Rights & Responsibilities

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Why it is important to distinguish between contractors and employees

There are three main reasons for clearly distinguishing if someone is an employee or an independent contractor:

• for determining minimum benefits under employment laws, awards and industrial agreements
• for allocating responsibility for other employment protections and benefits, such as workers compensation, anti-discrimination law and superannuation
• for taxation purposes.

However, there is no single legal definition of 'employee'. Some different approaches to the issue are described below:

• What the law says about contractors
• The approach taken by the courts
• Unfair contracts
• Applying to vary an unfair contract
• What can the Commission do?
• Employees of sub-contractors - the liability of the principal contractor
• New Subcontractor's Statement Form
• Security of payments in the building and construction industries

A number of Acts of Parliament, as well as the common law, contain meanings of the term 'employee'. For industrial purposes, where a contract for work covers a job prescribed by a NSW award, the person is normally an employee.

Other NSW and Federal laws may give some contractors the status of being an 'employee' in certain contexts, or impose employee-like responsibilities on them. The definitions applying for anti-discrimination and workers compensation purposes are broader than under common law.

Under Federal superannuation law, you are considered to be an employee if you are a sole trader and you do work for someone under a contract where the labour component of the contract is 50 per cent or more of its value.

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In determining whether an employment relationship exists, Australian courts have frequently considered the extent and nature of control exerted over the work done under the contract. That is, whether or not the worker is told not only what to do but how to do it (for example, what materials and work processes to use, or whether the worker is directly supervised by other person).

The integration test can also be important. Is the worker 'part and parcel' of another business? Or do they work for several different businesses and freely accept or reject work from them over time?

The following sets out indicators the courts have used to distinguish employees from sub-contractors. Not all need apply for the person to be considered an employee.

Employees are likely to:

• contribute only or mainly labour to the work being done
• do the work themselves, rather than having the freedom to delegate it to others
• receive hourly, daily or weekly payment, rather than an agreed sum related to the value of the work performed under contract
• have regular hours set by someone else, rather than being freely chosen within the time-limits of a contract
• have plant and equipment provided by the employer (this does not necessarily mean hand tools in the construction industry)
• have business expenses paid by the employer
• work exclusively or mainly for the other person in the relationship
• not be a director of an incorporated company or partnership
• have PAYE tax taken from their wage by an employer rather than use the Prescribed Payment System (PPS)
• have workers compensation and accident insurance paid by someone else.

Typically, courts will look at the whole relationship rather than just one of the above aspects. They will also consider the industrial context and whether the work performed is in a trade or an industry accustomed to contractual arrangements. They will look at whether there are other people engaged in the same or similar work, how they are employed and by whom.

For further advice you should contact us, the Department of Employment and Workplace Relations, your employer association or trade union or a lawyer.

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Even where a person is not an employee, the NSW Industrial Relations Act 1996 permits the NSW Industrial Relations Commission in Court Session to review the contract for their service in certain circumstances. The Commission in Court Session may find that a contract for the performance of work in any industry is an 'unfair contract' where:

• it is unfair, harsh or unconscionable
• unfair tactics or pressure were exerted on the parties to get their agreement
• it is against the public interest
• the total remuneration provided is less than that received by an employee performing the work
• it avoids, or is designed to avoid, the provisions of an award or enterprise agreement.

This section can also be used in relation to unfair contracts of employment, that is, where a legally defined 'employee' is involved.

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An application under the Unfair Contracts parts of the NSW Industrial Relations Act 1996 may be made by:

• any party to the contract (but not incorporated bodies)
• any person who, but for the making of such an order, would be a party to the contract
• any union or employer association whose members are employed or employ persons working in the industry to which the contract relates.

However, the following persons are not able to make an unfair contract application:

• An employee earning more $200,000 per year
• A partner to a partnership contract who earns more than $200,000 per year

Also, applications must be made within 12 months of the termination of the relevant contract.

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Where an application concerning an 'unfair contract' is made, the Commission must first try to settle the claim by conciliation. Only after conciliation has been unsuccessful will the Commission then proceed to decide the matter.

The Commission may decide that the contract was an 'unfair contract' at the time the contract was created, or at any later time due to the conduct of the parties, any variation of the contract or any other reason.

Where a contract is found to be unfair, the Commission may declare the contract to be void (wholly or partly). The Commission may also vary the terms of the contract, or order the payment of money as it considers to be just in the circumstances of the case. The Commission may also make a further order stopping any further contracts of the type found to be an 'unfair contract'.

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The NSW Industrial Relations Act 1996 (Section 127) secures the remuneration of employees of contractors, by making the principal contractor liable for these debts. These laws apply where a person (the 'principal contractor') enters into a contract with another person (the 'sub-contractor') for the carrying out of work by the sub-contractor in connection with the principal contractor's business undertaking.

A principal contractor who enters into a contract with a sub-contractor is liable for the remuneration (wages and other payments) of the sub-contractor's employees, unless the principal contractor receives a written statement from the sub-contractor that all wages for the period have been paid. The principal contractor may still be liable if he or she had reason to believe that the statement obtained was false.

The principal contractor may withhold payment from the sub-contractor until such a statement is received, without penalty.

As with other employment records the law requires sub-contractors to keep copies of any written statements given to a principal contractor for at least six years.

These provisions do not apply when a sub-contractor is in receivership, is bankrupt, and if payments made under the contract are made to the receiver, liquidator or trustee in bankruptcy.

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Subcontractor's Statement Form (pdf 74Kb)

A number of Acts contain provisions which make principal contractors liable for certain unpaid subcontractor obligations. The principal contractor will not be liable where the principal contractor has been given a written statement by the subcontractor stating that these payments have been paid. However, the principal contractor will still be liable if the principal contractor has reason to believe that the statement is false.

The Subcontractor's Statement Form has been prepared to assist contractors for the purposes of section 175B of the Workers Compensation Act 1987, Part 5B section 31G-31J of the Pay-roll Tax Act 1971 and section 127 of the Industrial Relations Act 1996. The Form has been developed by the Office of State Revenue, NSW WorkCover, and the Office of Industrial Relations.

Under section 127 of the Industrial Relations Act 1996, if a subcontractor fails to pay an employee the correct remuneration, the principal contractor will be liable for the unpaid remuneration. This does not apply if the principal contractor has a written statement given by the subcontractor stating 'that all remuneration payable to relevant employees for work under the contract done during that period has been paid'.

It is to be noted that the Subcontractor's Statement Form has also been approved by the Chief Commissioner of State Revenue for use by subcontractors in respect of the payment of pay-roll tax. There is, however, no requirement under the Workers Compensation Act 1987 for the form of the written statement to be approved by WorkCover, and no form has been prescribed under that Act.

The Director-General of the Department of Commerce has approved the Subcontractor's Statement Form for the purposes of section 127 of the Industrial Relations Act 1996. This approval follows the making of a regulation under section 127(3) permitting the Director-General to do so. (See Clause 43A of the Industrial Relations (General) Regulation 2001).

The Subcontractor's Statement includes the necessary information that a subcontractor needs to provide to meet the requirements of a written statement under section 127 of the Industrial Relations Act 1996. If you have any enquiries regarding the Pay-roll Tax or Workers Compensation aspects of the Subcontractor's Statement please contact:

• Office of State Revenue (Payroll Tax) on telephone 9685 2188 or 1800 673 402
• NSW WorkCover (Workers Compensation) on telephone 131 050
• Or visit the Office of State Revenue Website or NSW WorkCover.

The NSW Government seeks to promote increased security of payment to construction industry contractors, sub-contractors, consultants and suppliers as part of Government's role in promoting ethical behaviour in the industry.

Three key Government changes are:

Claims for unpaid debts

Claims for unpaid debts to sub-contractors, suppliers and workers can now be made through the local courts under the new Contractors Debts Act, 1997. This allows access to a low cost dispute resolution mechanism. Importantly, sub-contractors, workers or suppliers can use the Act to claim money from the principal who employed the defaulting contractor. You can approach your local magistrate for assistance and the standard Notices to use in a claim.

Standard reflective clauses

These clauses are being used in contracts for government-related work, whereby payment periods and other clauses in the contract with the client are reflected in all sub-contracts for work on the project.

The dishonest making of Statutory Declarations

This attracts increased penalties where this is done for financial gain; the system used to identify 'phoenix' companies and fraudulent company officials is also currently under review.

Emphasis is also placed on increasing industry awareness of contractual obligations and providing incentives to good practice in this area. Pre-qualification schemes for contractors and consultants are being extended to provide systematic information on financial management, which will assist sub-contractors in the arrangements they select.

Government agencies responsible for letting construction contracts have produced detailed information for contractors about their rights and responsibilities.