Employees and subcontractors

Correctly determining whether a particular worker is an employee or a subcontractor is essential.

The legal rights and obligations which apply to employees are quite different to those for independent or subcontractors.

A subcontracting arrangement is a business to business relationship, with workers providing a service which usually includes providing labour, tools and expertise. It is important that all workers are correctly classified as either employees or contractors.

The law treats employees and subccontractors differently. For example, taxation, rates of pay, superannuation and workers' compensation may be quite different dependent on whether workers are employees or subcontractors. All employers must know how the law distinguishes the two and in what context.

Getting it right is important

There is no single definition of subcontractor that will apply in every case. The various pieces of employment related legislation, for instance legislation covering workers' compensation, occupational safety and health, taxation and superannuation, may contain different definitions of "employee" or "worker" which can be specific to that legislation. This analysis gives some guidance on the common areas of concern by businesses in the context of labour relations.

It is important that employers or workers do not rely on what others are doing as being right, and rather determine for themselves if workers are employees or subcontractors. Some industries such as transport and construction rely heavily on contract labour but often these so-called "independent contractors" are found to be employees.

Understanding the differences

The following factors may assist in clarifying the differences between employees and contractors:

employees are under the direction and control of the employer, while subcontractors generally have the right to control how the work is done and who performs the work.
employees usually work for one employer on an ongoing basis while subcontractors usually only work for the duration of a particular job or on a project with a finite timeframe.
employees are usually required to do the work themselves while subcontractors can usually choose who does the work and delegate the work to others.
the bulk of an employment contract relates to the supply of labour and occasionally items such as tools or vehicles, while subcontractors often supply a significant amount of capital as part of their contract.
employees are usually paid by the hour, while subcontractors generally get paid to complete a particular job. Contractors quote and sometimes negotiate the price they will charge.

This is a complex area of employment. Anyone who has doubts about any particular situation should seek professional advice. For further information, contact Commerce's Wageline on 1300 655 266. For taxation advice for businesses, contact the Australian Taxation Office.