If you are performing paid work, or if you are paying someone to do work, it is important to be clear about whether the arrangement is one of employer and employee or of principal and contractor. An employee is part of an employer’s business; a contractor is running their own business. There are different tax and superannuation requirements for employees and contractors, and importantly, employers have vicarious liability for their employees’ actions. This is not the case for principals and contractors. You can work out whether a person’s status is employee or contractor by reviewing their work arrangements.
Basis of payment
An employee is paid for the time worked, per job or on a commission basis. A contractor provides a quote for the completion of a task.
Ability to delegate or subcontract
An employee cannot delegate the work to someone else; a contractor can.
Equipment and tools
An employee is provided with the equipment and tool required to complete the work, or is reimbursed for the cost of obtaining these. A contractor provides their own tool and equipment and is not reimbursed for this.
An employee takes no commercial risks and the employer is responsible for the work they do. A contractor is legally responsible for their own work.
An employee is working within and is a part of the employer’s business. A contractor is operating their own business. They can accept or refuse jobs.
Tax and super obligations
A business has different tax and super obligations when a person is working for them as an employee and when they are using a contractor.
Employers withhold tax from the salary of employees. Employees complete their income tax using a payment summary provided by the employer and can claim deductions based on their own records of any work-related expenses they have incurred. They receive paid sick leave and paid holiday leave.
Employees can choose a super fund for their employer to pay their superannuation into.
Contractors must put money aside to cover the tax they owe for their work and keep their own records of money earned and expenses incurred and complete their tax return and business and professional item schedule using these records. They must put aside money to pay for any period spent sick or on holiday.
Contractors are responsible for their own super and provide their own business insurance, income protection and workers compensation for anyone working for them.
Whether a person is an employer or a principal also affects the legal liability they have in the event a tort is committed by a person performing work for them.
Employers have vicarious liability for certain act and omissions committed by their employees in the course of their employment. Vicarious liability means that one person is held responsible for another person’s actions. For an act or omission to be considered ‘in the course of employment’ it must either have been authorised by the employer or be so closely linked to an act the employer authorised to be considered part of that act. Authorisation may be express or implied.
Vicarious liability does not mean that the individual employee who committed the act is not also responsible. In many cases, liability extends across both employee and employer.
Employers are vicariously liable for the torts of their employees provided the employee is acting within the scope of his or her authority and performing employment duties. For example, if someone is injured as a result of a negligent act by an employee carrying out their work, the plaintiff can take legal action against the company, on the basis that it is vicariously liable for its worker’s negligence. It is not generally a valid defence for an employer that the employee was not complying with directions.
A principal does not have vicarious liability for the torts of a contractor.
Employers are also vicariously liable for the unlawful discriminatory conduct of an employee, especially a manager. Employers may be ordered to pay compensation to an employee who is discriminated against by a manager, or to take steps to address discrimination in the workplace, such as by providing training or adopting policies.
It is a valid defence for the employer to show that it has taken steps to ensure that unlawful conduct does not occur.
A principal is not vicariously liable for the discriminatory conduct of a contractor.
An employer can be held vicariously liable for sexual harassment by an employee, including sexual harassment that occurs outside of work hours and away from the workplace, provided it occurs ‘in connection with the workplace.’ Some examples of this are an incident at a work Christmas party or while staff are attending a conference.
If you require legal advice in relation to an employment matter or any other legal matter please contact Go To Court Lawyers.