Independent Contractor VS Employee
Who to Hire?
In the electrotechnology and broader construction industry, it is very likely that companies have a mix of employees and independent contractors (contractors) working for them. There are advantages and disadvantages to both.
1. Independent Contractor
|Less management: In most arrangements, the company just has to brief an experienced contractor and they work towards completing the task without any management or training having to be conducted.
|Less control: This is the flipside to having to spend less time managing the contractors. Since there is minimal control over the day to day activities of a contractor it is best for companies to set out guidelines and deadlines for the contractors so that there is a framework within which the contractors must work within.
|Flexibility: Some companies want the flexibility of employing someone when they are really busy with projects without having to keep that individual on during slow periods. In instances like this, hiring a contractor is highly beneficial as they are just on board to complete a specific project and their contract ends.
|Priorities: This is the flipside of the benefits of flexibility. Although the company has flexibility to hire a contractor as and when they need it they must understand that the contractor may also be hired to do work for several other companies at the same time. As such, their focus on work is spread across several different companies.
|Cost saving: One of the main reasons why companies hire a contractor is that they avoid having to pay for the individual’s insurance, leave entitlements (e.g. annual leave), tools, vehicle and employee benefits.
|Constant workforce: This is beneficial to a company in a multitude of scenarios. For example, where a company may have employees away on long bouts of leave, they are able to shuffle their employees around to take on the workload left behind. In addition, having staff that have been around for awhile means they are educated on how the business operates and are very familiar with all the processes.
|Cost: Unlike contractors, employees can be costly from having to pay for their insurance, tools, vehicles, employee benefits, and leave entitlements. Additionally, there is the time cost of training, investing in their performance reviews, etc.
|Loyalty and dedication: Employees have no mixed priorities when it comes to their work especially where they are full-time. Their focus is only on the company and they dedicate their energy and time to furthering the company’s goals and fostering the workplace culture.
|Rules and Regulations: Unlike contractors, utilising employees comes with a lot of legal and regulatory compliance from Federal law (the Fair Work Act 2009) to Modern Awards. Companies must ensure that they are across these rules and regulations to avoid having claims for underpayment and claims of breaches brought against them.
|Management: A company is able to monitor and track employees’ performance and manage expectations on a day to day basis.
3. Sham Contracting
Sham contracting is where a company tries to disguise an employer-employee relationship as an independent contracting arrangement. If found to be sham contracting, a company can be fined for a breach of the Fair Work Act 2009 (the “Act“).
Companies may decide to hire an independent contractor and characterise them as such but they must understand that just labelling them as a contractor is insufficient and they run the risk of falling foul with the Act.
The law has a number of tests to determine if a contractor is in fact a contractor, or whether they are in effect, an employee.
The Fair Work Ombudsman’s website sets out the key differences and factors that would be considered by a court: https://www.fairwork.gov.au/find-help-for/independent-contractors. Below are just some of the factors:
|Work is managed and controlled by the company.
|Has a high level of control over how they perform the work.
|Not allowed to hire someone else to perform their job.
|Has the ability to hire others to assist with the work.
|Has an expectation of ongoing work.
|Typically hired for a fixed time frame or for a specific project only.
|Tax deducted by employer.
|Pays for their won tax and GST.
|Provided with tools and equipment.
|Use their own tools and equipment.
|Receives pay entitlements.
|Has no paid leave.
With an understanding of key factors that differentiate an employee from an independent contractor, companies can avoid a sham contracting situation. If you are uncertain about the differences or are considering hiring an independent contractor, do get in touch with Constructive Legal Solutions on email@example.com. We can support you in providing advice on the arrangements as well as assist you with preparing an agreement for an independent contractor.