nor is any particular indicator a greater determinant of the question, have been considered as relevant pointers to the nature of the relationship.

Control: The hallmark of a contract for services is said to be that the contract is one for a given result. The contractor works to achieve the result in terms of the contract. The contractor works on their own account.

How is the work performed? An independent contractor enters into a contract for a specific task or series of tasks. The contractor maintains a high level of discretion and flexibility as to how the work is performed. However, the contract may contain precise terms as to materials used and methods of performance and still be one for services.

Risk: An independent contractor stands to make a profit or loss on the task. They bear the commercial risk. The contractor bears the responsibility and liability for any poor workmanship or injury sustained in performance of the task. Generally a contractor would be expected to carry their own insurance policy.

Place of performance: A contractor may perform the work away from the payer's premises and will generally provide their own assets and equipment.

Hours of work: An independent contractor generally sets their own hours of work.

Leave entitlements: Generally an independent contract would not contain leave provisions.

Payment: Payment to an independent contractor is based upon performance of the contract.

Expenses: An independent contractor incurs their own expenses.

Appointment: An independent contractor is likely to advertise their services to the public at large.

Termination: An independent contractor is contracted to complete a set task or tasks. The payer may only terminate the contract without penalty where the person has not fulfilled the conditions of the contract. The contract will usually contain terms dealing with defaults made by either party.

Delegation: An independent contractor may delegate all or some of the tasks to another person, and may employ other persons.

Odco system

This system is one where no employer/employee relationship exists. There is no employment contractual relationship between an agency and the independent contractor who provides their labour. Three parties exist - the independent contractor, the agency and a business using the labour. The contractor has a contract with the agency to supply work. The agency supplies the contractor to the business. The business has the right to 'direct' the work. The business pays the agency a fee. The agency pays the contractor and administers all statutory obligations related to personnel administration. The system is voluntary for all parties.

Contractors currently working under such a system include farm hands, doctors, secretaries, managers, process workers, child care workers, shearers, fishermen, abattoir workers, metal trade workers, transport drivers, telemarketers, printers, security guards, sales people, building workers and many others.

Reasons for challenging an arrangement

Why would a person challenge the contractor/principal status of the relationship when, in many instances, the arrangement was at the request of the person rather than the company? In researching the relevant case law, it is interesting to identify the nature of the circumstances which persuaded a person to claim the existence of an employment relationship rather than a contractual one.

A common reason for challenging the employment relationship usually involves the person being injured or incapacitated whilst performing work for the company.

As a contractor does not usually have an entitlement to workers compensation, the loss of income can be the catalyst for a person pursuing a claim for compensation. Conversely, the pursuit of a common law action by an independent contractor when a company is alleged to have negligently caused the person's injury would normally involve costly and lengthy legal action by the contractor.

Characteristics may not be relevant

The courts have generally disregarded the existence of particular superficial features of a contract in determining whether the person is an employee or contractor. For example, the deduction of PAYG income tax from the person's payments or the payment of the superannuation guarantee charge (SGC) does not, of itself, mean the person is an employee. Likewise, a person who is covered by the company's workers compensation policy does not necessarily mean the person is an employee. This is because of the differing definitions of a worker under these laws.


Employee v contractor

Odco system of contracting

'Odco' system excluded employment relationship

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