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When do I need Workers Compensation Employee vs Contractor?
When you employ workers, you are required to take out works compensation insurance in NSW. But did you know that the definition of worker not only includes your employees, but may also include some contractors you engage?
This information sheets provides an overview of what is workers compensation insurance, and when you may need to cover your contractors.
What is workers compensation?
Workers Compensation is a statutory insurance scheme designed to compensate workers for injuries arising from their work in NSW. Under the Workplace Injury Management and Workers Compensation Act 1998 (Act), an “injury” also includes a disease which is contracted by the employee during the course of their employment, where the employment was a contributing factor to the formation or worsening of the disease.
When do I need to take out workers compensation?
If you employ workers, you must have a workers compensation insurance policy in place, unless an exemption applies.
The Act defines a "worker" to be any person who works under a contract of service or apprenticeship with an employer, whether the contract is expressed or implied, or is oral or in writing. However, the definition of “worker” does not include a person whose employment is casual (that is, for 1 period only of not more than 5 working days) and who is employed for a reason other than for the purposes of the employer's trade or business.
What is a contract of service?
A "contract of service" is just another name for an ordinary employment contract.
The common law test is used to determine whether or not someone is an employee. It is a list of factors (developed by courts over time) which, when looked at as a whole, indicate that a relationship is either one of employer/employee or contractor/subcontractor. No single factor is conclusive.
See below the tests used to distinguish an employee from a contractor.
Worker may include contractors
Principal contractors need to be aware that any subcontractor they engage could potentially be deemed their "worker".
A trade contractor may be deemed to be your employee, unless the contract work is incidental to their regular trade or business or they employ a worker or subcontract the work.
It is recommended that principal contractors carry workers compensation insurance even if they do not have employees on the books (wages or salary). Find out how to get "workers compensation insurance".
Note: The status of a person for tax purposes bears no direct relationship to that person's status as a "worker" for workers compensation purposes.
Penalties include double premiums and all costs associated with a claim.
How to distinguish between an employee and contractor?
There are several factors which need to be considered to distinguish an employee from a contractor. These factors are subjective, and no single factor can be regarded as decisive. All factors must be weighed up to determine whether they are an employee or contractor.
| Indicator | A person is more likely to be an employee if: | A person is more likely to be a contractor if: |
| Control over work | The employer controls what works is to be done and how it is done | The contractor has freedom in the way the work is done subject to an agreement. |
| Risk | The worker bears little or no responsibility to rectify poor work. | The contractor is required to rectify poor work at their own costs and bears commercial risk of loss incurred by a principal due to their poor work. |
| Ability to subcontract or delegate work |
The worker cannot subcontract or delegate the work. | The contractor can pay someone else to do the work. |
| Location and hours of work | The employer dictates the location of work and sets standard or set hours |
The contractor can decide when and where to work to complete the specified task. |
| Uniform |
The employer can insist that the worker wear a uniform or company logo. | Is not required to wear any uniform or company logo. |
| Expectation of work | The worker has an ongoing expectation of work. |
The contractor is engaged for a specific task or project. |
| Superannuation |
The employer pays superannuation contributions to a superannuation fund. |
The contractor is likely to be responsible for paying their own superannuation. |
| Tools and equipment |
The employer provides the tools and equipment or gives an allowance. |
Uses their own tools and equipment. They do not receive an allowance or reimbursement for the costs of the tools and equipment. |
| Tax |
The worker has income tax deducted by the employer out of wages/salary. |
Tax invoices include GST. The contractor is responsible for their own tax obligations. |
| Method of payment | The worker is paid on a regular basis (e.g., fortnightly/monthly). |
A contractor has an ABN and submits an invoice for work completed or is paid on the completion of a project. |
| Leave |
The worker is entitled to accrue and receive leave (e.g., annual leave, sick leave, long service leave, etc). |
Does not receive paid or unpaid leave. |
For more information see State Insurance Regulatory Authority.
What is the employer's liability?
If a worker suffers a work-related injury or illness (or passes away because of their work) then the employer must pay that worker (or his or her dependants) compensation.
If an uninsured worker is injured, icare, the Nominal Insurer, will compensate the worker and recover the money from the worker’s employer. A fine may also be imposed.
Tips for engaging contractors
Do not use the same trade contractor all year round, unless they are also doing work for other people. A trade contractor who works only for one head contractor all year round may be a deemed employee of that head contractor for workers compensation purposes.
Make sure they are operating as a genuine business – whether they have a regular trade or business depends on the facts, including use of a business name, advertising to the public, and working for other persons during the year.
Use trade contracts
Using a trade contract, and using it properly, may be evidence that parties intend to have a builder to contractor relationship as opposed to an employer and employee relationship.
HIA has trade contracts available:
- The Project Trade Contract is to be used by builders and subcontractors where the subcontractor is engaged for a single project.
- The Period Trade Contract is similar to the Project Trade Contract but designed to reduce paperwork where there is an ongoing relationship with a subcontractor or multiple jobs over a period of time.
- Digital versions of both the Project Trade Contract and Period Trade are available through HIA's Contracts Online platform.
More tips for engaging contractors can be found on preparing for and responding to an external audit.
To find out more, contact HIA's Contracts and Compliance team
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