Taxation Law 11: The Employee vs. Independent Contractor Distinction

This report delves into the complexities of taxation law, specifically focusing on the crucial distinction between employees and independent contractors. It begins by outlining the legal framework governing employment and independent contractor arrangements in Australia, highlighting the common law test and the incorporation of statutory definitions. The research explores the associated risks and exposures, emphasizing the importance of correctly structuring independent contract arrangements. The report examines factors used to determine the status of a worker, including the mode of remuneration, rights of delegation, and the application of common law tests. It also discusses the significance of written contracts and the implications of mischaracterizing employment relationships. By analyzing relevant cases and current trends, the report provides insights into the implications for both employers and employees, ultimately aiming to clarify the critical elements of this important area of law.

Running head: TAXATION LAW
Taxation Law
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Topic: The Common Law test for determining differentiating among the employee or
independent contractor is not any more relevant following the incorporation of
statutory definition of employee in certain regimes of taxation:
Introduction:
Contracting has turned out to be a substitute in respect of the old-style employee-
employer relations. A contract might engage with an enterprise either directly or as the
natural individual with the help of trust, through partnership, or company or may engage with
labour hire agency (Barkoczy 2014). At times contracting is regarded as the necessary
element where an individual may require the skill of expertise which is not easily obtainable
by hiring an employee. There are some individual that wish to be indulged as contractors
especially in the event of providing service to numerous multiple clients. Contracting may
prove as the more cost efficient tool than employment.
The current research study would be providing a thorough outline of the law, relevant
rules, appropriate structures and the trends that creates an impact on the employment and
independent contract arrangements. The initial part of the research study would be based on
the discussion of the lawful framework that governs the contract and the arrangement for
employment in Australia (Belloc 2017). Whereas the later part of this research would be
discussing the related associated risks and exposure. The research would be addressing the
correct structures and methods involved in structuring the arrangements for independent
contracts. Finally the research would deal with the current trends and cases along with the
implications of the cases on the employers and employee.
Legal framework differentiating employees from Independent Contractors:
The recent cases bought forward in Australian judges and court of law have in the last
years handed huge penalties and compensations against those individuals that are caught in

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act of mischaracterising employees and relationships of independent contract. Such cases
reflects the managers, employers, directors and the companies that hire labour to be more
understanding and utilising the definition of employment and arrangement for independent
contractor (Brokelind 2014). According to the “Fair Work Ombudsman” strong standpoint
against the bogus contracts and mischaracterised employment relationships acts as the
warning for those individuals that are either irresponsibly or decisively falsifying their
employees or arrangements for contracts.
The increasing amount of strong standpoint by the “Fair Work Ombudsman”, high
court and the tribunals against those individuals that are failing to appropriately apply the
contract arrangements, it is necessary to recognize the difference between the contractors and
the employees (Coleman and Sadiq 2013). Similarly, difficult trading environment and higher
costs of labour have created some of the contracting relationships to businesses that are
looking forward to maintain the competition and flexibility of labour in Australia.
Nevertheless, there are hazards in indulging the individual as the contractor without having
correct understanding of the law. There might be an instances where a person is considered to
be an Australian employee under the law and this accompanies numerous lawful obligations
and liabilities if it is incorrectly interpreted.
Factors determining the individual to be employee and independent contractor:
According to the common law of Australia it identifies a differences between an
employer working relations and the employee relationship. The common law also identifies
the differences between the working relationship of the principal and the independent
contractor. The former is identified as the “Contact of Service” while the latter is identified
as the “contract for services”. There are significant lawful consequences whether the
employee is the worker or the independent contractor (Grange, Jover-Ledesma and
Maydew 2014). The concrete consequence of this outcome is that prior to indulging with any

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worker as the independent contractor, employers are required to evaluate the substantive
nature of the working relations in order to ascertain whether the worker is actually an
employee or the independent contractor.
Correctly evaluating the differences between the employee and the independent
contractor is important for four chief causes;
a. Initially the two types of relationships is considered as mutually exclusive and as
defined each of the relationships results in fundamental different rights and
obligations in contractual tortious and fiduciary contexts (James 2014).
b. Statutory rights together with the responsibilities that are assigned to the independent
contractors are occasionally enjoyed. Likewise, the liability to tax for both the
workers and the employers creates a significant influence on the latter classifications.
c. The acts that are done by the worker especially in respect of the vicarious liability
originates for the employer chiefly where the workers is the employee, but not in the
situation where a person is an independent contractors (Kenny 2013).
d. Lastly, under some jurisdictions there are statutory restrictions that would impact the
rights of the employees but would not affect the independent contractors, in respect of
the ability to prosecute for damages that originates during the employment course.
According to Krever (2013) differentiating between the employee and the
independent contractor is considered to be vital element of the Australian employment law.
Consequently, there is a noteworthy form of well-defined principles that helps in helping the
court in distinguishing between the two arrangements.
There has been very restricted movement amid the statute or the common law as the
attempt to define the employment or the employment relationship with particular reference to
employee-contractor contradiction. Instead, the status of worker is ascertained with reference

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to the established principles of common law (Morgan, Mortimer and Pinto 2013). The
principles of common law is considered significant, since it helps in preventing the parties
from the construing the relationship that bears the aspects of the employer-employee since
the employer-contract relationship is entirely to reap the advantage that entails such forms of
characterisation.
The court of law states that the parties cannot create something that possess each and
every aspects of the roaster. When enquired to ascertain whether the particular worker is
considered as the employee or the independent contractor the Australian courts have placed
their emphasis on the substances of the relationship instead of label that are provided to the
parties (Sadiq et al. 2014). The Australian high court have stated that there are numerous
relevant indicators to ascertain whether the worker is considered as the employee or the
contractor. The indicators includes that medium of remuneration, the provision for holidays,
the responsibilities to work, deduction to taxation and work delegation by the supposed
employee.
According to Woellner (2013) the Australian high court have placed their emphasis
that even though the principles are held relevant it is entirety of the relation among the parties
which should be taken account of in every cases. The prevailing factor approach of the high
court have been adopted to assess whether the worker is entirely held as the contractor or the
employee is based on the multifactor test (Woellner et al. 2014). According to the multifactor
test, judges are required to place their weight on the particular characteristics of the
relationships that are in question and then creating an overall impression on those
characteristics to assess whether there is a better description of the relationship as the
employment or the contractual one. It turns out to be immediately obvious that the nature of
the test is considered as necessarily subjective and in several cases different adjudicators have
bought different answers.

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The below stated following factors states that the worker is the independent contractor
a. The contract is provided to achieve result instead of the mere provision of the labour
based on the continuous basis (McKeown 2016).
b. The worker is required to maintain the higher level of discretion and should be
flexible in performing the work in spite of the contract containing specific precise
terms.
c. The workers must bear the risk related to commercial laws or profit originating from
the job.
The below listed are the circumstances where the worker is regarded as the employee;
a. The remuneration of the worker is in the form of salary or wages
b. At the time of paying the worker PAYG is deducted from the wages or salary of the
worker by the company
c. The worker cannot carry out identical work in other companies.
d. The organization should provide the equipment and the materials to the worker for
work.
As evident from the above stated multifactor test it is necessary understand that the
there are no set of numbers or combination of factors that would determine the worker as the
employer or the contractors (Sutherland and Riley 2016). This is entirely based on the matter
of overall impression. Eventually, the court of law would evaluate the totality of the
workplace relationship in order to determine whether the worker is on the balance, an
employee or the independent contractor. This consist of examining the wide range of
indicators to ascertain the entire character of the particular relationship.

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Having a contract on writing:
In the statement bought forward by Tan, Braithwaite and Reinhart (2016) it is not
uncommon for the business to indulge with a person to carry out the work because of the
pressing nature of the work to be carried out or backlog of the administrative work, failure to
record the terms of the involvement in the written contract. It signifies that if there is any later
dispute regarding the individual contractor or the employee or dispute regarding the contract
terms then there might be a noteworthy disagreement among the parties that ultimately leads
to lawsuit. Consequently it becomes necessary to prudently keep track of the employment
terms in writing prior to engaging with both the parties affixing their signature.
The common law tests:
The common law tests for ascertaining whether the relationships is one of the
independent contract or employment is regarded as the multifactor test. The common law test
comprises of recognizing and weighing the numerous features of the relationship to
determine the balance.
Application of tests:
As stated by Cao et al. (2015) to determine an individual to be employee or the
contractor at law it initially requires the implementation of common law tests. The court of
law traditionally evaluated the relations against the variety of indicator and when all of them
are combined they are helpful in determining the true nature of the relationships.
Mode of remuneration:
As stated by Robin and Barkoczy (2018) there are notable and indicatory differences
among the modes of remunerating an employee in contrast to those that are contractor. The
employees are generally paid on the periodic basis depending upon the hours of work. The
independent contractors on the other hand are paid based on the pre-negotiated sum following

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the submission of an invoice upon the completing the service. Additionally, the receipt of fee
is opposed to the regular wage or salary that forms an indication of the contractor relations.
Wages that does not forms the basis of skills and toil of assignment or allocations of time for
completing the job provides a suggestion ordinary relation of employment (Blakelock and
King 2017). Even though the court of law does not takes into the account the medium of
remuneration solely as the dependable reflector of the workplace relations because of the
contemporary modes of payment, the court of law has already regarded remuneration based
on hours as one of indicative factors of employment relations.
Rights of delegations:
According to Knox (2018) rights to delegation refers to the requirement that a person
carries out the work to themselves be generally considered as the typical relationship in
employment. The independent contractors on a frequent basis have the powers to delegate the
work to the others either without or with the authority of the party that are contracting their
services. The court of law in “Australian Air Express Pty Ltd v Langford (2005)” held that
in determining the whether the person is held as the employee it is necessary to understand
the entirety of the relationship Mathews and Roufeil (2017). The court held that the right of
delegating or providing the substitute holds a noteworthy weight but it cannot be held as
entirely decisive. Therefore, the contractor agreements must consists of the right for
delegating their work to others or entities based on the supervision of contractors.
Employment obligations and entitlements:
Even though the court of law in previous instances have considered the treatment
relating to employee entitlements and obligations namely tax deductions, contributions to
superannuation and leave entitlement as they indicative workplace relations but these matters
are not held as determinative (Blakelock and King 2017). Characteristically, the employer

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withholds the tax deductions that are applicable and the superannuation contributions from
the remuneration of employees while the independent contractor must be paid the untaxed
sum and should be accountable for administering their respective tax liability and
superannuation planning. Additionally, the employee is entitled to yearly leave, person and
parental leave while the independent contractors does not have any such leave entitlements.
Considering these obligations and the entitlements would help in assisting the court in
ascertaining the intention of the parties.
Legislations that deems a person to be an employees:
According to Tan, Braithwaite and Reinhart (2016) there are some individual that
may appear to be contractors can be determined by the legislations that considers to be
employee for the purpose of the relevant legislation.
Superannuation: The “Superannuation Guarantee Act 1992” requires an individual to
make contributions in their superannuation for the benefit of the employees. This takes into
the account the employees under the common law and those individuals that are governed by
the extended decision of the employee (Sutherland and Riley 2016). This extended definition
of employee includes a person that works under the contract which is principally for the
labour of the person, the person is held as the employee of other party under the contract. The
extended definition provides that if an individual indulge as the contractor they would be
required to pay the superannuation contributions for their benefit even though the written
contract does not provides for this.
Payroll tax: In majority of the Australian states there are particular provisions for contractor
that considers payment to contractors as the part of the assessable wages that are subjected to
payroll taxation (Woellner et al. 2014). Accordingly, the available jurisdictions and
exemptions must be reviewed where the service is performed by the labour.

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Workers compensation: Employers are required to be aware of the workers compensation
legislations where the employers are required to takeout the workers compensation insurance
for individuals that indulge as contractors.
PAYG Withholding: The PAYG withholding usually does not requires to be withheld from
their payments to the individual contractor given the individual is genuinely held as the
contractor (Kenny 2013). The applicable test for ascertaining whether the person is
considered as the employee for the purpose of PAYG is that there is no such thing in the
legislation that would deem genuine for the contractors as the employees. The independent
contractors are not entitled to withholding benefits.
Trends and specific cases:
The numerous industrial and the employment authorities in Australia along with the
Fair Work Ombudsman have undertaken a strong step in monitoring, investigating and
punishing the misrepresented relationships of employment. The high court of Australia in
“Work Ombudsman v Happy Cabby Pty Ltd & Anor (2013)” have held in their decision to
increase the penalties that are related with the bogus arrangement for contract (Brokelind
2014). The business was noticed to have breached the “section 357 of the Fair Work Act
2009” for misrepresenting the employments of contract in the form of independent contractor
arrangement additionally with section 45 for being failure in fulfilling the award entitlements.
In another case of “Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd
(2013)” the high court of Australia passed its verdict relating to the question of the fake
contracts and the correct method of converting the contracts of employment to the odco
system of independent contracting. The case highlighted the requirement of the employers for
the correctly managing the re-classification of the employees to the independent contract with

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the help of open and consensual procedure (Coleman and Sadiq 2013). With the help of this
system the workers were re-characterised from the employees to the independent contractors.
Conclusion:
On a conclusive note, the relationship of employment is largely regulated than the
relation of independent contract. If the employer inappropriately classifies the individual as
the contractor whereas under the law they are an employee, the employer in this case may be
at the risk of breaching of the law. The findings from the research suggest that if the
employer incorrectly classifies a person as the employee or the independent contractor then
they may be held liable for the superannuation charges that they have been failure in making
the superannuation contributions for the benefit of the person. This may be either due to the
employee at the common law or due to the employee under the extended definition of the
superannuation guarantee act. Additionally the employers may also be held liable for payroll
tax as well where they may have wrongly claimed the exemptions of contractor for the
payments under the common law employees.

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employee?. InPsych: The Bulletin of the Australian Psychological Society Ltd, 39(2), p.30.
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