On the 9th of February this year, the High Court of Australia set down clarifications to determine whether a person is an employee or an independent contractor.

Ultimately, we have seen a move away from the ‘multi-factorial’ test which we have operated on over the past 30 years, solely relying on the written contract between businesses and their contractors.

Now, it is important that companies review their written contracts with their employees and independent contractors so that both parties fully understand the agreement they are entering into.

So how do you determine whether you have an employee or an independent contractor?

It is important to know the distinction and implement it correctly as it will affect your tax and super obligations and penalties apply if you are found to be doing the wrong thing.

Employee or Contractor?

There are some general rules to follow as to whether someone is an employee or an independent contractor.

An Employee: 

  • Cannot subcontract/delegate work
  • Is paid for the time worked/price per item or activity or a commission
  • Your business provides all or most of the equipment, tools and other assets required to complete the work, or you reimburse them
  • Takes no commercial risks
  • Is directed in the way in which they do their work
  • Does not operate independently of your business. They are considered part of your business.

A Contractor: 

  • Can subcontract/delegate work to others
  • Is paid for a result achieved based on provided quote
  • Provides all or most of the equipment, tools and other assets required to complete the work and does not get reimbursed
  • Takes commercial risks and is legally responsible for their work and liable for the cost of rectifying any defects
  • Has freedom in the way the work is done, subject to the specific terms in any contract
  •  Is operating their own business independently of your business and is free to accept or refuse additional work

ATO Decision Tool

The ATO has an effective decision tool you can use to determine whether you have an employee or an independent contractor. It involves answering simple questions about the working arrangement including:

  • Who you pay
  • Whether they can engage someone else to do the work for them
  • How you pay them (ie: set amount per period/price per activity or item/quoted price)
  • Who is responsible for providing equipment
  • Reimbursement of funds
  • Super obligations

Exceptions to the rule

It is important to note, the following people are always considered employees:

  • Apprentices
  • Trainees
  • Labourers
  • Trades assistants

At the end of the day, what matters is that employers clearly draft written contracts for both independent contractors and employees.

Both employer and employee/contractor must fully understand the agreements they are entering into and reflect the rights and obligations of both parties.

If you’d like assistance in determining your business structure and employee/contractor status, get in touch with a member of our team.