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The Importance Of Knowing The Difference Between An
Employee And A Contractor
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Posted by Esha Kumar on 1 April 2019
Do you know the difference between an employee and a contractor?
As the owner of a small business or startup, it is really important for you to know the difference between an employee and contractor, as getting this wrong might have huge consequences for your company.
A recent Federal Court case involving Foodora is a very good example of this.
Basically, Foodora had been wrongly classifying some of its employees as “contractors”.
In doing so they hadn’t been paying their workers the minimum wage, super contributions or penalty rates.
Well, all it took was one former employee’s complaint – and now Foodora has gone into voluntary administration and no longer has a presence in Australia.
To avoid these consequences for your small business or startup, let’s go through the factors that affect the classification, as well as the practical differences you need to be aware of the two.
Factors That Affect The Classification…
Degree Of Control Over How Work Is Performed & Hours Of Work
If your worker performs tasks under your direction on an ongoing basis, they are more likely to be classified as an employee.
If they are provided with autonomy and can control how the work is completed themselves, they are more likely to be an independent contractor.
In the Foodora case, all the evidence pointed to Foodora having significant control when it came to the services performed by their workers.
The company controlled shift times, by setting start and finish times, locations for delivery and a reward system which saw workers paid more when they delivered during certain times.
The judges of the Federal Court took this as evidence that Foodora clearly controlled how their workers performed tasks.
Unlike independent contractors, Foodora delivery workers had little to no control over their schedules, indicating that they were in fact, employees.
Expectation Of Work
An employee usually has an expectation that they will have ongoing work.
Whereas, a contractor is engaged for a specific task for which they have a particular skill set for.
Joshua Klooger, who is the former Foodora employee that brought the claim, expected ongoing work and was treated in a way that supported his expectation.
The company provided him with set shifts via an app. Though the days and times of work varied each week, the Federal Court thought that this looked like a casual employee, employed to complete work for a specific task or period.
The lesson here is that, if you want to hire people as independent contractors, you need to make it clear to your worker whether the tasks you require of them will be ongoing or just a one off.
Ignoring this might place them under the assumption that they are in fact an employee, and not an independent contractor.
Tools, Equipment And Uniform
If you are providing tools and equipment to your workers, they will be classified as an employee.
However, if the worker uses their own equipment, they are likely to be an independent contractor.
Something as simple as having your company logo printed on the equipment used by the worker, has the potential for an independent contractor being classified as your employee.
Even though Joshua rode his own bike when making deliveries, the storage box attached to his bike was labelled with the company’s logo.
Foodora workers also wore branded t-shirts when on the job, making it more likely that they were an employee rather than an independent contractor.
This is because the t-shirt could be considered as part of their uniform, associating them directly with their employer.
Method Of Payment And Leave Entitlements
Regular payments and leave entitlements may be an indicator that the person is an employee.
Independent contractors have their own ABN and will give you an invoice once the work you required of them is completed. They also don’t receive paid leave.
That being said, just not paying them regularly and giving them no leave entitlements doesn’t mean that they’re an independent contractor.
Similarly, just because you pay through an ABN, doesn’t mean the worker will be seen as an independent contractor.
These things need to be considered with the other factors mentioned above.
In the Foodora case, Joshua didn’t receive any leave benefits and was paid regularly in relation to the shifts he completed every week, which made it more likely that he was an employee.
Practical Differences – Risk, Superannuation And Tax
As an employer, you will be held legally responsible for all the actions your employees perform under their contract.
Whereas, an independent contractor will typically be liable for inadequate work or any work related injuries.
It is for this reason that independent contractors will often have their own insurance policy.
Super is another thing to consider. You must pay superannuation contributions for employees, but this is not required for independent contractors.
A similar situation applies for tax.
As an employer, you have an obligation to withhold PAYG tax from the regular payments made to your employee.
Whereas, a contractor will manage their own tax affairs.
Foodora made no superannuation contributions and did not deduct income tax.
You can see how an incorrect classification can quickly add up and be a significant financial risk for your business.
What To Take Away…
Knowing the difference between an employee and contractor is essential for any small business or startup owner.
It plays an important role when hiring people and defining their obligations as well as your responsibilities to them.
If you’re unsure of whether your workers are employees or contractors, do not hesitate to get in contact with us, we are here to help!
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About Latest Posts Esha KumarEsha is a marketing assistant at sprintlaw. She has experience in both the media and legal industries and is currently completing her Bachelor of Laws at the University of Sydney. Latest posts by Esha Kumar (see all) The Importance Of Knowing The Difference Between An Employee And Contractor – April 1, 2019 Can You Trust An Online Lawyer? – March 25, 2019 Terminating A Contract: What Do You Need To Know? – March 22, 2019
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