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Independent Contractor vs Permanent Employee and why it’s a decision you need to get right.

Written by Leanne Hasting

With the easing of restrictions and the Australian economy beginning to reopen, for many businesses affected by COVID-19 the challenge now for their owners is to put the pieces of their businesses back together amid the first economic recession Australia has seen in almost 30 years. One of those challenges undoubtedly is how to reassemble a workforce which services the needs of clients or customers, doesn’t take all of your available time to manage, and fits a severely depleted budget for wages. The appeal of outsourced labour is high, but in an environment where the spotlight is shining brightly on employee rights and entitlements it is more important than ever to make sure that your labour is engaged correctly.

Distinguishing the difference between an independent contractor and a permanent employee can be difficult however it is imperative to get that distinction right due to the legal and tax implications involved. The Fair Work Act 2009 also contains provisions for Sham Contracting which is where employers ‘dress up’ an employment relationship as an independent contractor arrangement, possibly for the purposes of avoiding the responsibility of appropriately managing an employee or their entitlements. Significant penalties can be applied to organisations found to be involved in Sham Contracting, further emphasising the importance of considering the method of labour engagement from the outset.

An independent contractor will have certain characteristics about their engagement arrangement however no single characteristic alone will determine with certainty. If brought before a court, an holistic assessment of the relationship will be used to make a determination. 

The characteristics which will typically be present in a genuine independent contractor arrangement are:

  • An independent contractor runs their own business for the purpose of making a profit and is usually engaged for a specific project or job. They will have their own ABN, may charge GST (depending on their level of income) and will generate goodwill for their own business, not yours. They will invoice you for the work they do and are responsible for paying their own income tax and making their own arrangements for leave provisions.
  • In many cases Independent Contractors will pay their own superannuation however there are some exceptions and you should seek financial advice to ensure you are meeting your Superannuation Guarantee obligations.
  • A contractor is able to work for other businesses away from yours and they have control over accepting or rejecting work as they wish. Their work hours are determined by arrangement, taking into account the job that needs to be done and the timeframe for its completion.
  • Independent contractors will supply their own tools / equipment and cover their own expenses, including appropriate insurance for their equipment, public liability etc.
  • An independent contractor will have considerable freedom and control over how they do their work and will bear responsibility for the quality of their work. They also have the ability to delegate or sub-contract the work to others, for whom they will also bear responsibility.

In contrast, an employment relationship is characterised by the level of control an employer has and their level of responsibility for their employee. Perhaps a somewhat daunting level of responsibility, particularly for business owners who are emerging exhausted from a once-in-a-generation pandemic. 

It isn’t difficult to understand the appeal of engaging a dispensable contractor as opposed to committing to a permanent employee to fulfil your labour requirements. Think of the time and headaches you could save yourself! However your headaches may just be beginning if your workforce are engaged incorrectly. Perhaps instead of outsourcing labour, business owners might consider outsourcing their human resource function, to allow them to still maximise their time and minimise their headaches, but with the support and comfort of expert knowledge and advice to manage their most precious resource – their people.

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