Who (or what) is an Independent Contractor?

Overview

Understanding the common-law definition of independent contracting is the key to understanding all the other issues relating to independent contracting. The definition is best arrived at by understanding the process which courts use to make their findings. If the process is understood, the definition can be understood.

It is not difficult. The courts look to find if a person is either

Working under a contract in which they have the right to control the contract terms and hence control their own actions (that is, an independent contractor); or
Working under a contract in which they do not have the right to control the contract terms and hence do not have control of their own actions (that is, an employee)

The finding of employment or independent contracting is not some artificial or mysterious legal creation. It is, in fact, a legal finding of the truth of real human behaviour. Does a person control themself? Or is that person controlled by someone else?

The courts use a process in which they apply a series of sub tests (listed below) to each set of circumstances. When a dispute occurs, the people in dispute come before a court and give evidence. The court considers the evidence in the light of each sub test. Normally, some behaviour indicates employment and other behaviour points to independent contracting. A court makes a decision based on the ‘total matrix’ and the balance of the evidence before them.

Independent Contractors of Australia calls the process a ‘swinging pendulum test’. In any given case, some of the sub test pendulums may swing to employment and some may swing to independent contracting. A court must look at the total picture and make a judgment on where the overall pendulum points.

Any person can apply the swinging pendulum test to their own circumstances. Are you an employee or independent contractor at common law? ICA hopes that once you have finished reading this section you can effectively self-assess your status.

The Investigative process

Judges apply a clearly established set of sub tests designed to investigate ‘right to control.’ The courts:

Apply the sub tests to each particular circumstance bought before them.
Make a ruling after hearing evidence from the people involved and examining all the circumstances.
Only take notice of written contracts to the extent that what is written is reflected in people’s behaviour.
Make rulings that are specific to the circumstances brought before them. Such rulings do not predetermine outcomes in any other circumstance. But rulings do provide pointers which enable the community to become educated on how to apply the sub tests themselves.

This is the swinging pendulum.

On each sub test the behaviour of persons can swing the pendulum strongly to employment or strongly to independent contracting. Or the pendulum may come in between and not indicate one way or the other. The judges have to bring all the pendulums together and make a decision. The sub tests that the judges use are always taken from the same list. There are often differences of opinion about how judges have interpreted the sub tests, but the sub tests are consistent. This process is the strength of the common law. It is consistent and impartial.

Note: You need a contract!
Before the employment/independent contracting sub tests can be applied, a court must established that there is a legal contract. This is a separate test. If there is no contract you cannot be an employee or an independent contractor. See What is a contract?

The sub tests: their origins and scope

The sub tests:

Are not found in legislation, but are the product of generations of evolving law reflecting social behaviour.
Can and do change slowly over generations and as society changes.
Are mostly discovered by reading legal judgements.
The sub tests summarised and explained below have been extracted from well-known and well-studied legal cases.Here are most of the sub tests:
Intent of the parties
Remuneration
Degree of control
Provision of equipment
Obligation to work
Hours of work
Deduction of tax
Holidays and leave entitlement
Other Regulation
Contractual obligations
How the work is performed
Risk
Rectification
Expenses
Appointment
Dismissal/termination
Written documents
IntegrationAll the sub tests investigate the core ‘right to control’ issue and look at this from many different angles. In other words:
If someone has the ‘right to control’ you, you are an employee.
If you have the ‘right to control’ yourself, you are an independent contractor.
Perhaps the most important sub test is the ‘intent of the parties’ because people’s intent tends to be reflected in all other sub tests. Not all of the tests are used in all legal judgements.

A self-assessment guide

To discover if you are an independent contractor, you can apply the sub tests to yourself. Where do you fit? Remember:

You must first have a contract with someone.
No one sub test overrides all others.
You must make an assessment on the balance of all the pendulums and the strength of swing of each pendulum.
However you rate yourself, if you found yourself in court, the judges could always interpret your circumstances differently.
The only independent contractor systems that have some certainty are ones that have succeeded repeatedly in court examinations.
(Note: The explanations used below in each sub test are ICA attempts to explain the legal wording in lay language.)Apply these pendulum tests to your circumstances. In which direction does the pendulum point in each test and how do you assess your position overall? Would you be clearly an independent contractor or clearly an employee or would there be some degree of doubt?

1. Sub test: Intent
This is perhaps the most important test of all.
One judge said ‘In the final analysis I find the genuine intention of all parties, as expressed in contractual terms and in their conduct to be more persuasive than any of the other indicia which I have dealt with…’ (Justice Woodward in Odco)
‘Intent’ looks at your attitude and that of the persons with whom you work. Do you want to control yourself? Do others want to control you?

An Independent Contractor

An Employee

You want to be independent. You want to control your own life. You are not willing to have people dictate to you and you stand up for your position, beliefs and the professional approach you take to your work. You insist on being treated as an equal. You are loyal to yourself and your professional integrity and capacity. You insist on having control of your contract. You may accept some contract terms with which you are not completely happy but overall you are satisfied with the contract.

You are content to have others tell you what to do. You don’t want to question whether an instruction is appropriate or not, because it’s not your responsibility. You go with the flow. You are expected to be loyal to someone else and think that if you are they will look after you. You are happy to be a cog in a system. You are happy to have your contract dictated to you by other people—whether that’s by an employer or a union or a tribunal.

2. Sub test: Remuneration
The remuneration sub test considers whether your time is being purchased indicating that someone controls you during that time (employee), or whether you are being paid for the job you perform indicating that you are focused on the end product (independent contractor).

An Independent Contractor	An Employee
You are paid when a job is finished for the whole of the job. Progress payments can be based on hourly arrangements for convenience but the overall job is the key. Sometimes the job may be priced by considering the hours involved. Sometimes the job may have an intangible outcome and therefore be difficult to price.	You are paid only on hourly, weekly or monthly rates. Piece rates can sometimes be used.

3. Sub test: Provision and maintenance of equipment or resources
Providing your own equipment indicates that you control most aspects of your work (independent contracting) If someone else provides equipment, then this indicates a lower level of control of your work (employment).

An Independent Contractor	An Employee
You provide your own equipment and maintain it, or you are liable to provide it or could provide it. The degree to which you need to provide equipment will vary from circumstance to circumstance. Providing your own equipment will mean that you need to charge more and can claim the equipment as a business tax deduction.	You never provide your own equipment, which is always provided by someone else. You are paid less than if you provided equipment. The firm that provides your equipment is the one who claims tax business deductions for the equipment.

4. Sub test : Obligation to work
Employees may be surprised to find that when they are employed, there is a legal obligation to work indicating that they do not control their own life. Independent contractors do not have a specific legal obligation to work and thus exercise considerable control over their own lives.

An Independent Contractor

An Employee

You work because and when you want to work. You can decide not to work and not have to justify that to anyone other than as a courtesy which makes good commercial sense.

You are required or expected to be at work at specified times. You working time is dictated to you by the need of the business to have you when they want you. Even if you don’t think you have this legal requirement, if you work under an award or ‘industrial instrument’, the document usually says things such as ‘an employee shall be ready willing and available for work when required by the employer’.

5. Sub test: Delegation of Work. Exclusivity of performance
If you can arrange for someone else to do a job, this indicates that you are in control of the end result. If the onus is on you doing the work personally, then this shows that as a person you have been bought, and during the period of purchase you have lost your control over yourself.

An Independent Contractor	An Employee
You can organise someone else to help you with part or all of the work. You may or can ’employ’ someone and become an ’employer’ or engage other independent contractors who work with you on projects. You are responsible, however, to ensure that the end result is to the standards required.	You are expected to be the person who does the work and you cannot arrange for someone else to do the work for you. You are being purchased as if you are a commodity. You would never ’employ’ another person to do your work or even help you. You don’t have that authority!

6. Sub test : Hours of Work
If you cannot determine when you work, you are controlled. If you decide the hours you work, then you control yourself!

An Independent Contractor	An Employee
You choose when you work and how many hours you work. You can work on weekends and not mid-week. You can vary your hours as you see fit without seeking approval from anyone. You can allow your work to suit your lifestyle, which depends, of course, on how much work you wish to do.	You are required to be at ‘work’ at certain times and must not be ‘absent.’ If you are absent, you must justify this. You don’t have control over changing your hours but must have approval from others to vary your work hours. It’s a bit like being at school. Your work dictates your lifestyle.

7. Sub test : Provision of Holidays and entitlement to leave
The withholding of ‘entitlement’ money is a method of control.

An Independent Contractor

An Employee

The payments you receive are total. No money is held back from you. When you work you earn. When you don’t work, you don’t earn. You don’t run the risk of losing ‘entitlements’ money if a client goes broke. You take holidays when you want. Generally, you find payments to you are higher than that of an employee, because money for holidays and other ‘entitlements’ is not deducted from you.

Money is taken out of your payment and held by the employer as a method of controlling when you can take holidays or other ‘leave’. You are paid less each week than should be the case. You run the risk that if your employer goes broke, the withheld ‘entitlements’ money is lost. You are told by your employer when to take holidays and are paid when you are on holiday.

8. Sub test : Deduction of Income tax
This used to be a test in Australia up until July 2000, because the authority of the tax office to require a payer to withhold income tax from a person and send the money to the tax office was legislatively tied to the existence of common-law employment. In effect, for the tax office to receive their money they had to push people into common-law employment.

The tax system changed in July 2000. Now the tax act stipulates the different administrative systems that requires payers to withhold income tax from both employees and independent contractors. The administrative systems are described under PAYG. Deduction of income tax is now a neutral issue in relation to a common-law assessment of employment/independent contracting.

9. Sub test : Characterisation of relationship for purposes of regulatory provisions
This is a complex area and is explained in a separate section (currently under development). Many pieces of legislation seek to regulate how we work or collect tax from our work effort. Different pieces of legislation in different States and jurisdictions have different provisions. Some legislation is dependent on common law (as the old tax income act was). Some legislation has application to both employment and independent contracting. The implication for the common-law test of employment or independent contracting is that sometimes, some regulations attempt to force you to be an employee, even if that is not your wish.

Some legislation of interest includes payroll tax, workers’ compensation, equal opportunity and anti-discrimination and occupational health and safety legislation. Generally, however, the application of industrial relations legislation is the most important.

An Independent Contractor

An Employee

Your contracts are regulated under commercial type law. Provisions of the federal Trade Practices Act and State fair trading acts will apply. You have access to commercial courts and small claims tribunals if in dispute over your contract. Your contract can never be unconscionable and must be freely entered into by you. But the courts will not seek to interfere in your contract unless you have a dispute. The courts will not try to determine the content of your contract before you enter it.

You do not control your contract. Industrial relations laws control most and sometimes all of your contract. Even if you have an ‘individual’ employment contract, the content must generally be approved by a tribunal. Industrial relations tribunals dictate the terms of your contract, whether you agree or not. The system is complex, legalistic and you have no control. The law takes your control of yourself away from you.

10. Sub test : Contractual Obligations
If you freely enter a contract in which you agree to be held to the requirements of the contract, you tend to control yourself. If the contract tends to be open-ended and not result-orientated, you have little control over yourself.

An Independent Contractor	An Employee
You work to achieve a specific task.For example, you are engaged to build a wall or a computer program or solve a particular problem. Your obligation under the contract is to the end-result required.	You are merely part of a process and neither understand nor care about the end result. Your contractual obligation is not to an end-result, but rather to the ’employer.’ That is, you are expected to be ‘loyal’ to the employer!

11. Sub test : How the work is performed
If your decide how you do a job, you control yourself. If you are told how to do a job, someone else controls you.

An Independent Contractor	An Employee
You have a high level of decision rights over how you achieve an outcome. The end result is the important thing, not necessarily how you got there! You have a high level of responsibility to conform with occupational health and safety, be honest and generally know and comply with the law.	Someone else must tell you how you must do a job and you just follow their instructions without question. You comply with legal requirements, but only because you are told to. If the job process is wrong, you don’t really care because you are paid to do as you are told. You only change because someone else changes the process and you follow a new set of instructions./

12. Sub test : Risk
Commercially winning (or losing) from a job indicates that you control yourself. If someone else wins or loses from your job, this indicates that someone else has exercised the control.

An Independent Contractor	An Employee
You achieve a profit or loss from your work. If a product you have worked on is faulty you can commercially suffer as a result. You can win commercially if the product or service proves to be hugely popular.	You do not care about profits or losses. You are simply paid for the time you spend at an enterprise and walk away at the end of each day. If a product proves faulty there is no comeback to you. You walk away at the end of the day without a care!

13. Sub test : Rectification
Being responsible for your actions is a key indicator of control. If you are held responsible, you control yourself. If you are not responsible, it’s because someone else controls you.

An Independent Contractor	An Employee
If you make an error or mistake, you have to correct this at you own expenses.You may have your own indemnity and insurance policies. You are happy to support your work by being prepared to fix problems.	If you make a mistake you may be disciplined, but you won’t be required to fix the error in your own time. Someone else might fix your errors. You do what you are told, but after that you don’t have any worries because someone else has to fix problems.

14. Sub test : Expenses
Being responsible for incurring your own expenses indicates a high level of self-control. If you have to obtain prior approval for expenses, you are controlled by someone else.

An Independent Contractor

An Employee

Payments made to you are higher than an employee because you have expenses an employee does not have. You may cover all your own phone bills, work-related travel expenses and so on. You must record and track these and claim as a tax deduction off your business income at the end of each year. Sometimes you may incur expenses that are passed on to your client, but this will be part of the arrangement in your commercial contract.

You find that you receive less money than an independent contractor but your employer pays your work-related expenses which will include phone, business accommodation and may include car and other expenses. You cannot claim any of these off your income, but your employer claims these as a business tax-deduction at the end of each year.

15. Sub test : Appointment
If there is an expectation that your appointment is on-going, this indicates that you have handed your being over to someone else. If your appointment is for the period of each agreed contract, this indicates that you maintain control of what happens to you in the future.

An Independent Contractor	An Employee
You actively ‘market’ or ‘sell’ yourself. You live from job to job and are always mindful of the need to promote yourself. You may advertise your services and/or network to make sure people know what you can do. Sometimes a job can be for a long time, but this does not mean that you have given up your independence. You actively control your career.	You work ‘in’ an organisation and only need to ‘promote’ yourself inside the organisation to move up the ‘promotional’ ladder. You don’t need or want to advertise yourself outside the organisation unless of course you intend to leave and are looking for other employment. You are a ‘corporate’ player. Someone else, or the ‘system’, organises your career.

16. Sub test : Termination
If there is a clear understanding that the arrangements finish when the job is done, no-one really controls anyone. If there are complex processes involved when either party wishes to stop, then this indicates that people are trying to control each other.

An Independent Contractor	An Employee
You work from job to job or contract to contract. You accept that when the job or contract finishes, the work ends. You don’t consider that you have a job for life or want a job for life. People come and people go and this is accepted as a normal part of life. You are confident that you can move on to another job.	It’s almost impossible for your employer to sack you without the initiation of ‘unfair dismissal’ processes. You consider that you need, and must have a job for life or for as long as you want the job. The process of finishing with a firm can be complex and messy.

17. Sub test : Documentation. Terms of the contract
No matter what written documents say, the courts will only take notice of the documents to the extent that behaviour matches the written statements. If a written document states that you are an independent contractor, but your actions are those of an employee, or the other party behaves like a ‘controlling’ employer, then you could be found, in fact, to be an employee.

An Independent Contractor

An Employee

Documents will have a distinct commercial look and language about them. They will use the language of ‘contract, engage, client, user, contractor, independent contractor.’ Independent contractor documents should be in the possession of independent contractors. People own and control their documents. Changes to written documents only occur with the agreement of both parties. The documents can be easily understood.

Documents will use ’employee’ type language such as ’employ, employer, employment etc’ Be careful of the use of the word ‘contract’ when in fact the term refers to ’employment contract’.Most employee documents are found in industrial relations instruments often controlled by unions and tribunals over which the employee has no control. As an employee, it’s often difficult to find the written contract, as industrial legislation and regulations are actually part of your contract, even though you don’t know it. Your contract can be changed by tribunals without even consulting you.

18. Sub test : Degree of Control

This is, as the title suggests, an assessment of the degree to which control is exercised over a person. If the courts can see that a level of control over a person is being exercised, they look to see if that control is strong or weak. If the control is limited, this will create a weak indicator of employment and potentially favour a finding of independent contracting. If the control is extensive, this will create a strong indicator of employment.

‘Control’ in this employment context must be understood as control of one person over another. It is different to control under independent contracting, where control is exercised equally by all parties—but over the terms of the contract, rather than over a human agent. The distinction is subtle but crucial to understanding the difference between ‘controlling’ employment and ‘self-controlling’ independent contracting.

19. Sub test : Integration.
This sub test is rarely used in Australia, but is frequently used in the USA and UK. It tests to see if a person is ‘part and parcel’ of the organisation.

Try Our 20 Point Checklist
Are you sure you are an independent contractor? ICA has produced a simple, one-page checklist for members as a guide. Click here to download the PDF (35K).