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Engagement of Individuals as Independent Contractors: Guidelines

Approving Authority: Director, Human Resources
Establishment Date: 23 April 2009
Date Last Amendment:  
Nature of Amendment:  
Date Last Reviewed:
Responsible Officer: Director, Human Resourses

 

Introduction

When contracting directly with an individual for the provision of a service, it is not always easy to determine whether a particular arrangement will give rise to an employment or independent contractor relationship, irrespective of whether the individual is operating as a business and has an ABN.

It is important that the correct relationship is established, as an improper engagement may place the University at risk in relation to taxation and superannuation obligations, in addition to other industrial considerations.

Various legislation has expanded the definition of an employee to include individuals contracted primarily for labour, so that Superannuation Guarantee charges and other tax liabilities can be incurred in relation to these contractors. These liabilities do not generally apply to contracts made with companies or partnerships.

The following guidelines provide information intended to assist in distinguishing between an employment contract (also known as a contract of service) and an independent contractor arrangement (also known as a contract for service).

Advice should be sought from the Senior HR Adviser for your Cost Centre, where it is not readily determined from referral to these guidelines that an intended contract will clearly fall within the scope of either an employment contract or an independent contractor arrangement.

These guidelines should be read in conjunction with the University’s Engagement of Individuals as Independent Contractors Policy. The policy outlines the administrative requirements associated with engaging an independent contractor, including completion of a contract (Independent Contractor Services Agreement) and associated contractor registration and insurance requirements.


Guidelines

 
1

[Key Characteristics of Independent Contractors] The following are generally accepted characteristics that identify an individual worker as an independent contractor (contract for service). While it may not always be essential for all of the characteristics to be present in order for an independent contractor relationship to exist, a majority would customarily apply.

Should there be uncertainty as to the extent to which one or more of these characteristics accurately apply to the circumstances of an intended contract, advice should be sought from one of the Senior HR Advisers in the HR Client Services team.

As a starting point, it will not be possible to enter into an independent contractor relationship with an individual who does not hold a current ABN. The following information assumes that the prospective contractor is an individual with an ABN.

1.1 Results Based

An independent contractor is engaged for the purpose of providing for a given and agreed result, as opposed to merely the provision of their personal labour.

A clear and simple example of such a “results based” contract would be where a contractor is engaged to cut down and safely remove a tree from the University premises. However the principle of contracting for a result may be applied to a wide range of circumstances where the provision of a specific service is required (eg an administrative or management related project, or a specialised service not able to be performed by existing staff).

1.2 Payment Upon Completion

Payment will usually be made upon satisfactory delivery/provision of the agreed result. A fee will be negotiated and set in advance of any work being undertaken and should not be based upon University set rates of pay (ie casual hourly rates or similar). Progress payments may be applicable for longer projects.

1.3 Freedom to Delegate

An independent contractor will not be constrained contractually (ie via the Services Agreement) to be the only individual to perform the work associated with the contract. The contractor will be free to delegate work and functions associated with the delivery of the agreed result.

In this connection, it is advisable to ensure that the Services Agreement (ie the contract) provides for an unfettered freedom to delegate; eg by enabling work to be delegated by the contractor to employees of the contractor or other persons who are competent to undertake the work.

1.4 Materials, Equipment and Expenses

It is expected that an independent contractor will supply and use their own materials, tools and equipment in the production of the agreed result. Similarly, ancillary expenses are typically the responsibility of the contractor (eg travel and communication expenses).

1.5 Responsibility and Risk

An independent contractor will be expected to bear any risk associated with their work and will be responsible for rectifying any faulty or defective work without further payment. Accordingly, an independent contractor is expected to have appropriate insurance.

In examining the level and type of insurance that an independent contractor has, the University may need to assess the risk of engaging an individual, particularly where insufficient coverage may leave the University itself more open to risk. The level of actual risk may of course depend upon the nature of the service being provided.

1.6 Freedom Regarding Performance of Work

An independent contractor will generally maintain a high degree of flexibility in relation to how and when work is to be performed towards the production of the agreed result, even if the contract contains specific terms regarding the use of materials and methods of performance.

1.7 Provision of Services to Other Organisations

An independent contractor will typically be free to provide services to other businesses and organisations and is free to accept and refuse work accordingly. In this regard, an independent contractor generally advertises their services to the public at large.

 
2

[Key Characteristics of Employees] The following circumstances tend to be characteristic of the existence of an employment relationship (contract of service) between an organisation and an individual (employee).

2.1 Acceptance of Direction

The individual employee accepts direction from the organisation in relation to the manner in which work is to be performed and the times and locations at which work is to be performed.

2.2 Responsibilty and Risk

Commercial risk is borne by the organisation in respect of work performed by the individual. The organisation also takes responsibility for loss associated with faulty or defective work by the individual.

2.3 Supply of Equipment

The organisation is responsible for providing the individual employee with the materials and equipment necessary for the performance of work. Any use of the employee’s own equipment or materials will generally be compensated by an allowance or reimbursement.

2.4 Regularity and Nature of Payment

The individual employee is paid on a regular and systematic basis for the performance of work over a defined period of time (eg weekly, fortnightly, monthly). The organisation is paying the individual for the supply of their labour, in order to contribute to the achievement of organisational results. (Note that this is different to a results based contract, in which an organisation contracts for a specific result, as opposed to contracting for labour.)

2.5 Freedom to Delegate

While the individual employee may have some power to delegate certain duties to other employees in the organisation, they have no inherent right to delegate their work to others (eg outside the organisation).

2.6 Identification

The individual employee is publicly identified as being part of the organisation for which the work is being performed (eg wearing company uniform, having an internal email account, having a staff identification card, being formally identified in corporate publications).

3

[Making the Distinction] When considering the engagement of an individual as an independent contractor (contract for service), it is important to take careful account of the full circumstances surrounding the intended relationship.

3.1 The General Position

As a general rule an individual operating as an independent contractor will operate independently of the core activities of the University and will be engaged for the provision of a specific result. They would not be expected to undertake work that is normally undertaken by employees in association with core activities and they would generally advertise and offer their services to a range of other organisations, operating as a business with an ABN.

3.2 An ABN Provides No Guarantee

A common difficulty in relation to the ABN is that, while its production is essential, it does not necessarily indicate, or in any way guarantee, an independent contractor relationship.

For example, where teaching services are being provided by an individual and they form part of the core activities associated with a topic (eg normal lectures and tutorials for which the University provides set rates of pay in accordance with its Collective Workplace Agreement) it would generally be the case that an employment relationship (contract of service) is appropriate, even if the preferred method of payment is by invoice with a quoted ABN. In this instance payment must be made through the payroll system, with associated tax deducted, superannuation guarantee charges paid if applicable and payment of payroll tax.

In the above example it would be difficult to demonstrate that the individual has discretion as to when and how to perform the work, particularly where lectures and tutorials have been pre-scheduled as part of normal topic offerings.

3.3 The Balanced Approach

These guidelines are not intended to address all possible circumstances that may attribute to a prospective independent contractor engagement. A determination should be made based on a balanced account of the various circumstances pertaining to each separate instance of engagement.

As a guiding principle, should five or more of the key characteristics from section 1 be clearly present, including 1.1 (Results Based) and 1.3 (Freedom to Delegate), it might be reasonable to conclude that an independent contractor relationship will be appropriate. If less than four of these characteristics appear to be present, the intended relationship might be more indicative of an employment contract and advice should be sought from the HR Client Services section if an independent contractor engagement is still preferred.

 

  4

[Contracting with Companies, Labour Hire Agencies and Other Organisations] Where the University enters into a contractual arrangement with an entity other than an individual (such as a company, labour hire agency, or external organisation), through which an individual’s services are supplied, then the individual would not be considered at common law to be an employee of the University. This type of arrangement would clearly provide for a contract for service and would not give rise to an employment contract between the University and the individual.

However, contracting directly with an individual (sole trader) who operates a business under an ABN might still give rise to an employment relationship, even if not specifically intended, hence the need to take careful account of all characteristics of the relationship. It is important to note that having an ABN does not make a business a company. A company is an entity incorporated under Australian law, has an Australian Company Number (ACN) and is usually characterised by the term Pty. Ltd.

 

  5

[Risks of Improper Engagement] Making the right choice between engaging an independent contractor and an employee is extremely important, as an improper engagement may bring significant risks to the University, particularly in terms of direct financial cost.

5.1 Superannuation Guarantee

A key risk to the University of engaging individuals as independent contractors is that they may be capable of being deemed as employees for the purposes of the Superannuation Guarantee (SG), even if they appear to meet the common law test for independent contractors.

This can occur when a contract with an individual is principally for the “provision of labour”, as opposed to the “production of a result”, but also where the individual is unable to delegate some, or all, of the work to others.

Penalties may apply to the University where it is found to be in breach of the SG requirement, bringing potential consequences both financially and in terms of the University’s reputation. Additionally, the University may be found to owe superannuation contributions to individuals who have been engaged on an understanding that they are independent contractors.

A carefully constructed Independent Contractor Services Agreement will significantly assist in reducing the above risk, particularly where the “result” is clearly described and the Agreement (or contract) provides the contractor with the freedom to delegate work.

5.2 Payroll Tax

Under certain conditions and in accordance with tax legislation, the University is subject to provide payroll tax in relation to individuals and some companies operating as independent contractors (ie an individual operating a business with an ABN and in some cases, a company with an ACN). This will be so even where the individual (or company) is considered at common law to be an independent contractor.

In should also be noted, that where an independent contractor is deemed under the Superannuation Guarantee legislation to be an “employee” for the purposes of SG, payroll tax will also be payable upon the University’s superannuation contributions made on behalf of the individual.

5.3 Employee Entitlements

It has been suggested above that an independent contractor may be deemed under SG legislation to be an employee for the purposes of the superannuation guarantee, even if a common law test indicates that the relationship is indeed that of an independent contractor.

Over the years our courts have been asked to make determinations on a number of cases concerning the fundamental question of whether a contract is one of, or for, service (ie employment or an independent contractor arrangement).

One party or the other would usually need to initiate proceedings in order for such a determination to be made. However, it remains that if a so-called ‘independent contractor’ was found through legal examination to be an ‘employee’, that individual may have rightful claim to a significant number of entitlements and benefits accruing to employees of an organisation and not enjoyed under an independent contractor relationship.

These include a range of leave entitlements, salary and allowance conditions, workers compensation coverage and in some instances, access to unfair dismissal provisions in industrial legislation.

  6

[Summary]

Independent contractors are capable of making important contributions to the University in terms of flexibility in the way services are provided.

The engagement of individuals as independent contractors is not without risk and care needs to be taken to ensure that intended independent contractor relationships can be properly characterised as such.

Financial and reputational risks of improper engagement are potentially high, although these risks are capable of being managed and minimised by a sensible application of the key principles outlined in this document.

A number of factors will influence determinations as to whether an individual may be properly engaged as an independent contractor, as opposed to an employee. A balanced consideration of all characteristics accruing to individual cases will usually point predominantly to one or the other type of engagement.

Advice should be sought from the HR Client Services section, Human Resources Division, in relation to interpretation of the information contained in these guidelines and how it may be used to assist in making sound and pragmatic decisions.