There are multiple reasons to employ workers in Australia. Since 2020, the rate of employment in Australia has enjoyed healthy increases and unemployment fell to a historic low of 3.5%. What’s more, as of August 2022, there were approximately 1.1 million contractors working in Australia. While this gives global employers the necessary flexibility to scale their Australian workforce However, when doing so, it’s vital to stay compliant with Australia’s laws on what constitutes a contractor vs. an employee. As with many buoyant employment markets around the word, employee misclassification could lead to significant consequences, so you’ll need to proactively minimise risk where possible.
And, like other popular employment markets such as the USA, Australia uses multi-factor tests to help companies ascertain whether they’re employing a contractor or an employee. We’ll take you through these tests and share some core strategies to help you avoid misclassification penalties in Australia.
Key Differences Between Contractors and Employees in Australia
When sourcing talent from Australia, the nature of the relationship between a company and a worker defines whether the worker is a contractor or an employee. Where required, the ultimate decision is made by the Fair Work Commission or the Australian courts, interpreting the Fair Work Act.
In Australia, a six-factor analysis is used to determine the employment status of a worker:
- Control over work – Independent contractors have a high degree of control over when, where, and how work is performed. Employers control these factors for their employees.
- Financial responsibility – Independent contractors assume responsibility and/or risk for work performed. Employers assume responsibility and risk for their employees’ work.
- Tools and equipment – Independent contractors may be expected to use their own materials. Employers typically provide or subsidise materials used by their employees.
- Work substitution – Independent contractors are generally free to subcontract or otherwise delegate their work. Employees are typically not allowed to substitute.
- Work schedule – Independent contractors have a high degree of control over when work is completed. Employers typically establish schedules employees must follow.
- Continuation of work – Independent contractors are engaged for a specific task, project, or series thereof. Employees have a reasonable expectation of continuous employment.
These distinctions are extremely important; if the regulatory authorities in Australia find an employer is misrepresenting an employee as a contractor, they can face significant employee misclassification penalties and legal implications.
The Consequences of Employee Misclassification in Australia
Misrepresenting a working relationship and passing off an employee as a contractor is referred to as “sham contracting” in Australia. In particular, employers who do this knowingly and willingly are often trying to avoid paying contractors fair direct or indirect compensation.
Companies that engage in sham contracting can be fined up to AU$93,000 if they have fewer than 15 employees. If they have more than 15 employees, they can be fined up to AU$469,500. Workers engaged in sham contracts can also be fined depending on the working arrangement, with maximum penalties of AU$18,780.
Beyond these direct fees, employers involved in sham contracting settlements are likely to face reputational harm, as workers may be less willing to work with a company in any capacity.
Recent and Upcoming Changes to Australian Employment Law on Misclassification
The Australian government has prioritised worker classification and other matters of fair labour practice in recent years. As part of its “Closing Loopholes” initiative, the Australian government has adopted and plans to adopt several changes widening the scope of the Fair Work Act.
For example, as of August 24, 2024, decisions regarding a worker’s status will consider the “real substance” of the relationship between the individual and the company. Rather than looking at the written contract, legal analysis will be applied to the actual work performed in practice, irrespective of how it relates to a contract’s terms. A written contract is not a guarantee of status.
The Australian government has also proposed the creation of new minimum standards for contractors, although information about what exactly they will comprise is not yet available.
Should You Use Contractors or Employees in Australia?
When deciding between contractors vs. full time employees in Australia, it’s important to weigh the risks of hiring contractors against the many benefits that can come from the arrangement.
In particular, utilising contractors gives both employers and workers more freedom. Companies sacrifice a degree of control over how work is performed, but they also free themselves of many employee-specific obligations, such as ongoing training and support. In addition, employees’ total compensation is often significantly more than contractors’, especially at scale over time.
Importantly, companies can also take a more dynamic approach to talent management and convert their contractors to employees when the nature of their employment relationship changes. What’s most important is that companies know how to manage contractors so they can stay compliant at all times.
The Importance of Accurate and Compliant Documentation
Whether companies decide to use contractors, employers, or a combination thereof, they’ll need to keep all documentation regarding their workers accurate, updated, and compliant. To that effect, they may need to work with an Employer of Record (EOR) that streamlines payment and overall management across all their workers in Australia—or any international context.
The best EOR service providers offer compliance suites that monitor and manage contracts to ensure workers are classed and paid according to Australian employment law. In addition, EORs help to offer complete employment compliance and more in terms of supplementary benefits for employees, helping companies attract, retain or convert workers to different states to meet changing talent needs.
