INDEPENDENT CONTRACTORS LAWS
Effective Date: 1st March 2007
All clients involved with contractors should make themselves aware of the new laws.
Summary of Key Changes
- Stop state laws from requiring independent contractors to be treated as if they were employees
- Establish a three year “transitional” period during which existing state laws may still apply to existing contracts
- Keep state laws protecting textile, clothing and footwear outworkers
- Do not affect New South Wales and Victorian laws specifically dealing with owner-drivers
- Replace New South Wales and Queensland unfair contracts with a new federal unfair contracts jurisdiction
- Make it illegal for an employer to disguise an employment relationship as an independent contracting arrangement, and
- Make it illegal for employers to threaten or mislead employees to get them to change their status to independent contractors
Should you be unsure of any part of these new laws, please contact our office.
Are you covered by the new laws?
The new independent contractor laws came into effect on 1 March 2007.
To determine if the changes apply to you, you must first establish whether you are an independent contractor.
You can use the comparisons below to help you work out your status as either an independent contractor or an employee.
It is important to be aware that several other pieces of legislation have a different definition of who is an “independent contractor”, including those relating to WorkCover.
At a practical level, this means if you are an independent contractor covered by the independent contractors laws, you will not necessarily be a contractor for other laws.
For further information you can contact the Independent Contractors Hotline on 1300 667 850.
Independent contractor (contract for services) vs. employee (contract of service)
Lawful authority to command:
Under a contract of service, the payer usually has the right to direct the way in which the work is done. Of course, where the nature of the work involves the professional skill or judgement of the worker, the degree of control over the manner of the performance is diminished. What is important is the lawful authority to command that rests with the payer.
The hallmark of a contract for services is that the contract is one for a given result. The contractor works to achieve the results in terms of the contract. The contractor works on his/her own account, i.e. a plumber.
How the work is performed:
Tasks are performed at the request of the employer. The worker is said to be working in the business of the payer.
An independent contractor enters into a contract for a specific task or series of tasks. The contractor maintains a high level of discretion and flexibility as to how the work is to be performed. However, the contract may contain precise terms as to materials used and methods of performance, and still be one for services.
An employee bears little or no risk. An employee is not exposed to any commercial risk. This is borne by the employer. Further, the employer is generally responsible for any loss resulting from poor work.
An independent contractor stands to make a profit or loss on the task. She or he bears the commercial risk. The contractor bears the responsibility and liability for any poor work or injury sustained in the performance of the task. Generally a contractor would be expected to carry his/her own insurance policy.
Place of performance:
A worker under contract of service will generally perform the tasks on the payer’s premises.
A contractor on the other hand will generally provide all their own assets and may work at a number of locations.
Hours of work:
An employee generally works standard or set hours
An independent contractor generally sets their own hours of work.
An employment contract will generally provide annual leave, long service leave, sick leave and other benefits and allowances.
Generally an independent contract would not contain leave provisions (although mere non payment does not simply make the contract one for services)
An employee is generally paid an hourly rate, piece rates or award rates.
Payment to an independent contractor is based upon the performance of the contract.
An employee is generally reimbursed for expenses incurred in the course of employment.
An independent contractor is responsible for their own expenses.
An employee is generally recruited through an advertisement by the employer.
An independent contractor is likely to advertise their services to the public at large.
An employer reserves the right to dismiss an employee at any time (subject to any state or federal laws).
An independent contractor is contracted to complete a set task. The payer may only terminate the contract without penalty where the worker has not fulfilled the conditions of the contract. The contract will usually contain terms dealing with defaults made by either party.
An employee has no inherent right to delegate tasks to another. However, there may be a power to delegate some duties to other employees.
An independent contractor may delegate all or some of the tasks to another person and may employ other persons.
Plant and equipment is usually provided by the employer.
The contract usually specifies who is to provide the plant and equipment. This is usually the responsibility of the contractor.
Scheduling of work:
An employee determines or controls the time frame within which the work is to be performed.
The work would be performed in accordance with agreed schedules and consistent with the obligations under the contract.
Expectation of work:
An employee usually has an ongoing expectation of work.
A contractor is usually engaged for a specific task.
Method of payment:
An employer usually pays an employee according to an award or employment agreement.
A contractor usually invoices the person who engages them for their services.
An employee pays PAYG tax which the employer pays on behalf of the employee.
A contractor usually deals with his/her own tax.
Relationship to the business:
An employee is usually an integral part of the employer’s business.
A contractor’s work is usually an accessory to the business.
Ability to accept other work:
A full-time employee is usually restricted to work for the one employer during normal business hours.
A contractor can accept as many contracts as they wish.
Right to refuse work:
An employee does not have the right to refuse a reasonable task.
A contractor usually agrees to the tasks beforehand. The contract governs the tasks that must be performed.
Frequently asked questions
When does the legislation come into effect?
The laws came into effect on 1 March 2007.
Who is an independent contractor?
You are likely to be covered if you are an independent contractor with a contract where:
- One of the parties is a constitutional corporation (this generally covers incorporated companies who have significant or substantial trading or financial activities)
- One of the parties is a federal government entity, or
- The contract was entered into, or will be performed in a territory (such as Northern Territory or the ACT) or one of the parties live in a territory.
The independent contractor laws use the same test as the courts to work out who is an employee and who is an independent contractor. Using this test, all of the circumstances of the working arrangement are taken into account to work out whether you are an independent contractor or an employee.
The test looks at a broad range of factors, such as the ability to control a worker, hiring, training, location of workplace, who supplies tools and equipment, etc.
A definition of who is an independent contractor is not included in the legislation as it would be less flexible than the common law test.
Who is a ‘deemed’ employee?
Under some state laws, workers have been prevented from becoming independent contractors. Instead, they are ‘deemed’ to be workers or employees even though they have been hired as independent contractors.
The Australian Government legislation will stop independent contractors being treated as employees under state laws. People will now be able to choose whether they want to work as an employee or an independent contractor.
What will I need to do if I am ‘deemed’ to be an employee under state or territory laws?
People who are ‘deemed’ to be employees under state or territory laws workplace relations laws will have a three-year transitional period before they become ‘undeemed’, that is, become independent contractors. This means that they will continue to be covered by those state laws for up to three years from 1 March 2007.
Employees and employers covered by the transitional system may agree to become ‘undeemed’ before the end of the three year period. To do this they must both sign a written agreement that they no longer want state or territory laws to apply to their contract.
The transitional period will also not apply to workers who enter into new service contracts after the laws come into effect.
Independent contractors who are ‘deemed’ to be employees will need to get information on the different legal obligations that also apply to them, for example, different tax and superannuation arrangements.
What if I no longer want to be ‘deemed’ an employee?
At any time during the transitional period, you and your ‘employer’ may agree to opt-in to the new system. By opting in to the system, state ‘deeming’ laws will no longer apply and you will no longer be an employee. An agreement to opt-in to the federal system must be in writing and signed by both you and your employer.
Once you and your employer opt in to the new system, you cannot return to the state system. This means that once a worker has been ‘undeemed’, they cannot be ‘deemed’ to be an employee again.
What happens to my employee entitlements if I am no longer ‘deemed’ to be an employee?
You may be owed entitlements that you accrued as a ‘deemed’ employee. These entitlements are owed to you under state law and should be paid to you if you leave the transitional system and become an independent contractor. You will be able to pursue any unpaid employee entitlements under state law.
How will these laws protect employees from being sacked and the re-engaged as independent contractors?
The new laws protect genuine employees from ‘sham’ contracting arrangements which are sometimes used by employers to avoid paying employee entitlements (e.g. annual leave).
A ‘sham’ contracting arrangement occurs when an employer deliberately disguises an employment relationship as an independent contracting arrangement when in fact that worker is an employee under workplace relation’s law and entitled to a range of entitlements.
Employees can also be pressured to become independent contractors by being threatened with the sack or being misled about the effect of changing their working arrangements.
The laws make it illegal for an employer to misrepresent an employment relationship, or employment offer, as an independent contracting arrangement.
It is also against the law to dismiss, or threaten to dismiss, an employee to re-hire them as an independent contractor to do much the same work.
It is illegal to knowingly make false statements to a current or former employee to persuade that person to become an independent contractor to perform much the same work.
An employer who behaves in this way can be fined up to $33 000.
The Office of Workplace Services and the Australian Building and Construction Commissioner have the power to prosecute employers who break this law.
What do I do if my employer threatened to sack me if I do not become an independent contractor to do the same job?
You should immediately contact the Office of Workplace Services on 1300 724 200 or the Australian Building and Construction Commissioner on 1800 003 338 (if you work in the building and construction industry).
How are owner-drivers covered by the independent contractors laws?
Independent contractor owner-drivers in NSW and Victoria are covered by special laws which, among other things, allow tribunals to set minimum rates of pay and settle disputes.
The Australian Government will review this issue with the aim of achieving nation-wide consistency in this area of regulation.
How are contracted outworkers covered by the independent contractors laws?
There are currently a range of protections available to outworkers in the textile, clothing and footwear industry, both at a federal and state level which apply to both employee and contract outworkers.
Those existing protections will continue to operate.
Examples of these laws include:
- Laws for registration and record keeping requirements in the textile clothing and footwear industry.
- Laws regulating the giving out of work by those in the contracting chain.
- Industry codes of practice which apply to those in the textile, clothing and footwear industry (such as the New South Wales Ethical Clothing Trades Extended Responsibility Scheme).
Will I still be covered by WorkCover if I am an independent contractor?
The independent contractor laws will not affect the WorkCover laws. If you are ‘deemed’ to be an employee under workers’ compensation laws, or any other state law other than an industrial relations Act, that law will continue to operate.