What is the difference between a contractor and an employee?

An independent contractor is a person who agrees to deliver a certain outcome, whereas an employee must obey the employer’s command.

The systems that govern workplace relations in Australia are based on the common law ‘contract of employment’. A central characteristic of this standard ‘contract of employment’ is the power of the employer to command the manner of the work performance. Some employment relationships, however, such as those involving independent contractors, do not share this characteristic.

The principal/independent contractor relationship is referred to as a contract for services whereas the relationship between an employer and an employee is a contractual one and often referred to as a contract of service. An independent contractor typically contracts to achieve a result, whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).

It is often self-evident whether an employer/employee or a principal/independent contractor relationship exists. On the other hand, it is sometimes difficult to discern the true character of the relationship because the intentions of the parties may be unclear or ambiguous, particularly if the terms of the contract are disputed between the parties.

In the case Re Porter: re Transport Workers Union of Australia (1989) 34 IR 179 at 184, Justice Gray stated that the parties ‘cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck’. In other words, if the underlying reality of the relationship is one of employment, the parties cannot alter that fact by merely having the contract state (or have the worker acknowledge) that the worker’s status is that of an independent contractor.

What makes it confusing is that there are no statutory definitions of employment. This can make it difficult to tell the difference between an employee and a contractor. Indicative factors that point to the worker being one rather than the other are

1. the amount of control exercised over the worker,
2. the mode of remuneration,
3. the responsibility for the provision and maintenance of tools and equipment,
4. the extent of the obligation to work for an organisation, and
5. the capacity of a worker to delegate work to others.

There is no set combination of factors that determine whether a worker is an employee or a contractor. An example of a ‘non-employee’ employment relationship would be owner-drivers and their principals. If problems arise and the matter ends up in court, the court will look at the whole relationship and make a decision based on how the work is performed and the type of employment relationship fostered by the parties. Even though the intention of the parties will be taken into consideration, any written agreement stating the nature of a relationship as either employment or contractual will be relevant but not conclusive.

In order to clearly define the relationship with your independent contractors and ensure they are not deemed to be employees:

1. Always ensure your contacts clearly spell our the nature of the relationship.
2. Ensure that both parties act in a way that reflects the true nature of the relationship at all times.  A case will not swing on a single factor, but allowing your contractor to demonstrate aspects of an employee relationship, will make the matter harder to defend.
3. Avoid requests that any one employee perform work and wherever possible contract with corporate bodies. Allow the contractor to determine which employees should perform the work.

By Ian MacLeod