Sham arrangements – Division 6

This Division deals with sham arrangements.

On this page:

What is the difference between an employee and an independent contractor?
How to determine if a person is an employee or an independent contractor

IMPORTANT: Pages dealing with whether a worker is an independent contractor or employee are currently under review in light of the High Court decisions in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 . Please refer to these cases for the current approach to be taken in determining whether a worker is an independent contractor or employee.

What is the difference between an employee and an independent contractor?

In an employment relationship, labour (being a combination of time, skill and effort) is traded for remuneration.[1] There is a provider, a purchaser, an exchange and a contract containing terms and conditions that regulate the exchange.[2]

The ‘label’ the parties have expressly given to their legal relationship is an important consideration.[3] However ‘[t]he parties cannot create something which has every feature of a rooster, but call it a duck and insist that everyone else recognise it as a duck’.[4]

In particular, an express term that the worker is an independent contractor cannot take effect according to its terms if it contradicts the effect of the terms of the contract as a whole: that is, the parties cannot deem the relationship between themselves to be something it is not.[5]

Courts will look to the ‘real substance of the relationship in question.’[6]

There have been many detailed discussions by courts and tribunals about the distinction between an employee and an independent contractor, including what issues should be considered and the way the issues should be decided.

In Hollis v Vabu Pty Ltd[7] it was held that ‘the distinction between an employee and an independent contractor is rooted fundamentally in the difference between a person who serves his employer in his, the employer’s, business, and a person who carries on a trade or business of his own’.[8]

In simple terms, the issue is whether a person works for an employer or works for themselves.

How to determine if a person is an employee or an independent contractor

To help determine whether a person is an employee or an independent contractor, there are a series of factors, referred to as ‘indicia’, which generally help decide what a person is.

There are no rules as to the weighting given to the indicia in the decision making process.[9] The indicia are just a guide, with the ultimate question being whether the worker is acting for another or on their own behalf.[10]

In considering the criteria, it is necessary to consider the following questions (posed by Bromberg J) in On Call Interpreters and Translators Agency Pty Ltd v Federal Commissioner of Taxation (No. 3):[11]

‘Simply expressed, the question of whether a person is an independent contractor in relation to the performance of particular work, may be posed and answered as follows:

Viewed as a “practical matter”:

is the person performing the work an entrepreneur who owns and operates a business; and,
in performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

If the answer to that question is yes, in the performance of that particular work, the person is likely to be an independent contractor. If no, then the person is likely to be an employee.’

The following table is adapted from the summary of indicia originally provided in Abdalla v Viewdaze Pty Ltd t/a Malta Travel[12] and updated in Jiang Shen Cai t/a French Accent v Do Rozario:[13]

To be Generally considered an employee	To be generally considered an independent contractor
Employer exercises, or has the right to exercise, control over the manner in which work is performed, the location and the hours of work etc.	Worker controls how work is performed.
Employee works solely for the employer.*	Worker performs work for others, or is genuinely entitled to do so.
Employer advertises the goods or services of its business.	Worker has a separate place of work and or advertises his or her services to the world at large.
Employer provides and maintains significant tools or equipment.	Worker provides and maintains significant tools or equipment.
Employer can determine what work can be delegated or sub-contracted out and to whom.	Worker can delegate or sub-contract any work to other persons to complete.
Employer has the right to suspend or dismiss the worker.	Contract may be terminated for breach.
Employer provides a uniform or business cards.	Worker wears their own uniform or other clothing of their choice. Worker has own business cards.
Employer deducts income tax from remuneration paid.	Worker responsible for own tax affairs.
Employee is paid by periodic wage or salary.	Worker provides invoices after the completion of tasks.
Employer provides paid holidays or sick leave to employees.	Worker does not receive paid holidays or sick leave.
The work does not involve a profession, trade or distinct calling on the part of the employee.	The work involves a profession, trade or distinct calling on the part of the worker.
The work of the employee creates goodwill or saleable assets for the employer’s business.	The worker creates goodwill or saleable assets for their own business.
The employee does not spend a significant portion of their pay on business expenses.	The worker spends a significant portion of their remuneration on business expenses.