Independent contractors and employees have different rights and obligations. This means it’s important to understand the difference between the two.
Independent contractors provide services to another person or business. They aren’t employed by that person or business. Independent contractors usually negotiate their own fees and working arrangements and can work for more than one client at a time. Independent contractors are also called contractors or subcontractors.
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Whether someone is an independent contractor or an employee depends on a number of indicators. These include:
- the amount of control over how work is performed
- financial responsibility and risk
- who supplies the tools and equipment
- ability to delegate or subcontract work
- hours of work
- expectation of work continuing.
The table below has some of the common indicators and general examples of rights and duties that, when considered together, can help tell the difference between an employee and a contractor.
Some general things to note:
- A contract can be verbal, in writing or a mix of both. Not all indicators will necessarily be present in the contract. There usually won’t be one deciding indicator. For example, just because you have to have an ABN or issue invoices doesn’t automatically make you a contractor.
- It will come down to what is agreed to at or before the start of the working relationship. What happens after the contract has been agreed to will usually not be relevant to determining whether someone is a contractor or an employee.
- A person won’t automatically be an employee or a contractor because of the type of work they do. A person may perform the same type of work as an employee of a business but may still be an independent contractor. This means that whether someone is an employee or an independent contractor will depend on the individual circumstances.
|Contractual indicator of rights and duties||Employee||Independent Contractor|
|Amount of control over how work is performed
(Note: the other factors below may form part of assessing the level of control over how work is performed)
Performs work under the direction and control of their employer. Work is controlled by the employer including hours, work location and how work is done.
Has a high level of control over the work they perform, including their hours, work location and how they do the work.
|Financial responsibility and risk||
Has no financial risk (as this is the responsibility of their employer).
Carries the risk for making a profit or loss on each task or job. Is usually personally responsible and liable for poor work or any injury sustained while performing the task. Contractors generally have their own insurance policy.
|Tools and equipment||
Tools and equipment are generally provided by the employer, or a tool allowance is paid.
Uses their own tools and equipment. (Note: alternative arrangements may be made within a contract for services.)
For example, an auditor who brings their own computer to do their work.
|Ability to delegate or subcontract work||Is required to do the work themselves. For example, they can’t ask someone else to go to their workplace and do their work for them.||Can delegate or subcontract the services to be performed to another person or business.|
|Hours of work||
Works standard or set hours (unless they’re a casual employee, in which case their hours may vary from week to week).
For example, a person who works regular 5 hour shifts twice a week at a petrol station.
By agreement between both parties, decides what hours to work to complete the specific task.
For example, a graphic designer who negotiates the cost of creating a logo based on how long it will take, and decides when they will do the work.
|Expectation of work continuing||
Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period or on a casual basis).
For example, a worker in a pet shop who works on a part-time basis, 4 times a week on an ongoing basis.
Usually engaged for a specific task.
For example, a removalist who does a one-off house move for a customer.
Whether a worker is an independent contractor or an employee can be complicated, and will come down to the circumstances of each working arrangement. In some situations, a court may need to determine the nature of the working relationship. If it is not immediately clear whether someone is an employee or a contractor, you may want to consider seeking legal advice.
See Legal organisations for various community organisations that may be able to assist.
Example: Cleaning employee misclassified as a contractor
Peter has worked for a cleaning business for 7 months. His contract requires him to work 3 shifts a week and provides him with a fixed hourly pay rate. Peter is required under his contract to wear a shirt with the business logo while working, to keep a record of his start and finish times and fill out a timesheet at the end of each shift.
The contract also provides that Peter’s boss, Alfred, will give him all the cleaning supplies he needs, and requires Peter to perform his cleaning duties the way Alfred tells him the cleaning should be done. Alfred pays Peter’s tax, insurance and superannuation contributions, as set out in Peter’s contract.
Peter has an ABN, and his contract requires him to submit invoices in order to be paid for his work each month. However, Peter hasn’t been paid for the 60 hours he invoiced last month.
Peter looks at the information on fairwork.gov.au and notices that most indicators point towards him being an employee.
Peter isn’t sure how to raise the issue with Alfred, so he completes the Difficult conversations in the workplace online course. Peter arranges a meeting with Alfred to discuss the issue. Alfred apologises and pays Peter what he’s owed as an employee. Alfred corrects his records and ensures Peter receives his employment entitlements going forward.
Example: Independent contractor in the gig economy not entitled to sick leave
Gab uses her bike to deliver flowers for 3 delivery companies. She has her own ABN and gets her work from the delivery companies under service agreements to access work through their apps. Each of these service agreements provides:
- how she can find work with each company,
- how she chooses what work to undertake, and
- how she will be paid for each delivery.
Gab is free to perform her work how she chooses, including how much, when she works and which app she uses.
Gab uses the apps to choose which deliveries she wants to make and when she wants to make them. Some weeks she makes two deliveries a week, other weeks she makes ten. Sometimes she gets work from multiple delivery apps on the same day. The apps keep a record of the deliveries she makes, and each pays her after every delivery.
When she’s delivering flowers, Gab wears her own clothes and doesn’t have a uniform. If she gets busy, she is allowed under each of the app service agreements to get someone else to make a delivery for her.
One day, Gab twists her ankle playing sport. Her doctor tells her she can’t ride a bike for 2 weeks. A friend tells her she could be entitled to sick leave.
Gab looks at the information on fairwork.gov.au and notices most indicators point towards her being an independent contractor, not an employee. This is because she has control over the hours she works and can work for different delivery companies. She uses her own bike to make deliveries and can subcontract the deliveries to someone else.
As an independent contractor, Gab isn’t entitled to sick leave. This is because independent contractors aren’t covered by the National Employment Standards.
Gab decides to take out insurance to cover herself if she loses income because of illness or injury again. Now that she understands she’s a contractor, she also looks into other financial arrangements, including paying her own superannuation and tax.
Sometimes a business (or individual) may tell or represent to a worker that they are an independent contractor, when in fact they are an employee of the business. If the business knew (or should have known) that the worker was an employee, there may be a sham contracting arrangement.
Sham contracting is illegal under the Fair Work Act 2009. It’s illegal to:
- knowingly or ‘recklessly’ represent to an employee they are an independent contractor when they aren’t (it may be ‘reckless’ if the employer reasonably should have known that the worker was an employee)
- knowingly say something false to convince an employee to do the same work for the employer as an independent contractor
- dismiss or threaten to dismiss an employee in order to engage them as an independent contractor to do the same work (or mostly the same work).
Sham contracting arrangements are sometimes set up by employers at the time of entering into a contract to try to avoid the responsibility for paying legal entitlements to employees.
Courts can impose penalties against businesses or individuals for sham contracting. The maximum penalty is $18,780 for individuals and $93,900 for corporations, per contravention. See What to do next if you think you’re in a sham contracting arrangement.
Independent contractors don’t get employee entitlements, such as annual leave, sick leave, and minimum rates of pay. Independent contractors are also responsible for paying their tax and GST (if applicable) to the ATO, and generally pay their own superannuation.
Independent contractors are protected from adverse action, coercion and abuses of freedom of association. See Protections at work for more information.
Since independent contractors aren’t employees, they don’t have a minimum wage or pay rate. Instead, independent contractors usually negotiate payment as part of their contract for the services they provide.
An independent contractor will usually submit an invoice when they need to be paid. They can be paid on a regular basis or at the end of the contract or project.
If an independent contractor doesn't get paid for an invoice, they can take their own legal action or seek independent legal advice. The FWO can’t enforce payment of unpaid invoices.
For support resolving disputes, you can contact the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) who can help with issues such as recovering unpaid invoices.
Security of payment
Security of payment refers to a building contractor’s right to receive payments that are due under their contract. Each state and territory has its own security of payment laws that provide a statutory mechanism for resolving payment disputes.
The agencies listed below can provide information on relevant laws, details or adjudicators for payment delays and disputes in each state or territory.
- Australian Capital Territory: Environment, Planning and Sustainable Development Directorate
- New South Wales: Fair Trading
- Northern Territory: Construction Contracts Registrar
- Queensland: Queensland Building and Construction Commission
- South Australia: Office of the Small Business Commissioner
- Tasmania: Department of Justice
- Victoria: Victorian Building Authority
- Western Australia: Building and Energy
Tax and super
Since independent contractors provide services to another person, they need to pay their own income tax on money they earn (to comply with tax laws) and may need to pay GST. For more information on tax visit the Australian Taxation Office.
As well as paying their own tax, independent contractors may need to make their own superannuation contributions. There are exceptions to this, such as when a contractor is hired wholly or principally for labour. In this case, the person that hired them is responsible for paying their superannuation. For more information on when superannuation is paid by the contractor or the hirer, visit the Australian Taxation Office.
We can help employees who think they’ve been incorrectly engaged as an independent contractor, including if they think they’re in a sham contracting arrangement. You can call us to speak to a helpful adviser between 8am — 5:30pm, Monday to Friday.
Independent contracting laws
The Independent Contractors Act 2006 sets up a national unfair contracts remedy scheme for independent contractors. Contractors can ask a court to review, change or set aside a contract if it is harsh or unfair. Visit business.gov.au – contractor rights and protections for more information.