Is Your Worker a Contractor or Employee?

Some tasks within a healthcare practice may require a particular skill set to perform them. Practices may wish to utilise the skill of particular professionals by contracting them to perform work within their practice, rather than have them on the payroll as an employee of the business. This may be appealing to employers as there are different legal obligations in regards to employee entitlements depending on whether a person is performing a task within the practice as a contractor or as an employee.

Contractor or Employee: What’s the difference?
An employee is hired by the employer under a contract of work. The employer has direct control over the work undertaken by the employee, and pays the employee an ongoing wage. Employers have a legal obligation to their employees to provide benefits such as paid leave entitlements, superannuation contributions, and tax deducted from employee wages.
In comparison, an independent contractor is hired under a contract for work. Contractors have greater autonomy from the running of the overall business, and will often have their own Australian Business Number and insurance policy for their work. Contractors are not entitled to the same employee benefits, and manage their own tax and superannuation contributions.

Why it matters:
Employers need to know whether the persons performing work within their practice are contractors or employees to ensure that they meet their legal obligations under Fair Work laws. There are serious consequences for employers who claim to hire someone as a contractor, but in fact engage with him/her as an employee. This is known as a sham contracting arrangement, which may result in penalties being imposed on the employer.
Sometimes it isn’t easy to know when someone is working as a contractor or an employee; there is no set test to indicate whether someone is an employee or contractor. The case ACE Insurance Limited v Trifunovski [2013] FCAFC 3 highlights that all factors of the work relationship must be considered to determine whether someone is working as a contractor or an employee.

ACE Insurance Limited v Trifunovski
Five insurance sales agents were contracted by Combined Insurance Company of Australia (“Combined Insurance”) to sell insurance packages, paid on commission. The contract between the sales agents and Combined Insurance specifically stated that they were hired as contractors, not employees.

Despite this, the five sales agents claimed that they had in fact been working as employees of Combined Insurance and were entitled to unclaimed employee benefits. Specifically, all five sales agents made a claim for unspent annual leave entitlements and three made claims for unspent long service leave entitlements. The court was required to consider whether the working relationship between the sales agents and Combined Insurance was that of a contractor or employee.

Decision:

The court noted that there was no one indicator to determine whether someone is working as a contractor or employee, but must look at all relevant circumstances to determine the relationship between the worker and employer. In this case, all five sales agents worked in a particular region and reported to a regional manager, who was employed by Combined Insurance. In addition, the sales agents were required to undertake further training as part of their ongoing work with Combined Insurance. Combined Insurance also restricted the sale agents from delegating any of their work to further sub-contractors.

Upon consideration of these facts, the court decided that Combined Insurance had a high level of control over the work being conducted by each of the sales agents and they could not work independently from the employer. Because of this, they were considered to be working as employees of Combined Insurance,rather than as independent contractors. This was despite the fact that the original contract of work stated that they were in fact not employees. The court emphasised that employers cannot hide behind the convenience of a contractual relationship to hide an employment relationship. Combined Insurance was required to pay retrospective leave entitlement to each of the sales representatives, costing the employer approximately $500,000.

Considerations for employers:

Contracts should always make it clear whether a worker is hired as a contractor or employee of the practice. To limit the confusion, the contract should state as many specific details about the work relationship between the employer and worker to avoid later confusion.

The terminology used in a contract will not be the only factor to consider when establishing the type of working relationship present. The following provides a guide on various key points that will distinguish the relationship as one of either contractor or employee:

Degree of control over work

A contractor has a high level of autonomy from the employer in terms of how their work is conducted. In contrast, employers provide direction and control over employees’ work through supervision of work and reporting structures.

Hours of work

Contractors usually negotiate a number of hours necessary to complete a specific task. Employees tend to have set hours and will work on an ongoing basis.

Mode of remuneration

Contractors have their own Australian Business Numbers and submit an invoice to the employer for work completed. Contractors receive payment once the work is completed. Employees are paid on an ongoing basis for hours worked for the employer.

Risk

Contractors bear the responsibility regarding their work performance and any injury sustained while performing work tasks.

As such, they usually have their own insurance policy. Employers bear the burden of risk in relation to financial risk and injury sustained by employees while at work.
Responsibility to maintain tools and equipment

Contractors will generally supply and maintain their own tools and equipment unless otherwise agreed upon. Employees are generally provided tools by their employer and the responsibility for supply and maintenance of tools used in the practice is primarily undertaken by the employer.

Delegation of work to others

Contractors may be able to sub-contract their work in order to meet the required deadline for the employer. Employees generally cannot delegate work to others unless discussed first with the employer.

For more information, visit www.clinlegal.com.au . See ClinLegal’s Guide: Minimize risk: Contractor or Employee? and ClinLegal’s contract templates for employment. This article was written by Rebecca Hyde, Workplace Compliance Advisor at ClinLegal. Rebecca holds a Bachelor of Laws and Legal Practice (Hons) and a Bachelor of Behavioural Science (Psychology).

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