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Employees and Independent Contractors

An employee is someone who performs work under a contract of employment.

Non-employees may be 'independent contractors' or 'sub-contractors' and are engaged under a contract for services or even as agents representing a client business.

The legal consequences of being an independent contractor are significantly different to those for employees. Only an 'employee' can be covered by an award, make a workplace agreement or be entitled to the protections of the Fair Work Act 2009 (Cth) or the Fair Work Act 1994 (SA). The rights and obligations of employees are very different to those who are self-employed.

There are, however, some cleaners, outworkers and some drivers of public passenger vehicles who might ordinarily be considered independent contractors are deemed to be employees under the Fair Work Act 1994 (SA) [ss 4, 5, see also, for example, ss 30F, 47 - 48].

On 9 February 2022 the High Court of Australia delivered two important judgments which clarified, and changed, the approach to determining whether a person is, or was, an employee or an independent contractor [Construction, Forestry, Maritime, Mining and Energy Union & Anor v. Personnel Contracting Pty Ltd [2022] HCA 1 (‘Personnel Contracting’) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (‘Jamsek’)]. While the Justices were not unanimous in their approach, Personnel Contracting (supported by Jamsek) set out the following principles:

  • Where there is a comprehensive written contract and the validity of the contract is not in dispute, the rights and obligations of the parties under the contract will determine whether the relationship is one of employment or independent contractor. There is no need to consider a wide-ranging review of the entire history of the parties' dealings. [Per Kiefel CJ, Keane and Edelman JJ at [59], see also [40]-[62], per Gordan J at [172]-[178] and per Steward J at [203].]
  • The previous multifactorial approach (where all of the circumstances of an engagement are to be considered, including any written contract) is no longer appropriate, except as it may be relevant:
    • to the rights and duties established by the contract between the parties, including where a contract is partly written and partly oral, or where there is no written contract;
    • to ascertain the existence of variations to any contractual terms;
    • where there are allegations of invalid (sham) contracts;
    • in circumstances where a party is relying on another legal remedy such as rectification, estoppel or a statutory right or remedy.

[Per Kiefel CJ, Keane and Edelman JJ at [44]-[46], [59]-[61], per Gordan J at [177]-[178], [188]-[190], per Steward J at [203]].

  • The critical issue is to determine whether the person was working ‘in’ the business of the putative employer (where the work was so subordinate to the employer’s business as to be seen to be performed by an employee) or as part of the person’s own business [per Kiefel CJ, Keane and Edelman JJ at [39], per Gordan J at [180]-[186], per Steward J at [203]].
  • The existence of a contractual right to control the activities of the worker (including how, where and when the work is done) provides a strong indication of an employee relationship [per Kiefel CJ, Keane and Edelman JJ at [73]-[74], per Gageler and Gleeson JJ at [113]-[114], [121]].
  • The name, label or characterisation of a position as employee or independent contractor in a contract is not determinative or even, in some cases, relevant [per Kiefel CJ, Keane and Edelman JJ at [58], [63]-[66], [79], per Gageler and Gleeson JJ at [127], per Gordan J at [184], per Steward J at [203]].

Given the complex area of law, we provide the following recent case examples:

Personnel Contracting

Background

An international backpacker (‘McCourt’) was engaged by a labour hire company (‘Construct’) to provide physical labour in the building industry. McCourt signed a contract which described his role as an independent contractor. Construct required McCourt to work on building sites operated by a separate builder (‘Hanssen’).

Decision

Despite the labels used in the contract, the High Court held that McCourt was an employee of Construct based, amongst other things, on the following factors which arose from the terms of the written contract:

  • Construct could determine where and when McCourt would work, and McCourt was entitled to be paid by Construct
  • McCourt had promised Construct that he would co-operate in all respects in relation to the performance of his labour to the client, Hanssen
  • Construct’s control over work location and the ability to provide a compliant worker were assets to Construct’s business as a labour hire agency

Jamsek

Background

Two truckdrivers initially engaged as employees were, in 1986, advised that their employment could no longer be guaranteed. They were offered independent contractor positions provided that they purchased and maintained trucks to provide transport/delivery services. The truckdrivers agreed, formed partnerships with their respective wives and entered in a series of contracts with the company over the years which identified the relationship as contractor.

Decision

The High Court held that the respondents were independent contractors and not employees, taking into account, amongst other things:

  • The comprehensive nature of the written contracts between the parties (which contracts were not challenged)
  • The contracts were for the provision both of the drivers (personal service) and the vehicles owned by the partnerships
  • The contracts were with the partnerships, not with individuals
  • The company did not control the vehicles utilised by the partnerships or the method of transport/delivery chosen by the truckdrivers

Deliveroo Australia Pty Ltd v Franco [2022] FWCFB 156

In an unfair dismissal appeal before the Full Bench of the Fair Work Commission, a Deliveroo food delivery driver engaged pursuant to a series of contracts was found to be an independent contractor. It was acknowledged that the decision would have been different before the High Court cases of Personnel Contracting and Jamsek, as the Commission was now limited to considering the rights and duties created by the contract in force at the time of the termination. The Commission held:

  • The requirements for the driver to pay tax and insurance, and to acquire and maintain an Australian Business Number (‘ABN’) “merely reflects the view in the agreement that he is in business on his own account” and is therefore irrelevant as a label.
  • Consistent with the decision in Personnel Contracting, the right to accept or reject work, and the ability to work for other parties including competitors, is not inconsistent with casual employment and is therefore not determinative.
  • The following factors supported an independent contractor arrangement:
    • The driver was able to select when and where he was available to work
    • Even once the driver agreed to collect and deliver an order, he could ‘unassign’ himself from the collection
    • Deliveroo had no control over the way in which an order was delivered – the driver could select his own route and could even deliver items for competitors enroute, as well as having the right to select the vehicle used
    • The driver was required to provide and maintain his own vehicle
    • The contract allowed the driver to subcontract deliveries and therefore did not require personal service
    • The driver was required to pay an administrative fee of 4% to access Deliveroo’s software
  • The factors required to be ignored in the circumstances (which previously would have been relevant) included:
    • Pursuant to an earlier version of the contact, drivers were required to confirm their availability in advance, providing operational control to Deliveroo over the drivers
    • The value of the motorbikes used by the driver in this case were minimal and therefore it was of less significance that the driver was required to provide his own vehicle
    • Deliveroo strongly encouraged and provided branded insulation bags and clothing to be worn by drivers, thereby presenting the drivers as part of their business
    • One of contracts provided an expectation that the appointed driver personally provide the services, reducing the possibility and impact of any potential to subcontract the services
    • The various contracts were prepared by Deliveroo unilaterally with no right to negotiate or consult with drivers

Written contracts are especially important in the employee/independent contractor distinction. Legal advice should be sought if there is doubt about the nature of a position being offered, or currently held.

The Australian Tax Office has an online decision tool to help businesses to understand whether individual workers are employees or contractors for the purposes of tax and superannuation [as at 8 September 2022, the decision tool had not been updated as a result of the Personnel Contracting and Jamsek decisions; see also the ATO Decision impact statement].

Multifactorial approach

The factors previously considered in the multifactorial approach, and now relevant in limited circumstances, included, in addition to any contract:

  • Control over work - generally an employee works as directed by the employer whereas a contractor has a greater say in how the work is to be done.
  • Payment - employees are usually paid on the basis of an hourly rate or a salary. Contractors are more often paid for a required result, with less regard for time. Contractors send invoices for their services.
  • Work injury - contractors are responsible to insure themselves against injury but employees are not.
  • Risk — employees generally do not bear in an immediate or direct way the risk of financial loss incurred by the business for which they work. Contractors have a chance of profit, and also the risk of loss.
  • Sub-contracting - an employee cannot can assign or delegate (sub-contract) the work to others whereas a contractor is typically permitted to do so.
  • Tools and equipment - contractors may supply special equipment or tools to do the job and generally supply their own rather than using others. They also do not usually wear the uniform of another organisation.
  • Income tax and superannuation - employers usually pay these for their employees whereas contractors make their own arrangements.

Sham contracting

Sometimes an employer may attempt to incorrectly describe the true nature of a relationship so as to avoid responsibilities under various statutes and awards, but the Parliament and courts are wise to this. The Independent Contractors Act 2006 (Cth) and the Workplace Relations Amendment (Independent Contractors) Act 2006 (Cth) came into effect on 1 March 2007 and apply to all independent contractor arrangements which involve a constitutional corporation (that is a foreign, financial or trading corporation), the Commonwealth or a Territory. These Acts impose penalties on businesses that use ‘sham arrangements’ to either disguise employees as independent contractors or coerce employees into independent contracting arrangements.

Under the Fair Work Act 2009 (Cth) an employer must not misrepresent an employment relationship as an independent contract (sham contracting) [s 357], must not dismiss an employee to engage them as an independent contractor [s 358] and must not make a false statement to encourage someone to be engaged as an independent contractor [s 359].

See also the Fair Work Ombudsman's website on sham contracting.

Express and implied terms of the contract

All employees have an employment contract, which can be verbal, written or a combination of both. Many contracts of employment are purely verbal. While this does not reduce any contractual rights, it may be difficult to prove the existence of a particular term. A verbal contract may be later put into writing, for example, by a letter of confirmation sent after the verbal contract has been made.

If an employee is covered by an award or enterprise agreement, it is normal to rely on a verbal contract with a letter of confirmation, because the award or enterprise agreement usually provides details of most of the conditions of employment. However, if the employee is not covered by one of these, it is a good idea to have a written contract of employment so that the conditions of employment are recorded. The contract should cover issues such as:

  • the main duties of the employee,
  • the location of the employment site,
  • whether the employee is casual, part-time or full-time (see Casual employees),
  • the normal hours of work and whether the employee is entitled to payment for overtime, or time off in lieu of overtime (usually there are limits on the amount of time that can be accumulated and overtime must be agreed to in advance),
  • the level of salary or wages including whether the employee is entitled to pay rises upon certain occurrences, including cost of living increases, national wage increases, increments for age or years of service,
  • whether the job is for a fixed period or is ongoing (see Fixed term contracts),
  • whether there is a probationary period and the period of probation, and
  • where there is a probationary period, or where the position is for a fixed period but is renewable, the form of the review process.

The express terms of a contract of employment are those specifically agreed between the parties, whether verbally or in writing. In many cases these are few (the wage, the hours, the type of work that has to be done and where), but there are always other terms that are implied (that is, they exist without being stated or written down). These fall into two categories - those implied by law and those implied by the circumstances of a particular case. Implied terms do not apply when contradicted by an express term.

Breach of contract

Under the Fair Work Act 1994 (SA) the South Australian Employment Tribunal constituted as the South Australian Employment Court has jurisdiction to hear and determine any question, action or claim founded on, or otherwise arising out of or in relation to a contract of employment [s 10].

A common example of this is an allegation of a breach of contract.

The South Australian Employment Tribunal may make a number of different orders if they find a breach of contract, including: an order of specific performance, granting an injunction, or awarding damages [s 10 (2)-(5)].

The employee's duty of co-operation, care, and fidelity

The employee must take all reasonable steps to carry out what has been promised under the contract of employment. Sometimes this is described as the duty to obey the lawful and reasonable orders of the employer, which usually means getting on with the work when there is work to be done and fitting in, as far as is reasonable, with the employer's scheme of operation.

The employee must exercise reasonable care and skill in the performance of the work; in other words, the employee has the duty to be efficient and to avoid negligence in doing their work.

The employee must do the job honestly and faithfully. This includes the duty to account for any property used and to pass on to the employer any profits made through the employment. 'Tips' received by many employees belong in law to the employer, although there may be exceptions peculiar to the custom and practice of a particular industry. However, an employer cannot force an employee to be searched unless it is expressly agreed to in the contract.

If an employer requests information about the conduct of other employees the employee may be under a duty to disclose information about conduct that falls within the range of the employee’s work activities. An employee who exercises managerial or supervisory functions may be obliged to disclose information to the employer, even if not asked, about the misconduct of other employees. So if an employee becomes aware of another employee’s damage to or theft of the employer's property, he or she must pass that information on to the employer.

While the courts are reluctant to intrude on an employee's spare time (that is, after knock-off time or prior to starting time), they have held that activities that are harmful to the employer's business (such as running a competitive business) may be incompatible with the duty to the employer. Basically, a worker should not tell others any details of the employer's profits or losses, customers, special methods or techniques used, or any information about the business that might help a competitor. Such insider knowledge is different from any skills, expertise, or general knowledge learnt or developed in the course of employment.

Some contracts of employment contain an express term preventing the employee, on leaving the employment, from entering into competition with the employer's business (restraint of trade clause). Such a term may be declared void by the courts despite this express agreement, unless it can be shown to be reasonable and not contrary to the public interest.

It is not a breach of the duty for an employee to disclose misconduct by the employer or other events that have occurred in the employment which ought to be disclosed in the public interest but, in so doing, the employee cannot also disclose the employer's trade secrets or misuse confidential information acquired in the employment. Under the Public Interest Disclosure Act 2018 (SA) (formerly the Whistleblowers Protection Act 1993 (SA)), some people who disclose information in the public interest have protection from victimisation resulting from the disclosure, although legal advice should be sought before disclosure [see ss 5 and 9]. In the case of Sutton v State of South Australia (1996) 68 SASR 13 the Supreme Court held that even the Ombudsman could be sued in the unlikely event that he or she victimised anyone for making an appropriate disclosure of public interest information. Public interest information is very broadly defined, and includes information that can be considered to be environmental and health information, or public administration information [see s 4]. An informant who is victimised can take legal action in the courts or can lodge a complaint with the Commissioner for Equal Opportunity, see discrimination.

If in the course of employment an employee creates or invents something when he or she is employed to do things of that sort, the property in the creation or invention (unless otherwise agreed) belongs to the employer, see copyright.

In some workplaces there are specific rules (often referred to as the employer’s policies) which may be handed to workers when they start their employment or sometimes they are displayed on notice boards. If before the employment contract is made the worker is given a copy of the rules and made to sign for them, or if the existence of the rules is reasonably brought to the worker's knowledge, the rules become part of the terms of the employment. If they are shown to the worker after the commencement of employment, he or she must consent to them before they become part of the contract.

The employer's duties and rights

As with the employee, the employer must take all reasonable steps to make it possible for the employee to carry out their part of the agreement and must not deprive the employee of the opportunity to perform the work.

The law increasingly has been suggesting that an employer does not have the right to simply have someone sitting around so long as the employer pays them. In other words, there may also be an obligation to give an employee something meaningful to do. This is still a developing area of law and if an employer has no work to provide it may lead to the employee's retrenchment.

Under the national system employers have a duty to keep employee records and to provide payslips to employees within one working day of paying the employees wages [Fair Work Act 2009 (Cth) ss 535-536 ].

Employers also have a duty to pay superannuation to almost all employees, the Australian Tax Office has a guide to assist employers know whether they must pay superannuation. Superannuation is additional to pay and is a minimum payment of 11% of gross income (as at 1 July 2023) [Superannuation Guarantee (Administration) Act 1992 s 19(2)].

Employers also have responsibilities to ensure safe work places - see the Handbook sections on Workplace Bullying and Safety Legislation.

Other terms implied by circumstances

Some terms are implied depending on the circumstances of the job. Some exist because they are so obvious that they go without saying, while others may be said to exist because, although they were not expressly raised at the time the contract was made, it is certain that they would have been agreed on if they had been raised. In some trades there are terms that are implied as a matter of custom, but these must be well known and accepted before they will be recognised by the courts. An example of an implied term is where an employer will pay an employee for time spent in washing or cleaning up if the work is dirty.

Casual employees

The meaning of a casual worker is specifically defined in the Fair Work Act 2009 (Cth).

A person is a casual employee of an employer if [s 15A(1)]:

  • an offer of employment made by the employer to the person is made on the basis that the employer makes no firm advance commitment to continuing and indefinite work according to an agreed pattern of work for the person; and
  • the person accepts the offer on that basis; and
  • the person is an employee as a result of that acceptance

In determining whether, at the time the offer is made, the employer makes no firm advance commitment to continuing and indefinite work according to an agreed pattern of work for the person, regard must be had only to the following considerations [s 15A(2)]:

  • whether the employer can elect to offer work and whether the person can elect to accept or reject work;
  • whether the person will work as required according to the needs of the employer;
  • whether the employment is described as casual employment;
  • whether the person will be entitled to a casual loading or a specific rate of pay for casual employees under the terms of the offer or a fair work instrument

Under Division 4A of Part 2.2 of the Fair Work Act 2009 (Cth) a casual employee who has worked for an employer for at least 12 months and has, during at least the last 6 months of that time, worked a regular pattern of hours on an ongoing basis may be entitled to be offered, or request, conversion to full-time employment or part-time employment. Small businesses with than 15 employees do not have to offer casual conversion, but an employee can make a request themselves in certain circumstances. All employers need to provide their casual employees with the Casual Employee Information Statement (including new employees) that outlines casual conversion requirements [see s 15A(2)].

A regular pattern of hours does not of itself indicate a firm advance commitment to continuing and indefinite work according to an agreed pattern of work [s 15A(3)].

The question of whether a person is a casual employee of an employer is to be assessed on the basis of the offer of employment and the acceptance of that offer, not on the basis of any subsequent conduct of either party [ s 15A(4)].

A casual employee usually works on an irregular basis and may or may not be offered work which in turn he or she has the option to refuse. Workplace agreements and awards often contain provision for casual employees. However, many workers are called 'casual' when in fact they are part-time or full-time employees, with an advance commitment to ongoing employment. If an employee has regular work and there has an been an advance commitment to ongoing employment, then they may not be true casual workers and should seek further advice about their entitlements.

As a general guide, casual employees:

  • have the right to access a pathway to become a permanent employee (casual conversion) under the National Employment Standards
  • are not entitled to holiday pay, sick pay, or payment for public holidays not worked;
  • should be paid an extra ‘loading’ (25% extra in compensation for not getting annual and sick leave);
  • are entitled to workers compensation;
  • are protected by anti-discrimination laws;
  • may be entitled to long service leave if their employment has been constant;
  • have the right to make an unfair dismissal claim if they have been employed as a regular casual employee for the minimum period; and
  • should receive superannuation payments (11% on top of pay - as at 1 July 2023) - the requirement to earn at least $450 per month was removed on 1 July 2022 [Superannuation Guarantee (Administration) Act 1992 s 19(2)].

Fixed term contracts

From 6 December 2023, new rules apply under the Fair Work Act 2009 (Cth) when engaging employees on fixed term contracts. A fixed term contract is an employment contract that terminates at the end of a specific period. This can be contrasted with an employment contract that is ongoing or permanent.

Fixed Term Contract Information Statement

Employers must give every employee engaged on a new fixed term contract a Fixed Term Contract Information Statement (FTCIS) before the employee commences employment or as soon as possible following their commencement [s 333K].

The FTCIS can be downloaded from the Fair Work Ombudsman’s website here.

The FTCIS is in addition to the Fair Work Information Statement which employers must provide to all new employees. This outlines minimum workplace rights and entitlements.

Limitation on using fixed term contracts [s 333E]

Time limitation

A fixed term contract cannot be for longer than 2 years, including extensions and renewals.

Renewal limitations

A fixed term contract cannot include an option to:

  • extend or renew the contract such that the total employment period is longer than 2 years, or
  • extend or renew the contract more than once (even if the total period of employment is less than 2 years).

Consecutive contract limitations

An employer cannot employ someone on a new fixed term contract if:

  • the contract is for mainly the same work as a previous fixed term contract, and
  • there isn’t a substantial break in the employment relationship between the previous contract and the new one, and
  • any of the following apply:
    • the total period of employment for the previous contract and the new fixed term contract is more than 2 years
    • the new fixed term contract can be renewed or extended
    • the previous fixed term contract was extended
    • there was an initial fixed term contract in place (before the previous contract) that was for mainly the same work and there was continuity of employment between the initial contract and the previous contract.

Contracts entered into before 6 December 2023

The new limitations do not apply to fixed term contracts entered into before 6 December 2023. However, contracts entered into before 6 December 2023 will be considered when applying the consecutive contract limitation for a new fixed term contract entered into on or after 6 December 2023.

Exceptions [s 333F]

The new limitations on fixed term contracts do not apply to fixed term contracts involving:

  • Specialised skills (for example, a research project)
  • Training arrangements (such as apprenticeships)
  • Essential work (for example, fruit picking)
  • Emergency circumstances or temporary absences
  • High income employees
  • Government funded contracts
  • Governance positions (such as a position on a board of a corporation)
  • Award provisions (awards may allow for different fixed term contract options).

Further categories of contracts excluded from the operation of the new rules may be prescribed by regulation [s 333F(1)(i)].

Consequences of a fixed term contract failing to meet the new rules

If a contract does not meet the new limitations rules, the contract’s end date will not apply. Other terms and conditions in the contract will continue to apply [s 333G].

If an employee and an employer disagree about whether the new limitations apply to a particular contract, and they are unable to resolve the disagreement, they can take their dispute to the Fair Work Commission.

This page largely reproduces the information, except for examples and tables, provided by the Fair Work Ombudsman at www.fairwork.gov.au/newsroom/news/new-rules-for-fixed-term-contracts. © Fair Work Ombudsman www.fairwork.gov.au Information (Licenced Materials) provided by the Fair Work Ombudsman is licenced under a Creative Commons Attribution 3.0 Australia licence (Licence). You can view a copy of the Licence on the Creative Commons Australia website.

    Employees and Independent Contractors  :  Last Revised: Thu Sep 8th 2022
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