Employee or Contractor? Know the difference

Determining whether a worker is an employee or contractor can be a difficult task. However, the distinction is critical.

The law treats each relationship differently and if business owners get it wrong the consequences can be expensive. The incorrect classification of workers can (and has) led to unfair dismissal claims, back payments and severe sanctions.

1. What is the difference?

A worker will be viewed as an employee if he/she is the subject of a controlled, ongoing relationship. In contrast, an independent contractor is just that, independent. The table below outlines some of the fundamental differences between employees and contractors:


Employee Contractor
Works for the employer who controls what, when and how the work will be performed. Has control over the hours worked, when and how the work is performed and when they will and will not work.
Is an integral part of the business and usually works on an ongoing and exclusive basis for the employer. Can accept and perform work for multiple businesses at the same time.
Is paid according to the relevant award, agreement or contract of employment. Has an ABN and submits an invoice for work completed or is paid at the end of the contract or project.
Is contractually entitled to be paid annual, sick and long service leave. Has no contractual entitlement to paid annual, sick or long service leave.
Works using the employer’s plant, equipment and materials. Supplies their own plant, equipment and materials.
Has tax, superannuation and workers compensation paid by the employer. Usually responsible for their own tax, superannuation and workers compensation.


Employees cannot be contractors simply by calling them such in a contract – they must fit within the legal definition. This was summarised in Re Porter: Ex Parte TWU (1989) 34 IR 179 when Justice Gray stated:

“…the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.”

Nor is it enough to simply say that because a worker has their own Australian Business Number (ABN) the worker is therefore an independent contractor.

Fundamentally, the greater the control a principal is shown to have, the more likely it is that an employment relationship will exist.

2. Why does it matter?

Employment relationships are regulated by specific labour protection laws and various awards and workplace agreements. These generally provide a higher degree of protection to employees than the general commercial laws that regulate contractor relationships. For example, the Fair Work Act 2009 (Cth) (the Act) specifies minimum conditions and standards of employment for Australian employees (through “National Employment Standards”) which include minimum entitlements for leave, public holidays, notice of termination and redundancy pay. A number of employers have been caught attempting to treat their employees as contractors in order to avoid their obligation to meet these entitlements.

3. What are the consequences of getting it wrong?

Section 357 of the Act prohibits a person (the employer) from misrepresenting an employment relationship as an independent contracting arrangement. However, it is a defence if the person can prove that at the time they made the representation they did not know, and were not reckless as to, the true nature of the relationship. In addition, an employer must not dismiss or threaten to dismiss an employee in order to engage them to perform the same, or substantially the same, work as an independent contractor. A penalty of up to $33,000 may be imposed for engaging in a “sham” arrangement in addition to an order to remedy any underpayments to workers. If a principal/employer is involved in more than one “sham” arrangement then it may have to pay a penalty for each arrangement.

Principals should ensure that their workers are genuinely working as contractors when providing services. For example, in Fair Work Ombudsman v Centennial Financial Services Pty Ltd & Ors [2011] FMCA 459, nine employees were dismissed, told to obtain their own ABNs and then immediately re-hired as independent contractors. They were paid on a commission basis and no longer received wages or leave entitlements – despite performing substantially the same duties. This arrangement led to a shortfall of $39,533 in wages paid to the workers. The judgment stated:

“the law’s disapproval of the conduct in question should be marked and a penalty serve as a warning to others not to engage in similar conduct.”

Consequently, the director of the company was fined $13,200 and the former HR Manager was fined $3,750 for his involvement in the “sham” arrangement.

4. How to get it right?

The Fair Work Ombudsman and the ATO are both undertaking public campaigns in relation to sham contracting (particularly in the building and construction sectors). It is important for businesses to correctly classify their workers as either employees or independent contractors.

In addition, business owners should:

a) exercise thorough record keeping practices in relation to each worker to act as evidence of the worker’s status;

b) ensure that all contracts, be they service contracts for independent contractors or employment contracts, are in writing. These contracts should also (among other things):

i. clarify the status of the service provider – that is, expressly state whether it is a contract for services or an employment contract (while this will not override a sham contract it will go some way to preventing uncertainty between the parties);

ii. clearly set out the period of engagement and the remuneration;

iii. include dispute resolution provisions;

iv. state how, if at all, the contract can be varied; and

v. specify how the relationship can be brought to an end (i.e. before the work is completed in the case of a contractor, or by giving notice in the case of employees).

Please contact our Ben McPherson if you have any questions regarding the issues covered in this article. This article is for general guidance only and should not be regarded as legal advice. Legal advice should be obtained before taking any action on any issue covered in this article.