Employee and Contractor Classification

In recent years, there have been several significant common law and legislative developments in relation to the issue of employee and contractor classification. This article looks at the current legal status of employee and contractor classification in Australia.

Employees and contractors

The Australian workforce is made up of workers classified as employees, who are engaged under an employment contract, and those classified as contractors, who are engaged under independent contractor agreements.  The label that the employer or worker uses to describe the employment relationship does not determine the legal classification.

In the early twenty-first century, Australian law developed a multi-factorial test to determine when someone was an employee as opposed to a contractor based on the totality of the employment relationship. Although many factors are taken into account when determining if a worker is an employee, the main criteria are the personal relationship between employer and worker, the mutuality of obligation, the degree of control, the right to delegate or subcontract, and type of representation.

However, this approach was unsettled in 2022, when the High Court handed down two decisions on the worker classification issue. In CFMMEU v Personnel Contracting and ZG Operations v Jamsek, the Court clarified that the relationship between worker and employer is composed of the legal rights and obligations arising from the contract between the parties. These decisions shifted the focus firmly to the terms of the employment contract.

Employment contracts are typically written documents. However, an employment contract can be an oral agreement, or a hybrid combination of written and oral terms, or even have terms implied by conduct. Indeed, during the course of employment, an employment contract can change based on the conduct of either the employer or the worker. However, these 2022 decisions signposted that a worker’s conduct and work practices were not relevant to the classification unless they sufficiently varied the agreed contractual terms. These decisions upheld the primacy of the employment contract as the determinative factor in distinguishing between an employee and an independent contractor, and effectively eliminated the multi-factorial test in tribunal and court proceedings.

Reinstatement of multifactorial test

Following the two High Court decisions in 2022, the Fair Work Legislation Amendment (Closing Loopholes) Act 2023 amended the Fair Work Act 2009 to reinstate the multi-factorial test as the relevant approach when determining whether a worker is an employee or independent contractor.

Under this test, the major difference in classification between employees and independent contractors is that an employee works within and is a part of the business, while an independent contractor provides services to the business. There are certain additional indicia that separate the classifications of employee and contractor, though no single indicia is conclusive:

Control

An employer has the legal right to control how, where and when the worker completes their work, while the independent contractor chooses how, where and when they do their work, subject to reasonable direction.

Integration

Employees serve within the business and are contractually required to perform work as representatives of the employer. Conversely, independent contractors provide services for employers, performing work to further their own businesses.

Mode of remuneration

Employees are paid for either the time they work, per item or task, or on commission. Contractors are generally contracted to complete work or achieve a specific result and are usually paid a fixed fee at completion.

Ability to delegate or subcontract

There is no provision in an employment contract allowing an employee to delegate or subcontract their work to other people. The workers must perform their duties themselves and cannot pay someone else to complete the work. On the other hand, it is common for a contractor agreement to contain a clause allowing the worker to delegate or subcontract their work to others.

Tools and equipment

Employers provide most or all of the equipment, tools and other materials necessary to complete the work, or provide reimbursement to the employees for these expenditures. Contractors are wholly responsible for providing these items themselves.

Risk

An employee bears little to no risk because the employer is liable for any costs arising from injuries or defects in the employee’s work. Contractors bear the commercial risk for any injuries or defects arising from their work.

Goodwill

The employer benefits from any goodwill arising from the employee’s work, while the contractor’s business benefits from any goodwill arising from their work.

Superannuation

All full-time, part-time and casual employees are covered by the superannuation guarantee, while most contractors are generally exempt from this provision. However, employers must pay superannuation for contractors, regardless of whether they have an Australian Business Number (ABN), in the following circumstances:

• The contract is mainly for the worker’s labour;
• The contract is for a person’s skills and labour, and is not dependent on achieving a specific result; and
• The work cannot be delegated to someone else.

The employment law team at Go To Court Lawyers can provide further clarification on worker classification. Please contact our helpful and experienced staff on 1300 636 846 today.