What is the difference between an independent contractor and an employee?

In brief - Independent contractors must be "in business" and truly independent

There are significant contrasting features between a person who is an employee and an independent contractor. An employee is in a relationship of personal service. An independent contractor is a business person.

Independent contractors being "in business" is critical

Many people who are appointed as contractors are not really in business or truly independent, but rather are dependent on a principal.

In fact between about one quarter and 40% of all supposed independent contractors are in fact dependent and work for one entity.

Appointing independent contractors who are working under disadvantageous conditions may be good in the short term, but such relationships usually do not work out in the long term and tend not to be permanent.

Appointing independent contractors: look at the whole relationship

Entities that appoint contractors need to have a look at the whole relationship and all the indicia that make it up. Are you really appointing a true independent contractor ? This is a significant question.

There is not a lot of legal guidance as to what makes up an independent contractor. The High Court's most significant decision was in Hollis v Vabu Pty Limited (2001) 207 CLR 21.

This case involved bike couriers who were engaged by a courier company as contractors. When considering whether the bike couriers were in fact contractors or not, the High Court looked at the totality of the relationship between them and the appointing entity and concluded that the bike couriers were really employees.

Factors to consider when considering appointing contractors

In Hollis v Vabu, the Court held that the following were significant indicia of an independent contractor:

• Who owns the business?
• Who controls the operation / work?
• Who owns the office space?
• Who owns the tools?
• Who does the contractor provide duties to?
• Does the independent contractor bear a risk of profit or loss?
• Is there a creation of goodwill?
• How is the independent contractor paid?

The bike couriers had some features of an independent contractor, but not all of them. Essentially the bike couriers were not operating a business. The Court concluded, as one of the judges stated, that merely labelling a dog as a duck does not convert the dog into another creature.

Sham contracting arrangements prohibited by Fair Work Australia (FWA)

Notwithstanding the fact that the law is somewhat lax, the FWA has provisions that outlaw sham arrangements.

However, principals (employers) can defend themselves if they are able to show that "they did not know or were not reckless as to whether the true nature of the relationship was actually employment".

Implications for superannuation payments

The most recent developments have emerged in cases involving the recovery of superannuation payments.

In On Call Interpreters & Translators v Commissioner of Taxation (No. 3) FCA 366 (2011), the Federal Court considered whether legal translators were in fact independent contractors.

Here translators were allocated jobs, often by law firms. The usual arrangement was that a client would call the principal (On Call) for a language translator to assist them.

On Call would direct the translator to the client. The translator would perform the work and then On Call would invoice the client. On Call would then pay the contractor upon receipt of the fees from the client.

Even though there was no control in the way that the translator did the work, the Court held that the translator was not in business and accordingly was not really an independent contractor.

The court determined that On Call had to make the outstanding superannuation payments on behalf of its language translators, who were deemed not to be independent contractors.

Clearly, decisions of this nature can have a devastating effect on a business. The On Call case underlines the importance of determining correctly whether your workers are employees or contractors.

Appointing contractors: general principles you should follow

• If the supposed independent contractor is not "in business" then they may not in fact be an independent contractor.
• If there is any doubt when you appoint an independent contractor, then you should pay a portion of the contractor's invoices towards the contractor's superannuation.
• The wording of an independent contractor's contract should set out the actual business arrangements. There should not, however, be any reference to the payment of statutory entitlements (holiday pay and sick leave) for an independent contractor.
• There should be an emphasis in the written appointment arrangements that the independent contractor actually has a business.

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