In the eyes of the law, employees and contractors are as different as apples and oranges. Hence numerous legal issues turn on whether a person is another’s employee or, alternatively, an independent contractor.
The distinction is critical for ownership and protection of copyright and other intellectual property. It is also vital for legal compliance considerations under workers compensation, superannuation, insurance, taxation and other legislation.
A good contract prepared by a competent business lawyer will help remove legal doubts. However, take care. Consider the bias of the person preparing the contract. “Creative lawyering” involves genetic engineering (“GM”) to modify the distinction between employee apples and independent contractor oranges. What you see in some contracts is not necessarily what you get.
If you don’t have a clear and GM-free contract, you have to wade through layers of employment and business law to determine if A is an employee of B.
As a short and general statement, whether A is an employee or independent contractor depends on two things.
- whether common law says that A is B’s employee; and
- whether legislation says that, for a particular purpose (say, long service leave or occupational health and safety), A is treated as B’s employee no matter what the position may be under common law.
To better understand the concept of “employee”, let’s focus on the common law position before turning to its interplay with legislation.
The common law does not have a clear and unequivocal definition of “employee”. Instead, courts (which make common law) consider a range of facts or factors and the whole relationship between A and B. Contact us if you require specific advice on the usual range of facts or factors courts consider. If you know them, you can draft clear personal services agreements. As indicated, this is vital for questions about who owns intellectual property and what are each party’s financial legal obligations.
Employee legal relationships on the one hand and a customer and contractor legal relationship on the other hand are two ends of a scale. At one end, if A contributes only his or her labour, A is likely to be an employee. At the other end, if A and B are each contributing money or other resources to do the work, each has a say in what work is done and how it is done and A is paid according results (not just turning up to work), then A is almost certainly an independent contractor, not an employee.
A court will identify the relevant facts, weigh them on the scale, and make a judgement about whether the overall relationship is one of an employer-employee or, alternatively, customer and independent contractor.
4 practical hints
Here are four practical points to clarify personal services contracts and HR contracts. Apply them to draft a clear contract for an independent contractor, not an employee.
- Precisely identify the full names of the parties to the contract and their Australian Business Numbers (ABNs).
- Specify the project and its scope of work for which the contractor is responsible and any fixed period if applicable.
- Specify the basis for payment and indicate if it is GST inclusive or exclusive, eg fixed fee, fee estimate, fee per finished item, or hourly rate.
- Specify obligations as regards insurance, leave entitlements, taxation, superannuation, workers compensation with the contractor being responsible for all of them.
Develop in-house template contracts
Having an in-house set of contracts is the best option. To avoid doubt the best option is to commission experienced contract drafting lawyers to develop a set of standard contracts for your enterprise. We have done this work for clients of all sizes and in various industries. One set could be for employees. A separate set could be for consultants, joint venturers, alliance partners, collaborators and other types of independent contractors. Call for a costed proposal.