In brief - Independent contractors no longer defined as workers for compensation purposes

A legislative amendment passed by Queensland parliament means that there will be less uncertainty about whether or not independent contractors are defined as "workers". The amendment ensures greater consistency in calculating workers compensation premiums.

New legislation narrows definition of "worker"

On 5 June 2013, Queensland parliament passed the Industrial Relations (Transparency and Accountability of Industrial Organisations) and Other Acts Amendments Act 2013. Effective 1 July 2013, the new legislation narrows the definition of "worker" in the Workers’ Compensation and Rehabilitation Act 2003 (Qld) (WCR Act).

The old definition of "worker" is broadly defined in the WCR Act as "a person who works under a contract of service" and extends beyond employees. Under this definition, a contractor was regarded as a "worker" if (among other things) the worker performed services under a contract for labour or substantially labour only.

Who is a worker? - the new definition

The amendment will resolve the confusion and uncertainty caused by the previous definition. The amended legislation now aligns with the Australian Taxation Office, which defines a worker as a person who:

• works under a contract; and

• in relation to the work, is an employee for the purpose of assessment for PAYG withholding under the Taxation Administration Act 1953 (Cth).

New definition of "worker" could reduce employers' compensation insurance costs

Determination of a worker’s status significantly affects both the premium the employer is required to pay to WorkCover for insurance coverage and the decision by the insurer to accept a workers’ compensation claim made by an injured worker.

The amendment will mean that there will be less uncertainty as to whether independent contractors are "workers" and ensure consistency for the purposes of calculating premiums (possibly reducing them) and deciding claims.

The change is not retrospective, meaning that wages for the 2012/2013 financial year will still need to be declared pursuant to the current definition up to 30 June 2012.

Know the difference between employee and independent contractor to avoid sham contracting

The workers’ compensation, superannuation guarantee and payroll tax legislative regimes all expand on the usual definition of "employee". As a result, it is not always clear whether a worker is an employee or an independent contractor.

The distinction between employees and independent contractors is vital because it gives rise to significant differences in the parties’ rights and obligations under employment and other laws. Purporting to engage an independent contractor could result in further consequences for an employer if it is later discovered that contractors are actually employees.

Improper contracting arrangements can expose employers to significant penalties

Many employers misuse independent contractor arrangements with the intention to deprive employees of their entitlements. Other employers, however, innocently enter sham contracting arrangements when they comply with employees' requests to be treated by the employer as a contractor.

Regardless of the intention or who initiated the sham contracting arrangement, if the underlying relationship is one of employment, the employer (and others involved) could be faced with significant penalties and other liabilities.

Six mistakes employers commonly make in independent contractor arrangements

The following are often wrongly held to be the requirements of a valid independent contractor arrangement:

• written contract that purports to set up a contracting arrangement

• having a registered business name

• being able to quote an ABN

• being registered for the GST

• providing tax invoices

• the work is temporary or part-time


However, the above factors do not have any bearing whatsoever on whether a worker is in an employment or contractor relationship.

Difference between employee and contractor is the degree of control over how work is performed

The criteria in determining whether a worker is an employee or independent contractor are largely based on control. There are, however, other factors which are considered when distinguishing the relationship, such as who supplies plant and equipment, the ability to delegate or work for others, rectification for work and the basis for hiring.

Record penalties imposed by Fair Work Act for sham contracting

The Fair Work Act 2009 (Cth) expressly prohibits an employer from representing that an individual is an independent contractor to avoid its legislative obligations and reduce the cost of labour. Notwithstanding the other penalties that could be imposed, the sham arrangement provisions are civil remedy provisions which trigger the accessorial liability provisions of the Fair Work Act.

The consequences of incorrectly distinguishing between employees and independent contractors can be severe, not just for the employer, but also for the individuals responsible for issuing the relevant contracts, including human resources managers and in-house counsel.

For example, in Fair Work Ombudsman v Maclean Bay [2012] FCA 10, the employer and managing director were fined nearly $300,000 and, in Fair Work Ombudsman v Maclean Bay Pty Ltd (No. 2) [2012] FCA 557, also ordered to pay almost $40,000 in back pay.

Do you know the difference between employees and independent contractors?

If you are an employer, it is essential when engaging individuals and drafting agreements, that you carefully consider the differences between independent contractors, consultants and employees and the tests used to distinguish between them.

If you need assistance in determining whether a worker is an employee or independent contractor, or your obligations under the workers' compensation legislation, please contact us.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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