Employees vs. Independent Contractors.

1 July, 2015
Posted by Jennifer

Employees vs. Independent Contractors – What’s the difference and does it matter?

A lot of businesses around Australia engage people to provide services on an independent contractor basis. By engaging people as independent contractors, businesses do not need to pay employment entitlements such as annual leave, sick pay and super nor do they have to withhold and remit PAYG tax to the ATO. However if you incorrectly classify your workers as ‘independent contractors’, you could be in a lot of strife!

How to determine whether a worker is an employee or independent contractor?

There is no single factor that will be conclusive in determining whether your worker is an employee or contractor. You will need to look at the totality of the working arrangement. It is not enough for a worker to hold their own ABN, choose their own hours and be classified on paper an ‘independent contractor’.

The leading case on the matter is On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No.3) [2011] FCA 366 (the “On Call FCA Decision”). The On Call FCA Decision provided the following two-part test to determine whether a worker is an employee or a contractor.

1. Does the person providing the services (the “Worker”) own and operate a separate business; and if so

2. In providing the services, does the Worker provide those services to his/her own business rather than the business of the person engaging the Worker to provide the services (the “Business Owner”)?

If the answer is yes to both questions, then the Worker will be able to be classified as an independent contractor and not an employee.

In summary, a Worker will be able to be classified as an independent contractor when:

– The Worker is operating its own business independently from the Business Owner’s business
– The provision of the Worker’s services create goodwill for his/her own business
– The Worker provides his/her own tools/equipment/assets to provide the services
– The Worker takes commercial risks
– The Worker is legally liable for their work and any mistakes
– The Worker has his/her own public liability/professional indemnity insurance
– The Worker can freely accept or refuse work from a Business Owner
– The Worker promotes him/herself to the public through advertising
– The Worker does not just continuously and repetitively provide services to a Business Owner
– The Worker has control over the economic activity of his/her business
– The Worker has control over the way in which their work is done (subject to the terms of any contract)
– The Worker is free to sub-delegate and contract its services to third parties
– The Worker is representing his/her own business to the public (not the business of the Business Owner

What happens if you incorrectly classify workers?

As On Call Interpreters and Translators Agency Pty Ltd found out the hard way in the On Call FCA Decision, business owners who incorrectly classify workers as independent contractors and not employees can be penalized by the ATO for failing to pay years of PAYG tax, superannuation, workers compensation and payroll tax.

© 2012, Written by Jennifer Tutty.  Republished 1 July 2015.


The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter

For more information on employment and contractor matters, contact 03 9521 2128 or email helllo@studiolegal.com.au.