Employee or Contractor?

Not sure if you are, or your worker is, a contractor or an employee? Contractors and employees have different rights and obligations, so it’s important to work this out. Whether you’re a worker or someone who pays a worker, read the below or visit the ATO’s independent contractors decision tool, to help you understand what your working relationship is.

It is compulsory for all employers in the ACT to have a current ACT workers compensation policy in place with an Approved Insurer

What components of contractors wages do we need to declare?

Contractors and sub-contractors remuneration over the period of insurance, for which no certificate of currency has been obtained for proof of their workers compensation cover. Based upon the percentage of contract relating to the provision of manual labour.

 A Worker/contractor is defined as a worker when:

 Section 8 of the Workers Compensation Act 1951 defines a worker as a person who has entered into or works under a contract of service with an employer. The essential feature of this definition is “a contract of service” as distinct from a “contract for services” which refers to the rendering of services by an independent contractor.

A worker means an individual who;

(a) works under a contract of service, whether the contract is express or implied, oral or written; or

(b) works under a contract, or at piecework rates, for labour only or substantially for labour only; or

(c) works for another person under a contract (whether or not a contract of service) unless the individual—

(A) is paid to achieve a stated outcome; and

(B) has to supply the plant and equipment or tools of trade needed to carry out the work; and

(C) is, or would be, liable for the cost of rectifying any defect in the work carried out; or

Workers can include: people who work under a “contract for service”, who perform work for a principal contractor, and are required to perform part or all of the work, and who work on a regular and systematic basis.  This may include some contractors (section 11 of the Act) and sub-contractors (section 13 of the Act);

A contractor is more likely to:

  • be engaged to carry out a particular task using his or her own skill and judgement
  • employ others, delegate or sub-let work to another
  • be paid on the basis of a quotation for the job
  • supply his or her own tools and materials
  • carry on an independent business in his or her own name or under a business or firm name
  • be affected by PAYG tax arrangements.

Please note that an ABN by itself is not a definite indicator of a person(s) status.

A worker is more likely to:

  • be subject to direction from the employer as to the work to be performed and the time and manner in which it is performed
  • be required to actually carry out the work
  • be paid on a time basis
  • have tools and materials supplied by the employer
  • work exclusively for a single employer
  • wears company uniform

Deemed Worker: Schedule 1 of the Workplace Injury Management and Workers Compensation Act 1998, under Section 2 of that schedule, provides:

“2(1) –    Where a contract:

(a)          to perform any work exceeding $10 in value (not being work incidental to a trade or business regularly carried on by the contractor in the contractor’s own name, or under a business or firm name), or

(b)          is made with the contractor who neither sub-lets the contract nor employs any worker, the contractor is for the purposes of this Act taken to be a worker employed by the person who made the contract with the contractor.”

Definition of a worker

From 1 July 2015, changes will be made to how a worker is defined in the Northern Territory for workers compensation.

The PAYG test applied under the Australian Taxation Office (ATO) laws will now be used to determine who is required to be covered for workers compensation in the Northern Territory.

This change will make it easier for employers and workers, as there will be one definition to determine tax, superannuation and workers compensation requirements.

Under the change a worker is: ‘An individual who performs work or a service under contract and is in relation to the contract, an employee for the purpose of assessment for PAYG withholding under the Tax Administration Act 1953 (Cth), Schedule 1, Parts 2-5.’

The changes will have no impact for the majority of individuals who will continue to be covered by workers compensation.

The changes may affect individuals in the construction and transport industries due to the contracting arrangements used in those industries. Some individuals in these industries will be considered contractors and not workers.

Examples of a contractor include:

  • An individual who supplies their own heavy machinery/substantial plant (e.g. crane, delivery van or earthmoving equipment)
  • An individual who employs or subcontracts others to help in completing work or a service under contract
  • An individual who quotes an upfront total price for a job, provides the tools of their trade and who fixes defects at their own expense.
Employee

Characteristics of an employee include the following.

Contractor

Characteristics of a contractor include the following.

Ability to sub-contract/delegate: the worker cannot sub-contract/delegate the work – they cannot pay someone else to do the work. Ability to sub-contract/delegate: the worker is free to sub-contract/delegate the work – they can pay someone else to do the work.
Basis of payment: the worker is paid

  • for the time worked
  • a price per item or activity
  • a commission.
Basis of payment: the worker is paid for a result achieved based on the quote they provided.
Equipment, tools and other assets:

  • your business provides all or most of the equipment, tools and other assets required to complete the work, or
  • the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.
Equipment, tools and other assets:

  • the worker provides all or most of the equipment, tools and other assets required to complete the work
  • the worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.
Commercial risks: the worker takes no commercial risks. Your business is legally responsible for the work performed by the worker and liable for the cost of rectifying any defect in the work. Commercial risks: the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.
Control over the work: your business has the right to direct the way in which the worker performs their work. Control over the work: the worker has freedom in the way the work is done subject to the specific terms in any contract or agreement.
Independence: the worker is not operating independently from your business. They work within and are considered part of your business. Independence: the worker is operating their own business independently from your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.

Under section 11 of the Act, a worker must be an individual. Therefore, if you engage a corporation they will not be a worker as only an individual can be a worker. The same applies if you have entered into an agreement with a partnership or trust for the services of the worker. Sole traders are however engaged as individuals and may be a worker.

Please note a person/individual can be a worker even if they have an Australian Business Number (ABN) or are responsible for their own tax.

A ‘contract of service’ is a standard employer and employee relationship. A large part of the workforce works under a contract of service. A worker is likely to be a person who performs the same work in the same way as an employee. Even where a person calls themselves a ‘sub-contractor’, if you engage them for work, they may be a worker under the Act.

To determine whether you need to cover a contractor for workers’ compensation follow the process below:

  • As only an individual can be a worker, use the ABN Lookup tool to determine which of your contractors are registered as an Individual or Sole Trader
  • For each of these contractors, use the ATO employee/contractor decision tool to determine a person’s status as a contractor or an employee
  • For each contractor deemed to be an employee through the ATO decision tool, use our Contractor working sheet to record the necessary details and determine the total amount of contractor payments you need to include in your wages declaration.

The ATO employee/contractor decision tool and Contractor working sheet can be found at the below web site.

https://www.worksafe.qld.gov.au/premium2015/declaring-wages/who-do-i-cover/contractors

Who is a worker?

A worker (for workers compensation purposes) is a person by whom work is done under a contract of service (as defined by the Return to Work Act 2014). Contract of service normally represents a relationship formed between an employer and employee. For workers compensation purposes, it has a much broader application that ‘deems’ some independent contractors and other persons to be workers when they meet particular criteria.

This occurs across certain classes of work including:

  • building work (other than wall or floor tiling)
  • cleaning work
  • driving a taxi-cab or similar motor vehicle
  • driving or riding a vehicle (other than a commercial motor vehicle)
  • performing as an entertainer
  • performing work as an outworker where that work is governed by an award or industrial agreement that applies to ‘outworkers’
  • thoroughbred riding work performed by a licensed jockey.

‘Contract of service’ vs ‘contract for service’

Under common law, a working relationship may constitute a contract of service (employer/employee) or a contract for service (principal/independent contractor). The courts have provided some guidelines to distinguish between:

  • a contract for service (i.e. where the contractor is self-employed and works on his or her own account) and
  • a contract of service (i.e. where the person is employed by another person and works on account of, or in the business of, that other person).

Just because someone is referred to as a contractor does not necessarily mean that in law they are a contractor. The courts have provided certain indicators of the true nature of the relationship; however, those features are only ever a guide to answering that question. It is necessary in each case to examine all the terms of the contract and the relationship and to determine whether, on balance, the person is working in the service of another (i.e. as an employee) or is working on his or her own behalf (i.e. as an independent contractor). A contract may be expressed or implied and may be verbal or in writing.

There is no single objective test that will give the answer, however, the courts over time have indicated that it is the totality of the relationship between the parties that must be considered and the question is one of degree for which there is no exclusive measure.

Section 4B of 1988 ACT

When are contractors deemed workers?

In most cases the Act does not apply to independent contractors engaged in a contract for services. However, when a person enters into a contract with a contractor for work that is not related to a trade or business carried on by that contractor, that person is regarded as a worker employed by the contractor.

4B. Contractors

(1) Subject to subsection (2), where a person makes a contract with a contractor to perform work exceeding $100 in value that is not work incidental to a trade or business regularly carried on by the contractor in the contractor’s own name or under a business or firm name, and the contractor does not sublet the contract or employ any worker, the contractor is taken to be a worker employed by the person making the contract.

(2) If a contractor to whom subsection (1) applies takes out his or her own personal accident insurance, the contractor is taken not to be a worker for the period during which that insurance remains valid.

(3) If a contractor takes out his or her own personal accident insurance, the contractor is to provide the person with whom the contract is made with evidence of the contractor’s insurance.

(4) If a contractor does not take out his or her own personal accident insurance, he or she is to advise the person with whom the contract is made that the contractor has not taken out such insurance.

Worker

The Act has both a primary and extended definition of a worker.

The primary definition covers those who are employed under a contract of service – the relationship being one of employer-employee.

The extended definition broadens the scope of who is considered as a worker under the Act to include independent contractors engaged under a contract for service where the remuneration they receive is in substance for personal manual labour or services.

Deemed Workers

In some circumstances where a contractor’s workers are under the control and direction of a principal contractor, that principal contractor may also be liable (jointly with the contractor) for the contractor’s workers.

A workers’ compensation liability may also arise where a worker is engaged under contractual arrangements contrived so that the employer can avoid his or her liabilities under the Act; for example, by requiring the worker to incorporate (set up their own company) as a condition of getting a contract.

Important

Just because a person is described as self-employed or has an Australian Business Number does not exempt the person or entity who has engaged them from any liability for work-related injuries. The provisions of the Act apply regardless of any contract made to the contrary (section 301). In relation to contractors, this means that any private arrangement entered into in relation to compensation for workplace injury is null and void if the contractor makes a claim and is considered to be a worker under the Act.

 

Coverage of Employees National Comparison

Coverage of employees

Individual who has entered into or works under a contract of service with an employer, whether the contract is expressed or implied, oral or written — s8(1)(a), workers for labour only or substantially labour only s8(1)(b), or works for another person under contract unless they are paid to achieve a stated outcome, and has to supply plant and equipment, and is (or would be) liable for the cost of rectifying any defective work s8(1)(i)(a-c) OR has a personal services business determination s8(1)(ii).

Coverage of independent contractors

No, if employed under contract for services. However, there are provisions for the coverage of regular contractors.

Coverage of labour hire workers

Yes, where the individual is not an executive officer of the corporation and:

The individual has been engaged by the labour hirer under a contract for services to work for someone other than the labour hirer there is no contract to perform work between the individual and person for who work is to be performed, and the individual does all or part of the work.

Coverage of employees

A ‘worker’ means a person who has entered into or works under a contract of service or a training contract with an employer (whether by way of manual labour, clerical work or otherwise, and whether the contract is expressed or implied, and whether the contract is oral or in writing). However, it does not include:

  • a member of the NSW Police Force who is a contributor to the Police Superannuation Fund under the Police Regulation (Superannuation) Act 1906, or
  • a person whose employment is casual (that is for 1 period only of not more than 5 working days) and who is employed otherwise than for the purposes of the employer’s trade or business, or
  • an officer of a religious or other voluntary association who is employed upon duties for the association outside the officer’s ordinary working hours, so far as the employment on those duties is concerned, if the officer’s remuneration from the association does not exceed $700 per year, or
  • except as provided by Schedule 1, a registered participant of a sporting organisation (within the meaning of the Sporting Injuries Insurance Act 1978 while:
    • participating in an authorised activity (within the meaning of that Act) of that organisation, or
    • engaged in training or preparing himself or herself with a view to so participating, or
    • engaged on any daily or periodic journey or other journey in connection with the registered participant so participating or the registered participant being so engaged, if, under the contract pursuant to which the registered participant does any of the things referred to above in this paragraph, the registered participant is not entitled to remuneration other than for the doing of those things.’

s4, 1998 Act

The legislation also identifies various factual situations when a person will be deemed to be a ‘worker’ (see s5 and Schedule 1, 1998 Act).

Coverage of independent contractors

Not unless contractor is a deemed worker pursuant to schedule 1, 1998 Act.

Coverage of labour hire workers

Yes, labour hire firm held to be employer.

Schedule 1, clause 2A, 1998 Act.

Coverage of employees

A worker is a person who works under a contract and, in relation to the contract, is an employee for the purpose of assessment for PAYG withholding under the Taxation Administration Act 1953 (section3(1) of the Return to Work Act).

Coverage of independent contractors

No, unless determined an employee using the ATO Decision Tool.

Coverage of labour hire workers

If the individual’s contract is with the Labour Hire business they are the employer.

Coverage of employees

A ‘worker’ is a person who works under a contract and, in relation to the work, is an employee for the purpose of assessment for PAYG withholding — s11 (Workers’ Compensation and Rehabilitation Act 2003).

Coverage of independent contractors

No, unless determined an employee using the ATO Decision Tool.

Coverage of labour hire workers

Yes, labour hire firm held to be employer.

Coverage of employees

A ‘worker’ means:

  1. a) a person by whom work is done under a contract of service (whether or not as an employee)
  2. b) a person who is a worker by virtue of —Schedule 1 RTW Act 2014
  3. c) a self-employed worker

and includes a former worker and the legal personal representative of a deceased worker – s4(1).

Coverage of independent contractors

Yes, if covered by definitions in s4:

  • ‘worker’ which includes a person by whom work is done under a contract of service (whether or not as an employee).
  • ‘contract of service’ which includes if person undertakes prescribed work or work of a prescribed class.

See also Regulations 5 and s4(7).

Coverage of labour hire workers

Yes. A ‘worker’ means

  1. a) a person by whom work is done under a contract of service (whether or not as an employee).

Coverage of employees

Any person who has entered into, or works under, a contract of service or training agreement with an employer, whether by way of manual labour, clerical work or otherwise, and whether the contract is express or implied, or is oral or in writing, and any person or class taken to be a worker for the purposes of the Act. And, when used in relation to a person who has been injured and is dead, the legal personal representatives or dependants of that person or other person to whom or for whose benefit compensation is payable—s3(1).

The Act does not apply to any person:

  • whose employment is of a casual nature, and who is employed otherwise than for the purposes of the employer’s trade or business, or
  1. a) who is an outworker, or
  2. b) who is a domestic servant in a private family, and has not completed 48 hours’ employment with the same employer at the time when he suffers injury, or
  3. c) who is a member of the crew of a fishing boat, and is remunerated wholly or mainly by a share in the profits or gross earnings of that boat, or
  • Notwithstanding section s4D, who is participating in an approved program of work for unemployment payment under the Social Security Act 1991 (Cth) – s4(5)

Coverage of independent contractors

Persons engaged under a contract for services are not covered unless the contract is for work exceeding $100 that is not incidental to a trade or business regularly carried out by the contractor. A contractor is not covered during any period for which they have personal accident insurance — s4B.

Coverage of labour hire workers

Labour hire workers are generally covered with the labour hire company taken to be the employer.

Coverage of employees

“worker” means an individual —

  1. a) who:

(i) performs work for an employer; or

(ii) agrees with an employer to perform work – at the employer’s direction, instruction or request, whether under a contract of employment (whether express, implied, oral or in writing) or otherwise; or

who is deemed to be a worker under this Act — s3.

Coverage of independent contractors

Not unless the contractor is a deemed worker pursuant to clause 9 of schedule 1.

Coverage of labour hire workers

Yes, labour hire firm held to be employer (definition of ‘worker’ in s3).

Coverage of employees

Any person who has entered into or works under a contract of service or apprenticeship with an employer, whether by way of manual labour, clerical work, or otherwise and whether the contract is expressed or implied, is oral or in writing. The meaning of worker also includes:

  1. a) any person to whose service any industrial award or industrial agreement applies, and

any person engaged by another person to work for the purpose of the other person’s trade or business under a contract with him for service, the remuneration by whatever means of the person so working being in substance for his personal manual labour or services — s5(1).

Coverage of independent contractors

No, unless employed under contract for service and remunerated in substance for personal manual labour or service.

Coverage of labour hire workers

Yes, labour hire firm held to be employer.