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Why Employers Need to Distinguish Employees from Contractors

16 August 2019 2 minute readShare

Promoted by LegalVision.

Determining whether your worker is an employee or contractor will impact the obligations you owe as an employer. LegalVision's Employment Guide answers what you need to know.

Failing to classify workers correctly as an employee or contractor can land business owners in hot water. Eagle Tours, a Sydney transport company, was recently fined for incorrectly classifying its bus drivers as independent contractors instead of employees. Determining whether your worker is an employee or contractor will impact the obligations you owe your new hire, as well as what rights they have at work.

To help business owners navigate Australia’s employment law framework, LegalVision has published a How to Hire and Inspire Manual — its flagship employment law publication. The comprehensive guide also features insights from LinkedIn, Indeed and SafetyCulture about best practices regarding recruitment and retention.

Understanding what entitlements you owe your workers is a critical step towards ensuring compliance and avoiding harsh penalties from the Australian Taxation Office (ATO) and Fair Work Ombudsman (FWO). We’ve set out some key indicators to help you determine whether a worker is a contractor or employee.

Differences between Employees and Contractors

When determining whether an employment or contractor relationship exists, the FWO looks at the entire relationship, including:

  1. Control: Do you have the right to exercise detailed control over the way work is performed, or does the worker have full autonomy?
  2. Advertising the business: Do you require the worker to wear a uniform or display material that associates them with your business?
  3. Providing and maintaining significant tools and equipment: Do you require the worker to supply and maintain any tools or equipment (e.g. laptop, software, mobile, vehicle)?
  4. Right to delegate or subcontract work: Is the worker free to work for others at the same time? Can the worker subcontract or delegate work to others?
  5. Income taxation deductions: Do you deduct tax from the worker’s pay?
  6. Payment: Do you pay the worker according to task completion, or pay wages based on time worked?

It’s against the law to call a worker a contractor while treating them as an employee. This is called sham contracting. There are serious penalties if you mischaracterise workers to avoid your employment law obligations. You’ll also need to pay the worker any unpaid wages or leave entitlements.

Key Takeaways

Business owners owe different obligations to independent contractors than they do to employees. So it's essential to ensure you have correctly classified your new worker to avoid penalties from the ATO and Fair Work. If you're unsure of whether your worker is a contractor or an employee, speak to LegalVision’s employment lawyers.

LegalVision is hosting an event on Thursday 22 August in Sydney for employers and HR professionals looking to learn tips on building a thriving workplace culture. RSVP here and claim a complimentary ticket with the code ‘mybusiness’. A livestream option is also available for those unable to attend in person.

Why Employers Need to Distinguish Employees from Contractors
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