THE LEGAL DISTINCTION BETWEEN ‘EMPLOYEE’ AND ‘CONTRACTOR’ AND WHY IT MATTERS

1 Apr

The need to draw a distinction

Whether a worker is legally categorised as an ‘employee’ or a ‘contractor’ can have potentially significant ramifications for businesses for a wide range of reasons including in connection with assessing entitlements, payroll, tax, superannuation entitlements and even access to workers’ compensation. Drawing a clear distinction is vital to successful and mutually understood employment relationships. However, it is not an area of law that stands still and so business operators need to be familiar with the developments in the legal test and the factors that tend to establish an employment rather than contractor relationship.

Distinguishing between employee and contractor

Simply because the contract entered into by an employer with an individual describes their position as an employee or independent contractor, does not necessarily mean they are legally defined as a contractor in all instances. The conduct of the relationship between the two parties will determine the true position.

The most relevant question is ‘whether the worker has been engaged to serve, or to provide services’1. In answering this, there is a series of factors to be considered. A ‘multi-factorial approach’ 2 is to be taken that is, having regard to all aspects of the relationship. Some factors include:

Terms of the contract

Basis of payment
Who provided all or most of the equipment, tools or other assets
Who bears any commercial risk
Who has primary control over direction of the work
Whether sub-contracting or delegation is permitted
Whether tax is deducted and what is disclosed in tax returns
What leave entitlements exist
The independence of the worker
The parties’ intentions

A recent legal development has seen emphasis given to the stated intention of the parties, where an employment contract has been negotiated.3

If your contractor is an individual

Contracting an individual rather than a business can somewhat cloud the legal definition of their employment. It is important to ensure a contract’s clarity in regard to the factors set out above, but particularly clarify:

If payment is made upon a specified, achieved result
The contractor’s entitlement to delegate
The calculation of the price; whether super and tax is to be managed by the contractor or employer (if so, an indemnity preventing the contractor from claiming super after the contract’s completion or termination)

Relevance to Customs Licensing regime

Whether or not a worker is legally categorised as an employee or contractor can also have ramifications under statutory law, including the Customs Act 1901 (Cth) (the Act).

Part XI of the Act provides for three categories of customs brokers:

Corporate – a company or a partnership that is licensed to act on behalf of owners of imported goods. A corporate customs broker must employ nominee customs brokers to lodge customs declarations.
Sole trader – an individual who is licensed to act on behalf of owners of imported goods. A sole trader may also employ nominee customs brokers. A sole trader cannot be employed by a corporate customs broker.
Nominee – a natural person who is licensed to act as a customs broker but only as an employee of a corporate or a sole trader customs brokerage. A nominee may be employed by more than one corporate or sole trader brokerage at any one time.

Clearly, to be eligible to be a nominee for a corporate customs broker, an individual must either be a company director or member of a partnership, or they must be an employee.

The nominee provisions have been the subject of recent review. They are likely to be further considered by the Trade Single Window Taskforce in its current consideration of the simplification of the customs licensing framework within its broader review of regulatory reform and IT system changes. However, the eligibility criteria currently involves a careful consideration of the existence of an employee relationship for nominees that are not directors or partnership members. Businesses should be acutely aware, particularly as modern working relationships become more fluid, that the true status of a worker will be determined by many more factors than merely the terms of a contract.

Contributed by Ms Danella Wilmshurst a Partner at Norton White.