Independent Contracting in Australia

Independent Contractors & Employment Guidelines in Australia

Contract length allowance

The Independent Contractor Act 2006 promotes the freedom to enter into genuine independent contracting relationships and minimises the limits on the usage of independent contractors.

However, the use of independent contractors will be limited where it is a sham arrangement under the Fair Work Act 2009 (FW Act). Likewise, the law allows a certain level of scrutiny and redress in circumstances where the independent contract is, in fact, an unfair contract and makes provision for remedies for unfair contracts.

Fixed-term contract limitation

While previously there was no limitation to fixed-term contracts, in 2023, the Secure Jobs, Better Pay Amendment introduced a civil penalty for employing an employee on a fixed-term employment contract that:

• is for a period of longer than two years
• either could be extended or renewed for a period that, in total across all contracts, exceeds two years
• continues the same, or substantially similar, employment relationship and work duties as a previous fixed term contract, and either:
  • the contract and previous fixed-term contract would exceed two years in length
  • the contract or previous fixed-term contract contains a right of renewal or extension
  • the employee has previously been engaged under two consecutive fixed-term contracts

What makes someone an employee?

The main distinction stipulated by common law between employees and independent contractors is that an employee is someone who serves their employer in the employer’s business while a contractor is someone who carries on a trade or business of their own.

A person considered an employee usually falls under these fundamental characteristics:

• The organisation for which the work is performed has the right to direct the manner of performance of the work
• The commercial risk is borne by the organisation, as is the responsibility for any loss occasioned by poor workmanship or negligence by the employee
• The organisation prescribes the times and locations for the performance of the work
• The remuneration is in the form of a salary or wages and paid on a periodic basis based on hours worked
• Personal income (PAYG) tax is deducted by the organisation when paying the worker
• The organisation provides the equipment and materials for the work
• Any use of the worker’s own equipment or materials is compensated by the reimbursement or by an allowance
• The organisation has discretion in relation to task allocation and termination of the engagement
• The worker cannot perform similar work for other organisations
• The worker is presented to the public as being part of the organisation
• The worker has no inherent right to delegate their work to another, though there may be power to delegate some duties to other workers
• The worker receives benefits such as annual, sick or long-service

The level and degree of control exercised by one party over the other is the most significant factor affecting the characterisation of a relationship. Control refers to things such as supervision and direction given as to how work is performed and includes the authority to control work (as opposed to actual control). Generally, the greater the level and degree of control exercised by one party over the other, the more likely the relationship is to be characterised as an employment relationship.

Employee vs contractor

Rights, benefits and taxation between employees and independent contractors in Australia are very distinct. For instance, it is the employer’s responsibility to deduct and remit employee’s taxes from wages, whereas independent contractors are responsible for filing taxes themselves. Moreover, employees pay income tax, whereas contractors pay self-employed tax and can claim a much wider range of deductions with regard to their expenses.

Under the National Employment Standards and the FW Act generally, employees are entitled to the following benefits:

• Paid annual leave of 4 weeks (or 5 weeks for shift workers)
• Maximum working hours of 38 hours per week, plus reasonable additional hours
• The ability to request flexible working arrangements
• Parental leave
• Paid personal/carer's leave, compassionate leave and unpaid family and domestic violence leave
• Long service leave
• Community service leave
• Public holidays
• Notice of termination and redundancy pay
• Minimum rates of pay
• Unfair dismissal protection

In contrast, true independent contractors are not entitled to the benefits mentioned above.

Workers’ compensation is covered by State and Territory laws and entitles employees to claim benefits for job-related injuries. Some independent contractors are covered for workers’ compensation in some states and in specific circumstances. However, not all contractors are entitled to claim workers’ compensation, and it will depend on the relevant state legislation. All employees, however, are covered by workers’ compensation legislation and entitled to its benefits.

Employers are vicariously liable for the actions of their employees performed in the course of employment. However, an employer is not vicariously liable for any actions committed by an independent contractor in the course of performing work for the employer.

Benefits that both employees and contractors benefit from include:

• Safe and healthy workplace rights, where both can sue for associated breaches.
  Rights and remedies pursuant to the General Protections provisions of the FW Act, allowing both employees and contractors to bring a claim if the employer has taken adverse action against them because they have exercised a workplace right under workplace law.
• Protection under unlawful discrimination.

When it comes to intellectual property (IP), the characterisation of a person’s employment status may determine the beneficial ownership of the IP created by a worker. Copyright in an original work is ordinarily owned by the author of that original work.

However, copyright legislation provides an exception to this rule, allowing an employer of an author the right to own the copyright subsisting in their original work provided that:

• The worker is engaged under a contract of service.
• The work was made by the author “in pursuance of the terms of his or her employment.”

Penalties for Misclassification in Australia

Misrepresenting employment contracts as independent contractor arrangements can result in penalties of up to $63,000 for corporations and $12,600 for individuals knowingly involved in the contravention (such as a director or relevant manager).

In addition, companies will be responsible for back-paying the unpaid employee entitlements and the liabilities arising from non-compliance with statutory obligations plus interest, backdated to the date their contract of employment is deemed to have commenced, on the following:

• Paid leave
• Base salary as prescribed under an industrial award
• Awarded allowances on overtime or reimbursements
• Payment for public holidays and superannuation payments
• Workers' Compensation premiums (plus penalties for not complying with the insurance policies)
• Non-compliance with PAYG withholding and reporting obligations
• Remedies in the form of reinstatement or compensation of up to 6 months’ remuneration for unfair dismissal if the employee has been working for the company for a minimum of 6 months or, in the case of a small business, 12 months (in each case, total earnings must be less than the high-income threshold, which is currently AU$175,000 and indexed annually)