When is an Independent Contractor an Employee?

Recent media interest in the prospective class action against Appco Group Australia raised the difficult issue of when is an independent contractor actually an employee? From an employer’s perspective, it may in certain circumstances be preferable to engage a person as an independent contractor rather than an employee. A principal contractor will generally not be responsible for an independent contractor’s paid leave, overtime or other employment entitlements…… right? Well, not always.

Engaging a worker as an independent contractor can raise risks if the parties have wrongly classified the nature of the relationship. Just because I call my dog a cat, doesn’t turn my dog into a cat. Just because you characterise a contract as an independent contracting relationship, doesn’t mean that the relationship is not actually one of employment. This can give rise to a number of legal risks such as sham contracting claims, breaches of legislation including the Fair Work Act 2009 (Cth) and/or the terms of any applicable award or enterprise agreement and exposing the business to claims for unpaid leave and other entitlements. In addition to the employing entity, directors and human resource managers may also face individual penalties for breaches of the Fair Work Act 2009 (Cth).

The true nature of the relationship between an organisation and a contracting party may be hard to determine. It can also change over time and may not always be updated contractually. In determining whether a worker is an employee or an independent contractor, it’s important to consider the overall relationship between the parties. No single factor is determinative. Generally, however, the more control an employer has over a worker the more likely the worker is to be an employee and not a contractor.

Courts have considered the following factors as indicative of an employment relationship:

  • The employer has control over when and how the worker works
  • The way the worker is paid is linked to their time worked e.g. wages over lump sum payments
  • The employer provides the majority of equipment and materials for the work, or provides a tool allowance
  • A particular individual is required to do the work (not anyone can be delegated to do the work)
  • The worker generally works standard or set hours (note: a casual employee’s hours may vary from week to week)
  • The worker usually has an ongoing expectation of work
  • The worker bears no financial risk (liability for poor work or injury sustained while performing the task lies with the employer)
  • The worker is paid regularly (e.g. weekly, fortnightly, monthly)

We will await with interest the outcome of the Appco Group Australia case but in the interim, remember that determining the appropriate classification for a worker isn’t always easy, but it is important. If in doubt about the true nature of a contract, seek legal advice.