Contractor or Employee? Tips for Employing Contractors

Engaging contingent labour purely to save costs is fraught with risks, so employers should ensure they use contractors for the "right" reasons, and take adequate steps to protect themselves against potential claims. For some employers, they can face a significant risk of being deemed the "employer" of a contractor if care is not exercised.  

 

Of concern to many businesses is being found liable for entitlements associated with employment, including annual leave, superannuation and personal leave, along with exposure to unfair dismissal laws, and longer notice periods.
It doesn't matter whether your business has explicitly engaged a worker as a contractor, the law will disregard that if the nature of the relationship otherwise bears the features of an employment relationship.

To minimise risks in this area it is recommended  to ensure that contractors are engaged "for the right reasons. One of the "wrong" reasons is to save on rates of pay, a common example of this is the engagement of contract cleaners. Contract cleaners have specific minimum rates of pay under applicable modern awards . There have been businesses found attempting to save money by engaging their cleaners as contractors, so as to avoid the minimum hourly rates of pay under awards. 

Another “wrong” reason is simply because ‘that's what the worker wants’. It can be attractive from a taxation view to be engaged as a contractor, as opposed to an employee, but a worker who at the commencement of a relationship requests to be regarded as a contractor, may change their mind at a later date and  attempt to subsequently claim the entitlements associated with permanent employment.

Employers should always record the nature of engagement in a ‘solid’ contract that sets out and provides evidence in relation to why it is a contractor arrangement as opposed to any other sort of arrangement, and details of how the contract came about.

Another critical mistake that businesses can make in written contracts is to use the word 'employment' or 'employ' when they're talking about someone who they've deemed to be a contractor. A business that engages contract labour is not an ‘employer’; they are a ‘principal’. Someone who works under those arrangements is ‘engaged’, not ‘employed’, and not an ‘employee’;  they are a ‘contractor’.  Inadvertent use of the wrong terminology can cause issues should the matter be investigated.

Further tips for minimising liability include:

• Avoid giving contractors entitlements associated with an employment relationship such as 4 weeks annual paid leave. This is an employment entitlements and can cause the relationship to look like an employment relationship.
• Try to avoid specifying an hourly rate, as being paid an hourly rate is regarded to be consistent with being an employee
• Avoid long-term arrangements, as when an arrangement continues for several years, and that work is of a sort that you would get from an employee then you could wind up with the types of liabilities associated with employment
• Always review the arrangement on a regular basis – there is no ‘set’  amount of time when a contracting arrangement should be reviewed, but reviews should take place.