Insight Close-Up: Independent Contractors + Subcontractors – What’s The Difference?
Written by: Gabrielle Andersen | Canny Insight
Welcome to our Insight Close-Up series, where we delve into the most common commercial + business law services we offer our business clients.
This series will focus on the following topics relevant to most business owners, and will be released monthly throughout this year:
- Service Agreements + Terms and Conditions.
- Independent Contractors and Subcontractors – What’s the difference?
- Employees + Employment Agreements.
- Protecting your IP and Business Know-How.
- Do I Need A Policy For That? What Exactly Is Compliance?
- Do We Need A Business Prenup?
- What is the PPSR and How Can It Help My Business?
- Dealing With Disagreements With Customers.
If any of that sounds interesting, stay tuned as we’ll be letting you know when each Insight Close-Up instalment drops. But if you simply can’t wait or need advice on any of these topics now, contact our Canny Insight team, today.
What Is A Contractor?
A contractor can be an individual or a business. They work with their own clients to deliver goods or services independently, and not as employees for the business engaging them.
“Is there a difference between Independent Contractors and Subcontractors?”
Contractors can be referred to as independent contractors, contractors or subcontractors – there is essentially no difference between these terms, but sometimes the distinction refers to where they exist within the supply chain.
A contractor might be referred to as a subcontractor because they have been engaged by another contractors to perform work. An example of this is where a builder is contracted by a client to build, and they turn in engage other contractors to perform specialised parts of the work, such as electricians, plumbers, plasterers, etc. Each contractor performs their portion of the work separately as subcontractors and not as employees of the builder, and they will also agree with the builder their own terms and conditions in completing the work.
Legal Issues For Contractors
It is important to be aware that where a contractor engages other (sub)contractors to perform work, they may still be liable to the client for the work performed by those contractors. Whether or not a contractor is responsible for the work of subcontractors will depend on the position under any applicable laws, and also the terms of the contract with the client, and any other agreements in place with subcontractors.
This makes having written Independent Contractor Agreements in place with your contractors, crucial.
Not only will a written Independent Contractor Agreement clarify the responsibilities and obligations of your contractor, but it should also confirm to the contractor that they:
- Are engaged as a contractor;
- Are subject to certain terms such as the length and scope of the engagement how they will be paid – usually contractors are paid by the way of a fixed fee for services;
- Are responsible for obtaining their own work cover insurance (in addition to the work cover insurance you hold for all workers – whether or not they are contractors or employees);
- Must comply with all work health and safety obligations at law;
- Will be paid Superannuation where the worker is deemed an employee for the purposes of Superannuation; and
- Are subject to your businesses terms regarding subcontracting, exclusivity, confidentiality, restraints on taking your clients or network, and outline the process for terminating the contract.
When Is A Worker A Contractor + Not An Employee?
From a legal perspective, this unfortunately isn’t an easy question to answer. While most businesses would assume that having a worker engaged as a contractor would only need the agreement between both parties, sometimes a written agreement isn’t sufficient if the actual practical circumstances of the relationship are more aligned with that of on employer and employee.
The distinction between an employee and a contractor has recently become a contentious legal issue.
New amendments to the Fair Work Act 2009 (Cth) set to commence in August 2024 mean that having a clearly documented Independent Contractors Agreement in place is only one piece of the puzzle in confirming a contractor relationship. Businesses must ensure that the “totality of the relationship” – meaning both the terms of the contract, and also the manner of performance of that contract – reflect that of a contracting (and not employment) relationship.
The following factors matter in determining whether in practice a contractor is actually a contractor and not an employee:
| Contractor | -VS- | Employee |
| The worker can choose how, where and when their work is done (subject to reasonable direction) . | Your business has the legal right to control how, where and when the worker does their work. | |
| The worker performs work to further their own business and can work with other businesses. | The worker serves in your business and are contractually obliged to perform work as a representative of your business. | |
| The worker is free to determine their hours of work. | The worker must work the hours and at the times that you have stated. | |
| The worker is paid for a specific result, often for a fixed fee. | The worker is paid either for the time worked, a price per item, or by way of commission. | |
| The worker is free to delegate to others who the worker will separately pay to complete the work on their behalf. | The worker must perform the work themselves and cannot pay someone else to do the work for them. | |
| The worker provides all or most of the equipment, tools and other assets required to complete the work, and do not receive an allowance or reimbursement for the expenses incurred. | Your business provides all or most of the equipment, tools and other assets required to complete the work. If the worker provides these themselves, your business will provide them with an allowance or reimburse them for expenses incurred. | |
| The worker bears the commercial risk for any costs or injury arising out of or from a defect in their work. | Your business bears the commercial risk of any costs, injury or defect in the work. |
Legal Questions: PAYG, Superannuation + Workers Compensation
But why does this matter?
Unfortunately, the above multi-factor test in determining whether or not a worker is an employee or a contractor under the Fair Work Act, has led to uncertainty in other areas – namely whether or not you are responsible for that workers PAYG withholding Superannuation or Workcover.
PAYG
In 2022 the High Court decided to shake things up with its two Personnel Contracting and Jamsek judgements, which decided against the “totality of the relationship” being the decider in whether or not a worker was actually deemed an employee. Instead, the High Court essentially ruled that whether a worker is a contractor depends only on the terms of their written agreement, where one exists, rather than the subsequent conduct of the parties.
Following this, in 2023 the Australian Tax Office released it’s Taxation Ruling 2023/24 (ATO Ruling) to ensure this new position taken by the High Court on whether or not a worker is deemed an employee was consistent for PAYG withholding and Superannuation purposes.
This ATO Ruling is still in place and confirms that where the parties have a written agreement, it is the legal rights and obligations in that contract alone that are relevant in determining whether the worker is an employee of the entity. The ATO Ruling notes that evidence of how the contract was performed, including subsequent conduct and work practices, cannot be considered for the purposes of determining the nature of the legal relationship between the parties.
Superannuation
The Superannuation Guarantee (Administration) Act (‘SGA Act) confirms that when a worker works under a contract that is wholly or principally for their labour, they are deemed an employee for the purposes of superannuation. The factors for determining whether a worker is engaged “wholly or principally” for their labour are:
- Payment is provided for the workers personal labour and skills (which can include physical, mental or artistic labour);
- The worker performs the work personally and cannot delegate their work; and
- Payment is by reference to each hour of work, rather than to complete a specific project.
If the worker fits within the above criteria, your business is responsible for their superannuation payments.
As you can see – there are now different tests for determining whether a worker is an employee for the purposes of the Fair Work Act (on the one hand) and the laws relation to superannuation and PAYG withholding (on the other).
Want to understand Superannuation better? We’ve got loads of detailed articles that touch on such a topic! Here’s one; What Is The Superannuation Guarantee?
Workers Compensation
Workers Compensation Insurance is dealt with by each state/territory. In Victoria, Workcover provides the following guidance to help determine whether or not contractors or subcontractors are your workers for the purposes of Workcover requirements:
- Do I have the legal right to control not only the result of the work, but also what and how the work will be done?
- Does the contractor’s or subcontractor’s business depend on me for it’s existence?
If the answer is no to both questions, the worker may not be your worker for the purposes of workers compensation. However, the response to these questions is heavily subjective depending on who is answering, and the facts and circumstances surrounding that particular worker, which may also change over time. For example, they may start out working for other businesses, but end working only with your business, and you might not be aware of this change.
This is why best practice recommendations are usually that you should err on the side of having all workers covered with Workcover, regardless of whether or not you consider them to be contractors or employees.
If you’re thinking this is way too confusing – you’re not alone!
Canny Insight + How We Can Help Your Business
Canny Insight is a customised legal service that meets the specific needs of your business. If you’re a start-up or gearing up for a growth and expansion, we’ll come up with a legal services package aimed specifically at your business needs.
Whether you need an Independent Contractors Agreement prepared, or advice on the distinction between contractors (or subcontractors) and employees, our business law focused Insight Team will provide you with straightforward and reliable advice and contracts for your business.
Get in touch with our team today to see how we can help your business!
