Contracting has emerged as an alternative to the traditional employment relationship. However telling the difference between an employee and an independent contractor can be complex. There is no single rule that determines the question rather consideration is given to multi-factor tests.

Determining the Nature of Engagement
A contractor can be engaged directly as a natural person, through a trust, partnership or company, or through a labour hire agency. In determining whether the engagement is one of employment or contractual, it is important to look at the full circumstances of the engagement and consider all factors that led to the relationship:

Does a Written Agreement eliminate the confusion?
It is not unusual for a business to engage an individual to perform work and fail to record the terms of the engagement in a written contract. This means that, if there is later a dispute there may be significant
disagreement between the parties and – ultimately – litigation.

For this reason, it is always prudent to record the terms of engagement in a written contract before the engagement commences, and have both parties sign it. Even if you have already engaged the individual, it is not too late to enter a written contract, and acknowledge that the contract has already commenced.

However, you should be aware that simply calling an individual a ‘contractor’ on paper, or the fact that they have an Australian Business Number (ABN) or a registered business name, does not mean that this is determinative of the relationship. Courts can still look behind a contract to define the true relationship between the parties. Also, having a contract in place does not mean that you can contract out of your obligations under legislation.

What liabilities arise if we get it wrong?
Generally, the employment relationship is more heavily regulated than a contractor relationship. So, if you incorrectly classify an individual as a contractor, you may be liable for:

If a contractor meets all of the above criteria they may be entitled to be paid superannuation contributions. At the rate of 9.5% of their ordinary time earnings, as long as they earn $450 or more before tax per calendar month.

Where to for advice?
The Australian Taxation Office provides a Contract Decision Tool to help determine the nature of an engagement relationship. This link to the tool is provided below:

If you are unsure of your obligations when engaging for services, please contact our office and talk to one of our team members who can walk you through the process of determining the nature of the relationship and your obligations.

Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.

Recent Posts