How to legally determine a contractor vs an employee


Treating your staff like employees but calling them contractors? When you should legally call a spade a spade.

Are you looking to expand your business but don’t know how to go about it? When your organisation grows, how do you approach the staffing questions? When you are bringing on extra people, questions about the type of role, the type of employment contract and what it means for the business are all important factors to consider. As many organisations test the water to determine customer demand and response, they may choose to take staff on, initially on a contract basis, as opposed to employing someone part-time or full-time straight away.

What is the difference between employees and contractors?

Many businesses make the mistake of failing to understand the difference between employees and contractors. There is no one-size-fits-all formula to answer the question, but the law looks at different rules and factors to determine whether a staff member is an employee or contractor. These include:

  • Guarantee of work – if there is no guarantee of work then generally the person will be a contractor, while an employee has a set number of hours.
  • The 80/20 rule – if the staff member spends more than 80 per cent of their working hours in your business or works exclusively for you, then they are an employee.
  • Supply of tools needed to do the work – if you supply these then this is an indicator that the person is an employee.

What does it mean for your business?

In deciding the type of staff member that you intend to hire, look at the goals of your business and match those to any particular hire. When you need someone to work in the business on an exclusive, consistent and ongoing basis, then you need an employee. If you are hiring for a particular project and don’t mind if the staff member works for other businesses, then contractors can be a great help for your business.

If you choose to hire an employee, your legal obligations are more onerous than hiring contractors. Essentially a contractor is required to pay their own tax and superannuation while you are responsible for paying those on behalf of employees. Generally both employees and contractors are required to be brought under your workcover insurance requirements, but you will need to check the requirements for your particular workcover insurance scheme.

Obligations to your customers and clients

One point that is often overlooked is your obligations to your customers or clients when you bring on other staff. An employee is part of your business and therefore you are liable for the work that they do. If you bring on a contractor they should have their own insurance and that would cover any loss suffered by your clientele. While there is no legal requirement to advise them that you have staff doing their work, from a commercial business perspective they should be informed of your arrangements. This is simply good business practice and will keep your customers and clients happy to continue working with you. If you want your contractor to be liable for the work directly with your clients, then they have to engage them directly and not through your business.

Jeremy Streten is a lawyer and the author of the amazon best seller The Business Legal Lifecycle.

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Linda Norman
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Linda Norman

Found this to be a simplistic article. There are many other dimensions of the employment relationship that courts have considered when determining the employment relationship which could have been discussed here.

Malcolm Bell
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Malcolm Bell

This distinction should be reasonably clear these days in the Australian jurisdiction, where legislation, common law and enterprise agreements have closed loopholes. This is equally true in other developed countries. But are there international legal principles that may be applied to allow such tests in developing countries, where legal developments are not so advanced?

More on HRM

How to legally determine a contractor vs an employee


Treating your staff like employees but calling them contractors? When you should legally call a spade a spade.

Are you looking to expand your business but don’t know how to go about it? When your organisation grows, how do you approach the staffing questions? When you are bringing on extra people, questions about the type of role, the type of employment contract and what it means for the business are all important factors to consider. As many organisations test the water to determine customer demand and response, they may choose to take staff on, initially on a contract basis, as opposed to employing someone part-time or full-time straight away.

What is the difference between employees and contractors?

Many businesses make the mistake of failing to understand the difference between employees and contractors. There is no one-size-fits-all formula to answer the question, but the law looks at different rules and factors to determine whether a staff member is an employee or contractor. These include:

  • Guarantee of work – if there is no guarantee of work then generally the person will be a contractor, while an employee has a set number of hours.
  • The 80/20 rule – if the staff member spends more than 80 per cent of their working hours in your business or works exclusively for you, then they are an employee.
  • Supply of tools needed to do the work – if you supply these then this is an indicator that the person is an employee.

What does it mean for your business?

In deciding the type of staff member that you intend to hire, look at the goals of your business and match those to any particular hire. When you need someone to work in the business on an exclusive, consistent and ongoing basis, then you need an employee. If you are hiring for a particular project and don’t mind if the staff member works for other businesses, then contractors can be a great help for your business.

If you choose to hire an employee, your legal obligations are more onerous than hiring contractors. Essentially a contractor is required to pay their own tax and superannuation while you are responsible for paying those on behalf of employees. Generally both employees and contractors are required to be brought under your workcover insurance requirements, but you will need to check the requirements for your particular workcover insurance scheme.

Obligations to your customers and clients

One point that is often overlooked is your obligations to your customers or clients when you bring on other staff. An employee is part of your business and therefore you are liable for the work that they do. If you bring on a contractor they should have their own insurance and that would cover any loss suffered by your clientele. While there is no legal requirement to advise them that you have staff doing their work, from a commercial business perspective they should be informed of your arrangements. This is simply good business practice and will keep your customers and clients happy to continue working with you. If you want your contractor to be liable for the work directly with your clients, then they have to engage them directly and not through your business.

Jeremy Streten is a lawyer and the author of the amazon best seller The Business Legal Lifecycle.

2
Leave a reply

avatar
100000
  Subscribe to receive comments  
Notify me of
Linda Norman
Guest
Linda Norman

Found this to be a simplistic article. There are many other dimensions of the employment relationship that courts have considered when determining the employment relationship which could have been discussed here.

Malcolm Bell
Guest
Malcolm Bell

This distinction should be reasonably clear these days in the Australian jurisdiction, where legislation, common law and enterprise agreements have closed loopholes. This is equally true in other developed countries. But are there international legal principles that may be applied to allow such tests in developing countries, where legal developments are not so advanced?

More on HRM