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Employees and Independent Contractors

An employee is someone who performs work under a contract of employment.

Identifying who is, or is not, an employee has become an increasingly disputed area, with a number of different factors to be considered.

Non-employees may be 'independent contractors' or 'sub-contractors' and are employed under a contract for services or even as agents representing a client business.

The legal consequences of being an independent contractor are significantly different to those for employees. Only an 'employee' can be covered by an award or make a workplace agreement. However, some cleaners, outworkers and some drivers of public passenger vehicles who might ordinarily be considered independent contractors are deemed to be employees under the Fair Work Act 1994 (SA) [ss 4, 5], see also Fair Work Act 2009 (Cth) various references to rights of outworkers [for example ss 30F, 47 - 48].

The rights and obligations of employees are very different to those who are self-employed. To distinguish between employees and independent contractors, the courts take into account a number of factors to determine what is the real nature of a particular work relationship. These factors may include the following:

  • Control over work - generally an employee works as directed by the employer whereas a contractor has a greater say in how the work is to be done.
  • Payment - employees are usually paid on the basis of an hourly rate or a salary. Contractors are more often paid for a required result, with less regard for time. Contractors send invoices for their services.
  • Work injury - contractors are responsible to insure themselves against injury but employees are not.
  • Risk — employees generally do not bear in an immediate or direct way the risk of financial loss incurred by the business for which they work. Contractors have a chance of profit, and also the risk of loss.
  • Sub-contracting - an employee cannot can assign or delegate (sub-contract) the work to others whereas a contractor is typically permitted to do so.
  • Tools and equipment - contractors may supply special equipment or tools to do the job and generally supply their own rather than using others. They also do not usually wear the uniform of another organisation.
  • Income tax and superannuation - employers usually pay these for their employees whereas contractors make their own arrangements.

What is most important is that the law will uphold the true nature of a work relationship despite any attempts to make what is really an employer/employee relationship appear to be something else. It is does not matter what label the parties give it, the court goes past that and examines what the relationship really is. The courts look at the totality of the relationship to determine whether the worker is an employee or contractor [Hollis v Vabu Pty Ltd (t/as Crisis Couriers) (2001) 207 CLR 21].

Sometimes an employer may attempt to incorrectly describe the true nature of a relationship so as to avoid responsibilities under various statutes and awards, but the Parliament and courts are wise to this. The Independent Contractors Act 2006 (Cth) and the Workplace Relations Amendment (Independent Contractors) Act 2006 (Cth) came into effect on 1 March 2007 and apply to all independent contractor arrangements which involve a constitutional corporation (that is a foreign, financial or trading corporation), the Commonwealth or a Territory. These Acts impose penalties on businesses that use ‘sham arrangements’ to either disguise employees as independent contractors or coerce employees into independent contracting arrangements.

Under the Fair Work Act 2009 (Cth) an employer must not misrepresent an employement relationship as an independent contract (sham contracting) [s 357] , must not dismiss an employee to engage them as an independent contractor [s 358] and must not make a false statement to encourage someone to be engaged as an independent contractor [s 359].

The Australian Tax Office has an online decision tool to help businesses to understand whether individual workers are employees or contractors for the purposes of tax and superannuation.

See also the Fair Work Ombudsman's website on sham contracting.

Express and implied terms of the contract

All employees have an employment contract, which can be verbal, written or a combination of both. Many contracts of employment are purely verbal. While this does not reduce any contractual rights, it may be difficult to prove the existence of a particular term. A verbal contract may be later put into writing, for example, by a letter of confirmation sent after the verbal contract has been made.

If an employee is covered by a workplace agreement or an award, it is normal to rely on a verbal contract with a letter of confirmation, because the workplace agreement or award usually provides details of most of the conditions of employment. However, if the employee is not covered by a workplace agreement or award, it is a good idea to have a written contract of employment so that the conditions of employment are recorded. The contract should cover issues such as:

  • the main duties of the employee,
  • the location of the employment site,
  • whether the employee is casual, part-time or full-time, see casual employees,
  • the normal hours of work and whether the employee is entitled to payment for overtime, or time off in lieu of overtime (usually there are limits on the amount of time that can be accumulated and overtime must be agreed to in advance),
  • the level of salary or wages including whether the employee is entitled to pay rises upon certain occurrences, including cost of living increases, national wage increases, increments for age or years of service,
  • whether the job is for a fixed period or is ongoing,
  • whether there is a probationary period and the period of probation, and
  • where there is a probationary period, or where the position is for a fixed period but is renewable, the form of the review process.

The express terms of a contract of employment are those specifically agreed between the parties, whether verbally or in writing. In many cases these are few (the wage, the hours, the type of work that has to be done and where), but there are always other terms that are implied (that is, they exist without being stated or written down). These fall into two categories - those implied by law and those implied by the circumstances of a particular case. Implied terms do not apply when contradicted by an express term.

Breach of contract

Under the Fair Work Act 1994 (SA) the South Australian Employment Tribunal constituted as the South Australian Employment Court has jurisdiction to hear and determine any question, action or claim founded on, or otherwise arising out of or in relation to a contract of employment [s 10].

A common example of this is an allegation of a breach of contract.

The South Australian Employment Tribunal may make a number of different orders if they find a breach of contract, including: an order of specific performance, granting an injunction, or awarding damages [s 10 (2)-(5)].

The employee's duty of co-operation, care, and fidelity

The employee must take all reasonable steps to carry out what has been promised under the contract of employment. Sometimes this is described as the duty to obey the lawful and reasonable orders of the employer, which usually means getting on with the work when there is work to be done and fitting in, as far as is reasonable, with the employer's scheme of operation.

The employee must exercise reasonable care and skill in the performance of the work; in other words, the employee has the duty to be efficient and to avoid negligence in doing their work.

The employee must do the job honestly and faithfully. This includes the duty to account for any property used and to pass on to the employer any profits made through the employment. 'Tips' received by many employees belong in law to the employer, although there may be exceptions peculiar to the custom and practice of a particular industry. However, an employer cannot force an employee to be searched unless it is expressly agreed to in the contract.

If an employer requests information about the conduct of other employees the employee may be under a duty to disclose information about conduct that falls within the range of the employee’s work activities. An employee who exercises managerial or supervisory functions may be obliged to disclose information to the employer, even if not asked, about the misconduct of other employees. So if an employee becomes aware of another employee’s damage to or theft of the employer's property, he or she must pass that information on to the employer.

While the courts are reluctant to intrude on an employee's spare time (that is, after knock-off time or prior to starting time), they have held that activities that are harmful to the employer's business (such as running a competitive business) may be incompatible with the duty to the employer. Basically, a worker should not tell others any details of the employer's profits or losses, customers, special methods or techniques used, or any information about the business that might help a competitor. Such insider knowledge is different from any skills, expertise, or general knowledge learnt or developed in the course of employment.

Some contracts of employment contain an express term preventing the employee, on leaving the employment, from entering into competition with the employer's business (restraint of trade clause). Such a term may be declared void by the courts despite this express agreement, unless it can be shown to be reasonable and not contrary to the public interest.

It is not a breach of the duty for an employee to disclose misconduct by the employer or other events that have occurred in the employment which ought to be disclosed in the public interest but, in so doing, the employee cannot also disclose the employer's trade secrets or misuse confidential information acquired in the employment. Under the Whistleblowers Protection Act 1993 (SA), a person who discloses misconduct is called a whistleblower. Whistleblowers have protection from victimisation resulting from any disclosure of public interest information although legal advice should be sought before disclosure. In the case of Sutton v State of South Australia (1996) 68 SASR 13 the Supreme Court held that even the Ombudsman could be sued in the unlikely event that he or she victimised anyone for making an appropriate disclosure of public interest information. Public interest information is very broadly defined, and includes information about any person doing any unlawful act or any public official wasting resources or money. A whistleblower who is victimised can take legal action in the courts or can lodge a complaint with the Commissioner for Equal Opportunity, see discrimination.

If in the course of employment an employee creates or invents something when he or she is employed to do things of that sort, the property in the creation or invention (unless otherwise agreed) belongs to the employer, see copyright.

In some workplaces there are specific rules (often referred to as the employer’s policies) which may be handed to workers when they start their employment or sometimes they are displayed on notice boards. If before the employment contract is made the worker is given a copy of the rules and made to sign for them, or if the existence of the rules is reasonably brought to the worker's knowledge, the rules become part of the terms of the employment. If they are shown to the worker after the commencement of employment, he or she must consent to them before they become part of the contract.

The employer's duties and rights

As with the employee, the employer must take all reasonable steps to make it possible for the employee to carry out his or her part of the agreement and must not deprive the employee of the opportunity to perform the work.

The law increasingly has been suggesting that an employer does not have the right to simply have someone sitting around so long as the employer pays him or her. In other words, there may also be an obligation to give an employee something meaningful to do. This is still a developing area of law and if an employer has no work to provide it may lead to the employee's retrenchment.

Under the national system employers have a duty to keep employee records and to provide payslips to employees within one working day of paying the employees wages [ss 535-536 Fair Work Act 2009 (Cth)].

Employers also have a duty to pay superannuation to almost all employees, the Australian Tax Office has a guide to assist employers know whether they must pay superannuation. Superannuation is additional to pay and is a minimum payment of 9.5% of gross income.

Employers also have responsibilities to ensure safe work places - see the Hanbook sections on Workplace Bullying and Safety Legislation.

Other terms implied by circumstances

Some terms are implied depending on the circumstances of the job. Some exist because they are so obvious that they go without saying, while others may be said to exist because, although they were not expressly raised at the time the contract was made, it is certain that they would have been agreed on if they had been raised. In some trades there are terms that are implied as a matter of custom, but these must be well known and accepted before they will be recognised by the courts. An example of an implied term is where an employer will pay an employee for time spent in washing or cleaning up if the work is dirty.

Casual employees

A casual employee usually works on an irregular basis and may or may not be offered work which in turn he or she has the option to refuse. Workplace agreements and awards often contain provision for casual employees. However, many workers are called 'casual' when in fact they are part-time or full-time employees. If an employee has regular work and there is a reasonable expectation that work will continue, then they may not be true casual workers and should seek further advice about their entitlements.

As a general guide, casual employees:

  • are not entitled to holiday pay, sick pay, or payment for public holidays not worked;
  • should be paid an extra ‘loading’ (25% extra in compensation for not getting annual and sick leave);
  • are entitled to workers compensation;
  • are protected by anti-discrimination laws;
  • may be entitled to long service leave if their employment has been constant;
  • have the right to make an unfair dismissal claim if they have been employed on a regular and systematic basis for the minimum period and have a reasonable expectation of ongoing work; and
  • should receive superannuation payments (9.5% on top of pay) if they earn $450 or more a month. However, an agreement or award may entitle casual workers to superannuation payments even if they earn below this limit.
    Employees and Independent Contractors  :  Last Revised: Wed Oct 26th 2016
    The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.