In many cases, it will be self-evident whether there is an employer/employee relationship or a principal/independent contractor relationship. In certain cases, however, it can be difficult to discern the true character of the contract. A clause in the contract purporting to characterise the relationship between the parties as one of principal and independent contractor is not of itself determinative of the matter and must be considered with all the other terms of the contract. It may be that an employer/employee relationship has been created instead.
Two tax rulings from the ATO give the ATO’s view as to whether an individual is an employee or an independent contractor for tax and superannuation purposes.
The key indicators as expressed in case law are as follows.
- Control – The degree of control that a person engaging another person to perform work can exercise over that person is an important factor. In an employer/employee relationship, the employer has the right to tell the employee not only what work is to be done but how and where it is done.
- Given result – If the substance of a contract is to “produce a given result”, this is a strong indication that the contract is one for services (i.e. a contractor). As a result, the work can be done by anyone (e.g. third party labour) by any means using the contractor’s plant and equipment to achieve the specified outcome.
- Integration or organisation – If a person has to personally perform the work, this is an indication of an employee (integrated into the fabric of the organisation). In contrast, unless the contract provides otherwise, an independent contractor is free to arrange others (their employees or subcontractors) to perform some or all of the work. An employee’s power to delegate in a managerial or supervisory role is fundamentally different to delegation by a contractor.
- Risk – An independent contractor, but not an employee, bears the commercial risk and responsibility for any substandard work or injury sustained in performing the work and will usually take out the appropriate insurance.
- Provision of assets, equipment and tools – The provision of assets, etc, by an individual, and the incurring of expenses and other overheads, indicate an independent contractor although this is not necessarily inconsistent with some employment relationships.
- Other indicators suggesting an employment relationship include the employer’s right to suspend or dismiss the person engaged, the right to the exclusive services of the person engaged, provision of employee benefits such as annual, sick and long service leave and other benefits prescribed under an award for employees, and the wearing of the firm uniform (although independent contractors may also wear a uniform).
SMEs should become conversant with these guiding principles. While the facts of each case will ultimately determine the issue, these guidelines are a useful starting point.
Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.
