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$vuetify.icons.faPhone1300 650 620

Employees vs contractors

Engaging independent contractors in your business can assist with cashflow, project timeframes and areas of projects that you are not equipped to carry out. But do you know if your contractors are truly contractors or employees? Recent changes to the law make it a critical time to review your independent contracting arrangements.

New definitions

Recent changes to the Fair Work Act (FW Act) mean that there is now a new definition of both employee and employer. 

From 26 August 2024, to determine whether a person is an employee or contractor, we will need to consider: 

  • The real substance, practical reality and true nature of the relationship between the parties; and
  • The whole relationship, including the terms of any contract, and how it is performed.

This means that we need to look at the whole relationship, including the terms of any contract, and how it is performed, to determine the employee or contractor status.

Just because your contract says that someone is an independent contractor, doesn’t mean that they are. If your professional relationship has employee characteristics, there is a chance that they should be engaged as an employee.

Characteristics of employees and contractors

The characteristics of an employee will differ to a contractor. Being aware of these can ensure that you do not engage an employee as a contractor or vice versa. The following table sets out some of the key differences between employees and contractors.

Employee Contractor
Employer supplies tools and equipment Contractor has own tools and equipment
Employee has no control over how work is performed Contractor has control over how work is performed
Employer has no ability to delegate or subcontract work Contractor can delegate and subcontract work
Employee has fixed hours of work or works as per requests of employer Contractor works hours that they agree to
Employee has expectation of work continuing Contractor has no expectation of work continuing and generally works on a project basis
Employee is paid benefits such as sick leave, annual leave and compassionate leave Contractor does not receive any paid benefits
Employee is paid a salary Contractor is paid for services/project/goods or services and issues a tax invoice for payment
Employee can be subject to disciplinary action by an employer, for example suspension or termination Contractor is not subject to disciplinary action, however contract can be terminated for breach

 

If you find that your contractor has more characteristics of an employee, then there is a high possibility that the contractor is actually an employee.

What do you do if your contractor is actually an employee

If, after considering the real substance, practical reality and true nature of the relationship between yourself and your contractor, as well as the whole relationship and contract, you determine that your contractor is actually an employee, it is critical that you engage that person correctly to avoid penalties.

If the relationship resembles an employment relationship, this may result in a Court, tribunal or regulator deciding that the contractor is actually an employee. This can have major consequences for tax, insurance, portable long service leave and other legal responsibilities for the builder.

My contractor wants to opt-out, what does this mean?

Contractors can agree or request to ‘opt-out’ of applying the new definition of employee if they earn more than the contractor high income threshold ($175,000). This means that if a contractor falls under the new definition of employment and they earn more than the income threshold, they can choose to have the definition not apply to them.

This means that workers who are engaged as contractors and earn above $175,000 for work carried out with one business can choose to remain contractors, even though the new definition of employment would classify them as an employee.

HIA contracts for independent contractors

Do you have a contract in place with your independent contractors? If not, now is the time to ensure your independent contracting relationships are covered by a HIA contract.

The HIA Project Trade and Period Trade contracts ensure that key terms between you and your contractor are addressed, including:

  • Requiring a fixed price (subject to variations).
  • Requiring the contractor to fix defective works.
  • Confirming that the contractor may sub-contract or employ others to carry out the works.
  • Requiring that the contractor supply everything necessary to carry out the work.
  • Defining the trade work to be completed with provisions that the contractor can decide which work they will undertake.

If these contracts are used properly and the contractor signs one before each job, both the builder and contractor have a better chance of a successful business relationship and one that is accepted as an independent contractor arrangement as intended.

These contracts are available from the HIA Shop and Contracts Online.

To find out more, contact HIA's Contracts and Compliance team

Email us

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