What is an independent contractor?

What is the difference between an independent contractor and an employee?

Independent contractors must be "in business" and truly independent

We used to say that an employee provides a contract of service while a contractors provides a contract for service. However, the line has been blurred with contractors where some perform just about all their work for one Principal for a long period of time. Now the difference between a person who is an employee and one who is an independent contractor, is an employee is in a relationship of personal service. An independent contractor is a business person.

Independent contractors being "in business" is critical

Many people who are appointed as contractors are not actually in business for themselves. They are dependent on a principal rather than being actually independent. It has been estimated that between about 25% and 35% of all supposed independent contractors are in fact dependent on one Principal.

The true independence test is that they can demonstrate they are business for themselves.

Utilising independent contractors

If you are considering restructuring your business and thinking about transferring the work to contractors rather than use your own employees then you should consider the whole relationship.

Entities that expect exclusivity of appointed contractors need to consider all the things that that make it up. It may be great to avoid paying their Workers Compensation, Superannuation and Payroll tax. You pay them an hourly fee for work performed. You leave it to them to sort out their own Tax issues but you supervise all their work, you tell them what hours they have to work and even supply materials or even their equipment. Are you really appointing a truly independent contractor ? This is an important question to consider.

So how do we know if they are truly Independent?

The High Court's made a particularly relevant decision in Hollis v Vabu Pty Limited(2001) 207 CLR 21which involved bike couriers who were engaged by a courier company as contractors. When considering whether the bike couriers were in fact contractors or not, the High Court looked at the whole of the relationship between them and the Principal appointing them and concluded that the bike couriers were really employees.

The bike couriers had some features of an independent contractor, but not all of them. Essentially the bike couriers were not operating a business. The Court concluded, as one of the judges stated, that merely labelling a dog as a duck does not convert the dog into another creature.

Factors to consider when appointing contractors

The lessons learnt in Hollisv Vabu, were the following factors in determining what is an independent contractor. They are:

  • Who actually owns the business?
  • Who controls the operation or work performed?
  • Who owns the premises or office space?
  • Who owns the tools?
  • Who does the contractor provide duties to?
  • Does the independent contractor take the risk of profit or loss?
  • Is there a creation of goodwill?
  •  How is the independent contractor paid?

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