Teddington Blog

Contractor vs Employee in the Gig Economy

Contractor vs Employee in the Gig Economy

The media keeps reporting that the gig economy is on the rise, but how does that affect your business?

Are the people that you hired employees or contractors? The employment contract may say one way or the other but in the eyes of the law that is up for debate.

The essential differentiation is pretty simple, employees work for a business while contractors work for themselves.

What tends to happen with legal discussions is the surface is easy to understand, but then there are the intricate details that might be putting your business as risk.

Consequences of Incorrect Assignment

Firstly, I thought I would clear the air and stress the importance of having a fundamental understanding of these employment relations. Businesses are liable for up to $51,000 fines should they incorrectly label an employee as a contractor.

It might not be enough to tank your business, but it certainly will be dragging you down.

Fortunately, it’s easily avoidable so long as you’re educated on what definition applies to your hires.

 

Differentiators

Employment is judged based on the entire relationship of employment. This means any one factor doesn’t determine the status of the hire. For example, the contract alone doesn’t dictate the type of employment.

There are several factors that contribute, these are;

  • Remuneration: Essentially this is whether you are paying the worker based on if they’ve completed a task instead of the amount of time they spent doing it. While this seems like a simple way to split the options, traditional lawyers for example are paid by the number of hours they work, unlike Teddington where we usually do work based on a fixed fee. In this case, the traditional lawyers still aren’t employees because of the other factors in the relationship.
  • Leave: If the worker is accumulating sick leave or paid holidays while they work their hours at your discretion, it is a strong indicator for being an employee. If they take breaks when they please and complete the work on their schedule it suggests that they are a contractor. This boundary is being challenged with the increasing number of flexible workplaces where employees can take days off from work on a non-limited method, taking them as they need regardless of how many they have used. Like the other factors, this shouldn’t be a sole indicator of employment status.
  • Choice of Work Hours: Generally, if an employer can dictate when the hire works or where they work from, it is an indicator toward an employment relationship. Contractors usually retain this ability, free to choose on what schedule they operate and sometimes on what locations. However, if we look at construction workers (who are usually contractors) we can see that they have an assigned workplace and there is a growing trend to allow employees to work from where they want, when they want instead of office environments.
  • Equipment: If a hire is responsible for obtaining and maintaining their own equipment, they are usually a contractor. This is especially true if the cost is significant as a proportion of total income. The caveat being that some workplaces require their employees to provide their own laptop or devices, which is equipment which isn’t particularly cheap.
  • Taxation: Are you handling the hires taxation? Generally, the employer will handle the taxation on any payments to an employee but will leave a contractor to deal with tax themselves.
  • Sub-Contracting: If the hire can delegate work to someone else it would suggest that they are a contractor because employees usually have to do the work they are assigned. This isn’t a straight cut factor either as employees frequently pass off work to other people within the organisation
  • Contract: The contract between the two parties is a strong indicator toward the intent of the relationship. It will usually set out the terms based on the other factors and can be used to argue what category the worker falls under. It defines factors such as taxation, renumeration, insurance, superannuation, subcontracting and exclusivity. However, it isn’t considered to be the definition of the relationship and can be overturned by the Fair Work Commission.

It’s those factors that ultimately decide whether your new hire is an employee or a contractor, regardless of what the contract states.

It’s pretty clear that none of them solely dictate which category workers fall into, instead the entire relationship must be considered across those factors.

Let’s take a look at a Case Study to see if that can help give us some perspective

 

Uber Employment

You might have heard of the controversy with employment within Uber and other ride sharing companies.

This was tested by the Fair Work Commission giving us a solid ground to stand on for your business dilemma.

An Uber driver (Kaseris) was terminated from being able to operate on the app without warning due to his low rating. They claimed that Kaseris was an independent contractor and not an employee and thus had no obligation to give warning.

The Fair Work Commission said that Kaseris chose when and where he wanted to work, he only used the app on some days and chose which clients he would transport. Kaseris also used his own vehicle and paid maintenance on it. The driver only received payment when he completed a specified trip.

This meant over the factors that we talked about, he was considered an independent contractor and not an employee leaving Uber with no obligation to give warning to the termination of his contract.

 

 Independent Contractors

Independent contractors don’t have to be an individual. They are usually a business that is inhabited by people who complete the work.

On the flip side though, an individual can also be a business as a sole trader, leading to easy confusion as to the state of their employment.

A good way to look at this is tradies.

Generally, a tradie will be an independent contractor as they run their own business, completing work on their schedule and choosing what tasks they want to be involved with.

An apprentice for a tradie is considered an independent contractor to you as you hired the tradie. However, for the tradie, the apprentice is considered an employee and would expect to receive all the above benefits from the tradie (but not from you).

 

Reasons for confusion.

ABN: If a worker has an ABN, it doesn’t necessarily mean they are a contractor as you must look at the relationship as a whole. Having said that if they are using the ABN to operate a business in that field (especially if they have other clients) it is a strong indicator towards being a contractor.

Business Name: It is similar for a business name. I could be working as a lawyer here at Teddington and own a registered fruit stall in The Rocks, it wouldn’t make me a contractor for Teddington.

Invoicing: Invoicing is not a strong indicator of the relationship as both employees and contractors sometimes operate under this basis. For example, many casual employees log their hours on behalf of the employer and submit it for renumeration.

 

Employee

So what sort of responsibilities and obligations do you have toward your employees?

Well quite a number unfortunately.

Under Australian law, you are obligated to provide a minimum number of requirements defined as the National Employment Standards (NES for short). These mean they have protection but also it sets out to ensure that they are productive in the workplace.

Some industries are dictated by an additional set of requirements, specified as an ‘award’. I would strongly advise making sure you are compliant with your industry’s award levels.

Your non-casual employees have a maximum number of hours that you can request for them to work for. For full-time employees this is 38 hours and for part-time employees this is the number specified in their contract under the 38-hour mark.

That’s not to say that you can’t let them work over that limit, most ambitious employees will want to work longer hours, it just prevents you from requesting them to do so.

 

Long Term Casual Employees

Long term casual employees are those that have been working at your business for more than 12 months and have received a regular and systematic assignment of shifts. They must also have the reasonable expectation to continue to receive those shifts.

These employees have more rights than a standard casual employee and are closer aligned to permanent positions.

 

Flexible working arrangements and leave

Employees are also entitled to requesting for a change in the scheduling of their work hours should they have a child below school age or a child with a disability below the age of 18. This also applies to Long Term Casual Employees.

They are also entitled to unpaid parental leave during the development years of their child. If they have worked at your business for a continuous year they are able to access the government’s paid parental leave scheme giving them options to make this leave paid under the governments support.

Permanent employees are also entitled to both paid annual leave and personal leave. Annual leave accumulates as the employee works for your business, starting with 0 when they first start. For paid personal leave they receive a minimum of 10 days for each year at the business.

All employees will also receive a pair of unpaid carer’s leave days per year where they are caring for an immediate family member.

That’s a lot of leave to track and pay out, but if you have employees you are required to provide these as a minimum.

If you’re worried that your contractors may be in the grey area and you can’t support these amounts of leave I would suggest speaking with a lawyer on how you can get that contract more defined.

 

Superannuation and Tax

Your business also is required to handle the tax and superannuation payments of your employees. For super this means paying the current 10% of income into their nominated super fund.

For tax you are obligated to determine what rate you withhold from your employee to pay to the Tax Office. You will use a Pay As You Go system, withdrawing their tax percentage from each pay check so that they receive a constant flow of cash to support themselves.

Finally, you will also have to pay what is referred to as a fringe benefits tax, a rate against additional expenditures for you employees. This could include entertainment or living away from home costs.

At Teddington we would advise you at this point to speak to an accountant to ensure you have the correct processes in handling your payments.

 

Workplace Safety

Finally, you are obligated to provide a safe place of work for your employees. This essentially means reducing the risk that they are exposed to while under your duty of care. At a basic level you should be ensuring that they are trained in the operation of the workplace, that there are clear exit and entry points, that they understand fire safety procedure and that it is free of hazards. This act is complicated and varies greatly from workplace to workplace, so I would suggest seeking advice on how best to manage it.

 

Conclusion

You can see how easy it is to be confused by the two categories of workers. Generally, at Teddington we encourage our clients to review the relationship so that it is indicative of the category that suits your business. Whether that is the control over an employee or the flexibility and minimal commitment of a contractor.

With appropriate management you can tailor the relationship to match your business needs and reach your goals.

If you still have questions, feel free to shoot us an email at teddington@tt.legal or give us a call at +61 2 8096 8143