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Employee or independent contractor?

A woman recording or tracking stock in a warehouse or distribution facility.

Distinguishing between an employee and an independent contractor is often a complex and nuanced exercise. However, the distinction is crucial given employees and independent contractors have different legal rights, obligations and entitlements.

Prior to 2022

Historically, the test used in determining whether a worker was an employee or independent contractor was a "multi-factorial test", which focused on the totality of the relationship between the parties.

In applying the multi-factorial test, post-contractual conduct was relevant, and a range of factors were considered and assessed to determine whether a worker was an employee or independent contractor. The written contract between the parties was one of those factors, but it was not determinative alone. Other relevant factors included:

  • the extent of control of, or the right to control, the worker
  • whether the worker was provided with tools and equipment
  • whether uniforms were provided and/or required by the company
  • whether the worker was permitted to delegate or subcontract work
  • the remuneration structure - specifically, whether the individual received payment of a periodic wage or salary or compensation by reference to the completion of a task or project
  • whether the worker was entitled to paid annual leave or sick leave.

Current position

In 2022, two High Court decisions confined the use of the multi-factorial test used to determine whether a person is an employee or an independent contractor. These decisions were Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.

The decisions held that where the relationship of the parties has been committed to a written contract, and the contract is not challenged as being a sham and has not otherwise been varied or displaced by the parties, then the relationship ought to be characterised by reference to the rights and obligations detailed in the contract, with primacy given to the terms of the contract.

What this has meant is that the while the "multi-factorial" test is still relevant, primacy must be accorded to legal rights, duties, and terms of the written contract over the subsequent conduct of the parties.

Changes this year

There have been, and continue to be, a range of amendments to the Fair Work Act 2009 (Cth) (FW Act).

The Fair Work Legislation Amendment (Closing Loopholes No 2) Act 2023 (Cth) was passed on 12 February 2024.

One of the changes that it will introduce (from 26 August 2024 or an earlier date by proclamation) is an expanded statutory test for determining whether a worker is an employee or independent contractor.

Under the new test, the relationship is to be determined by ascertaining the real substance, practical reality, and true nature of the relationship, having regard to the totality of it. This includes the terms of the contract, and how it is performed.

The amendments made are a direct response to the "primacy of contract" approach that was adopted by the High Court, which is made explicit by a note inserted into the FW Act. Whilst the terms of the contract will still play a significant role in determining the relationship, effectively, we are going to revert to a multi-factorial test.

There is no exhaustive list of relevant factors, as the relevant factors will vary from case to case, as will the weight to be afforded to each indicator. This is intended to ensure a flexible approach that will enable the ordinary meanings of "employee" and "employer" to continue to adapt to changing social conditions, market structures and work arrangements.

Below are some of the factors that may be relevant to conducting an assessment about whether a worker is an independent contractor or employee.

Factor

Indicative of 

Employment

Independent contractor

Is the contractor incorporated?

No

Yes

Are they genuinely conducting their own business?

No

Yes

Does the person have control over the way they perform their work?

No

Yes

Does the person supply/maintain their own equipment?

No

Yes

Does the person set their own work hours?

No

Yes

Does the person work standard hours?

Yes

No

Is the person able to reject hours of work offered or requested by the company?

No

Yes

Is the person paid according to task completion, rather than receiving wages based on time worked?

No

Yes

Does the person incur any loss or receive any profit from the job?

No

Yes

Does the person accept responsibility for any defective or remedial work which was their doing?

No

Yes

Can the person work for others at the same time?

No

Yes

Does the person accept that work lasts for the term of each particular task or contract?

No

Yes

Does the person have the right to employ or subcontract any aspect of their work to another person?

No

Yes

Does the person have the right to employ an apprentice or trainee in the execution of their work?

No

Yes

Does the person understand the arrangement between the contractor and the company as a contract for services (ie as an independent contractor)?

No

Yes

Is tax deducted by the company from the person's pay?

Yes

No

Does the person provide their own public/professional liability and sickness and accident insurance cover?

No

Yes

Does the person receive paid holidays or sick leave from the company?

Yes

No

Is payment made for the person's service on production of a tax invoice for payment?

No

Yes

Does the person file GST returns?

No

Yes

Does the company employ staff members who perform the same role as the person?

Yes

No

Will the person be providing services to the company for less than 90 days in the financial year?

No

Yes

Does the person advertise their services to the parties operating in the trade or to the general public?

No

Yes

Is there a divergence between the overall remuneration of the person and their personal net income from the arrangement?

No

Yes


Note: A worker may have some indicators of them being an independent contractor, but they can still be an employee on overall consideration and weighing of the factors. This also works vice versa.

It is not necessary that each indicator point to the worker being either an employee or independent contractor; it is whether the totality of the relationship indicates that the real substance, true nature, and overall practical reality is that the worker is either an employee or independent contractor.

Support

Employers should familiarise themselves with the new FW Act provisions. For tailored advice on how these changes may impact your organisation, please contact a member of Lander & Rogers' Workplace Relations and Safety team.

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

Key contacts

Jamie-Lee Duckworth

Jamie-Lee Duckworth

Lawyer

Jordan Kopp-Collins

Jordan Kopp-Collins

Lawyer