EMPLOYEE OR CONTRACTOR?

There are many advantages in hiring workers as independent contractors rather than as employees. On many building sites today, virtually the whole workforce is employed as "subbies". To explore the situation, we shall take as an example a company with a fleet of trucks.

You are the director of a manufacturing company. Your company owns a fleet of trucks. It uses the trucks to transport its goods to wholesalers around Australia. You are considering leasing the trucks to the drivers and then negotiating with the drivers to carry the goods as independent contractors. If the scheme is successful, you intend eventually to sell off the vehicles to the operators. What would be the advantages of such a scheme? And the disadvantages?

First of all, we shall examine the difference between an employee and an independent contractor. People often refer to an independent contractor as a "sub-contractor" when, in fact, they mean an independent contractor. The difference between an employee and an independent contractor is primarily in the amount of control exercised. A person is an employee when a master and servant relationship exists. An employee's primary responsibility is to do as he is told. He lacks control over how the work is performed. An independent contractor, on the other hand, contracts to produce the finished product. The "finished product" may be such a thing as the manufacture of an article, the repair of an article or the carrying out of a service such as transporting goods from A to B. If the independent contractor contracts to carry goods from A to B, then, as a general principle, it does not matter what route he takes, what vehicle he transports them in or who he employs to do the job. As long as the goods are transported from A to B, he has fulfilled his part of the bargain. Another way of looking at it is that independent contractors are paid by piece-work while employees are paid on a time basis.

Under the general law of contract, certain conditions are normally implied in a contract of employment. Reasonable notice of termination of employment must be given. Generally, if a person is paid monthly, a month's notice must be given. If he is paid weekly, a week's notice must be given. In the absence of notice, the appropriate wages must be paid e.g. a month's or week's wages in lieu of notice. "Notice" does not normally apply with independent contractors. Once a contract-driver has transported goods from A to B, the person contracting with him (whom we shall call the "contractor" from now on) has no obligation to supply him with further work.

Under the general law of contract, an employer is liable for the torts of his employees committed while acting in the course of their employment. For example, if an employee is employed as a driver and negligently injures someone in the course of his employment, his employer will be liable to pay compensation for the injuries. The same principle would apply if the driver negligently damaged the premises of a customer. The employer would have to make good the damage. However, if the driver is engaged as an independent contractor, then he alone will be liable for any negligent acts. In the above two examples, the independent driver would have to pay compensation for the injuries and for the damaged premises. It is usual for employers to insure against negligent acts by their employees. It is called Public liability insurance when it is of a general nature. It is called Third Party insurance when it refers to negligence on the road. The contractor will thus save the cost of Public Liability insurance and Third Party insurance when he engages the driver as an independent contractor and not as an employee.

Most employees are covered by either a Federal or State award. Even when they are not so covered, in general, they are entitled to the same conditions as if they were. The award lays down conditions such as 1) wages, 2) penalty rates for overtime, weekend and public holidays, 3) sick leave entitlements, 4) annual leave entitlements, 5) annual leave loading of 17.5%, 6) redundancy payments etc. None of these will be payable when the driver is an independent contractor. There is no minimum wage for independent contractors. It is a sad fact that these days, many independent transport firms, in fact, make losses and go bankrupt. Under an award, severance pay for a long-time employee can be high. Most, if not all, interstate truck drivers drive more than an eight-hour day. Nearly all drive over weekends. When working for themselves, they normally base their charges on an hourly rate. This rate might be $50 per hour. It covers all costs including driver and vehicle costs. The rate is normally a flat rate and does not vary whether the driving is done during the day, at night or weekends. It is often the case today that if an owner-driver had to employ someone and pay penalty wages for overtime etc, he would go out of business.

In recent years, various laws have imposed various obligations on employers to make payments on behalf of their employees. These include 1) Workers Compensation insurance, 2) 3% or 5% Occupational Superannuation levy, 3) Training levy, 4) Long-service leave. These are not payable if the driver is engaged as an independent contractor. For long-distance truck drivers, the Government insurance office in the Northern Territory quotes a rate of 8.25% of gross wages for Workers Compensation insurance cover. Employers must expend 1.5% in training from 1st July '92 or pay an equivalent levy. Normally, an employee will qualify for 12 weeks long-service leave after 15 to 20 years service, depending on the provisions of the State Act. For a truck-driver, it will be seen that the combined levy for Workers Compensation insurance, Super (at 5%) and Training levy amount to 14.75% of gross wages.

Payroll tax is payable under State legislation throughout Australia. It varies between 5% and 7% of gross wages. There is a threshold below which payroll tax is not payable. This threshold varies from State to State. Obviously, payroll tax is never payable on contract drivers.

When a driver is an employee, PAYE tax must be taken out from his wages each payday and sent to the Tax Office once a month. However, if a driver is an independent contractor, it does not mean that no tax need be taken out. The contract driver may be subject to Prescribed Payment System (PPS) deductions. PPS deductions, at a flat rate of 20%, will have to taken out 1) where the contractor and the contract driver are both engaged in the transport industry or 2) when the contractor engages the contract driver on a regular daily basis under an arrangement involving the exclusive use of a vehicle. However, the administrative arrangements for deducting PPS tax are much simpler than those for deducting PAYE tax.

Normally, employers pay long-distance employee drivers a tax-free travelling allowance of $43 per day. The Taxation Office does not require any substantiation of this amount by the driver. However, once the driver becomes an independent contractor, he must keep a diary itemising his expenditure if he wants to claim the $43 per day. For many contractors, a big advantage of engaging contract drivers is that no union will be involved. The contract drivers cannot be pulled out on strike. If an industrial dispute is in existence somewhere else, they can continue working during the period of the dispute. Demarcation disputes will not arise. Conditions negotiated by the union for employee-drivers will not apply to contract drivers. With a reduction in union membership in the organisation, the unions can mount less pressure. The overall threat of industrial action loses some of its force. It is of course well-known that unions are not happy with contract labour. The Mudginberri dispute in the Northern Territory some years ago highlighted their discontent. It is a known fact that in these recessionary times, many employers have transferred their employees on to contract status and continued to pay them at the same hourly rate as before. Obviously, the employee in such as a case loses many benefits. These include penalty-rates pay, holiday-pay, public-holiday pay, sick-pay, redundancy pay, long-service leave, occupational superannuation, workers compensation cover, public liability insurance cover, formal on- the-job training.

A disadvantage to converting employees to independent contractor status is a possible lessening of control. Independent contractors generally register a Business Name and advertise for work in the Yellow Pages and elsewhere. In time, they may succeed in business and expand. The tail may end up wagging the dog.

DISCLAIMER: See disclaimer on home page.

Copyright 1994.


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