Subcontractors and Employees – What’s the Difference?
By Blaise Alexander, Lovegrove & Cotton.
Contractors need to be very diligent in drafting their subcontract agreements, as some subcontracts can be construed as employment contracts. Indeed in recent times we have had carriage of matters involving disputes between Principals and their contractors with respect to leave entitlements and superannuation.
Basically, employees are part of a business and contractors are running their own business. A number of factors go to determine whether an individual is an employee or a subcontractor.
Characteristics of an employee:
- Performs work under the direction and control of their employer;
- Gets paid for the time they work;
- Gets paid sick leave, annual leave, etc;
- Has tax deducted and are entitled to superannuation;
- Works standard hours or those that are set by an award or agreement;
- Uses materials provided by the business to perform the work;
- Takes no commercial or financial risk;
- Cannot make a profit or a loss from the works they perform.
Characteristics of a subcontractor:
- Completes a specific task at a certain price;
- Provides most of their own materials;
- Are free to delegate the work they perform;
- Are free to accept or refuse work;
- Provides services to the general public or other businesses;
- Can make a profit or a loss from the works they perform;
- Bears the risk, such as responsibility and liability for poor work or injury;
- May accept other contracts from third parties.
In some instances, independent contractors may be entitled to superannuation contribution payments from the Principal.
Subcontractors bear a profit/loss risk and also liability, and as such, contractors generally have their own insurance policy. Bear in mind that some works do not require the subcontractor to carry certain insurances.
A contractor should not assume that a subcontractor is responsible, and should always check that adequate insurance requirements are in place.
However, be aware that ultimately no single characteristic is determinative of a person being a subcontractor or an employee. The courts will look at the relationship between the Principal and the engaged person, and the workplace arrangement in each individual case, in a holistic sense.
Australian workplaces are regulated by the Fair Work Act 2009, which, together with the Independent Contractors Act 2006, protects the rights and entitlements of independent contractors.
There are heavy penalties for what might be perceived as ‘sham’ contracting arrangements, usually where employee relationships are disguised as independent contracting arrangements, which do not bear employee entitlement responsibilities.
Therefore, it is prudent to seek quality legal advice from an experienced property and construction lawyer in drafting an appropriate contract agreement, in order to avoid disputes later on.