Businesses are always looking for ways to save money and sometimes, that includes changing the way things are classified.  Here, we discuss pitfalls of classifying employees as contractors, and how getting it wrong can lead to needing to defend yourself in court.


Contractor or Employee

There was a trend for employers to use contractors instead of employees because it created opportunities for employers to shift costs and responsibilities from the company to the worker.  Superficially, the appeal is obvious, but it can end in tears when things go wrong.  Potential problems relate to taxation, workers compensation and public liability.



The employer pays the employee’s PAYG tax each time the employee is paid.  In contrast, when someone is a contractor, the contractor is responsible for their own tax payments.

As long as the contractor is really a contractor, this arrangement is fine, however if it can be argued that the contractor is really an employee, the business will be treated as an employer and will be liable to pay the tax of the worker and associated penalties levied by the ATO.[1]  This would mean the payments already made to the worker will be regarded as net pay, and the business would be retrospectively liable for a hefty tax payment to the ATO for the worker’s PAYG tax.

If the business has made a practice of incorrectly classifying contractors and there are multiple roles involved, then the business could receive a crippling tax bill that stops the business in its tracks.


Workers Compensation

Workers compensation can be a thorny issue for business and one of the perceived benefits of using contractors is the shifting of responsibility to the worker.  Using a contractor saves the business from having to pay premiums and deal with the consequences of having a claim against their insurance.  However, when things go wrong and the worker is injured, if the ‘contractor’ can demonstrate that they were really functioning as an employee, the court would support the view that the business is responsible for the workers injury.[2]  This would result in the business being responsible for paying the worker for the period the worker was unable to work, for the medical and rehabilitation costs associated with the injury, and any additional compensation if the injuries are permanent.


Public Liability

Most business owners have public liability insurance to protect them against the risk of being sued because of injury to people and property not working in the business.  Some might be tempted to structure their business to predominantly use contractors to shift the risk to the contractor.

The development of the law was a little more confused than tax and workers compensation, and the end result is broader.  It will be reasonably obvious that if someone is injured or harmed as a result of your employee’s actions, the business will be liable for any damage caused.  Following the same rationale as above, if a contractor is reclassified as an employee, the business will be liable as though the ‘contractor’ were any other employee.

However, it is even more complicated because the courts have decided that in some situations, the business will also be responsible for the actions of a genuine contactor under their control[3].  This means that if a contractor is working at your business, you can still be responsible for their actions if they do something that harms someone else within your business or someone visiting your business.


Differentiate Between and Employee and a Contractor

It is clear that contractors and employees will be treated differently, and the employer will have different responsibilities to both.  But how do you know if someone is really a contractor?  This question has been asked of and answered by the courts.[4],[5],[6]   It may not be completely black and white and there will be situations where argument might occur.

The following series of questions can help to determine whether a worker is a contractor or an employee.

The following features will mean the person is more likely to be considered an employee:

  1. The employer specifies the way work is performed, where it is performed and when it is performed.
  2. The employee works solely for the employer.
  3. The employer advertises the goods or services of its business, the employee does not.
  4. The employer can determine what work can be delegated or sub-contracted out and to whom.
  5. The employer has the right to dismiss the worker.
  6. The employer deducts income tax from remuneration.
  7. The employee is paid via a wage or salary.
  8. The employer provides business cards or uniforms.
  9. The employer provides paid holiday or sick leave.
  10. The work of the employee does not create goodwill or assets for the employee.
  11. The employee does not spend a sizeable portion of their pay on business expenses.

The following features will mean the person is more likely to be considered a contractor:

  1. The worker controls how the work is performed.
  2. The worker carries out work for other businesses.
  3. The worker has their own place of work and advertises services to others.
  4. The worker can delegate or subcontract any work to others for completion.
  5. The workers contract can be terminated if breached.
  6. The worker provides own uniform and has their own business cards.
  7. The worker is responsible for their own tax.
  8. The worker is paid on the basis of invoices.
  9. The worker does not receive holiday or sick leave.
  10. The worker greatest good will or assets for their own benefit.
  11. A sizeable portion of the workers remuneration is spent on business expenses.


Summing Up

Classifying people as contractors can be appealing because, at least when viewed superficially, it saves money and moves risk to away from the company to the worker.  This is not always as clever as it seems, if the worker can be classified as an employee instead of a contractor, and something goes wrong, the risk will come flooding back to the business in the form of tax, legal or medical liabilities.



[3] Stevens v Brodribb (1986) 160 CLR 16 at para. 31.

[4] Abdalla v Viewdaze Pty Ltd t/a Malta Travel [2003] 122 IR 215 at para. 34.

[5] Jiang Shen Cai trading as French Accent v Do Rozario [2011] 215 IR 235 at para. 30



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