Introduction
As far as the source of income is concerned, an employed individual differs in many aspects with one who is self-employed. This difference is made clear by the common law of Australia. This law specifically addresses the pair differently by providing a rationale on which to determine the two categories. The common law has in this effect established a number of principles or tests which differentiate the operations of the two entities. This report will look at some of these principles that have been formulated to guide the lines of duty of self-employed contractors and employees. The report will also address the perspective and situation of these very principles in Australia.
Major Definitions
In order to fully comprehend the principles of common law in relation to employment, it is essential to first identify key terms that are used in this scope. Key terms in this report are “contract of services” and “contract for services.” A person is said to be engaged in a contract of services if he or she is employed by another person or firm. In this case, the person does not offer his or her services to clients directly, but through the firm or the employer. The employee is also paid by the employer and not the client. A person who is engaged in a contract for service is self-employed. A self-employed person makes his or her decisions while an employee is influenced and directed by those people who are above him or her in rank3.
The Importance Of Principles Developed By The Common Law On Employment
For an existence of a smooth co-relationship between any employer and his or her employee, there has to be an agreement that clearly outlines the terms and conditions of their contract. The agreement serves as a binding document that formalizes the hiring of the employee by the employer as a worker in a particular firm or enterprise. Some of the factors specified in the agreement include the amount of pay or salary, the date of payment of the salary, the avenue of payment and any commissions or bonuses offered to the employee in the event of extraordinary performance. Furthermore, the agreement can contain information that explains how overtime work will be conducted and paid.
The Test Of Mutuality Of Obligation
One test in common law that can be used to gauge whether an individual is engaged in a contract of service or a contract for service is the test of mutuality of obligation. This is a doctrine of a contract of employment that defines the relationship and agreement between the employer and the employee. Under this obligation, the employee agrees to work willingly according to the directions and instructions given. On the other hand, the employer agrees to fully pay the employee for the services that he or she has provided for certain duration of time. This test can be used to identify that a certain individual is engaged in a contract of service or most specifically, is an employee.
The test of mutuality of obligation grants absolute power to one of the two parties involved in the contract to terminate it if one or more measures agreed upon at the time of the agreement is not met. This privilege is normally given irrespective of the authority or hierarchy in the contract. It can be randomly granted to the employee or employer. This test of mutuality of obligation is significant as it acts as a control measure of the contract. It ensures that both the parties involved in the contract perform their duties. Failure to do this by either or both parties will automatically attract legal penalties against the offenders.
Degree Of Control
The degree of control exercised by the employer over the employee is another principle or test that can be used to gauge the type of contract that an individual is engaged in. In the case of a contract for service, the employer has virtually absolute control over the employee. The employee is in most cases not entitled to making any decisions on his or her own. Such a move would be a violation of the terms and conditions of the agreement signed by both parties. The employer is always expected to follow the orders directed towards him or her from above.
However, there are instances where an employer may decide to give the employees freedom of choice in some less serious circumstances. This decision lies with the employer and is rare to come by in many firms and organizations. Since the employer is in most cases the owner of the business or directly answerable to the real owner, there is always a fear of plunging the business into a loss in case of imprudent decisions made by employees. Instead of putting the profitability and success of the business at risk by granting freedom of choice to employees, most employers therefore prefer to maintain a system of administration where there is only one source of command. Delegation of duty is in this case impractical.
On the other hand, the client exercises less or no degree of control over a contractor who is engaged in a contract for service. There are two reasons that can be attributed to this. First and foremost, this could be the policy of the contractor. Since the client must have agreed to the contractor’s terms and condition at the beginning of the contract and signed in acceptance, the contractor reserves the permission to allow any degree of control by the client. Therefore, the client has to watch passively and only come in where he or she notices a breach of contract by the contractor.
The second reason could be that the client is not in a position to personally visit the site of the contract to check on its progress. This could be due to long distance barrier. A good example of this is where a crippled client orders for the manufacture of a special car from abroad. The client will have to wait for the delivery of the car and will not be part and parcel of the entire manufacturing process. A second reason could be because of the dangerous or unfriendly nature of the contract. For instance, a client would not want to have a look at a contract involving mining in deep underground shafts.
From the above argument, it therefore becomes easy to tell whether someone is engaged in a contract of service or whether he or she is engaged in a contract for service. An individual engaged in a contract of service may have a little privilege of making decisions in his or her line of duty while anyone who is in a contract for service may have total control over the contract and without the personal surveillance of a client.
Task Execution
Another difference of between a contract of service and a contract for service is brought about by the person who performs the task in the contract stated. This depends on whether the person assigned the responsibility has the freedom to choose to do it himself or herself or whether the person can assign the same task to another person with the required qualifications to execute the task. For the case of a contract of service, the employee who has been given the job is not allowed to delegate. This is irrespective of whether the other person has the desired qualifications or not.
The employee in a contract of service is answerable to the one who assigned him the task. The employee is further prohibited from engaging in any other activities within the scope of duty without prior knowledge of the employer. Another factor that hinders the employee from reassigning the task to someone else is the source of payment. The employer is the only one who pays each employee according to the tasks assigned. The employer will therefore lack any records of the reassignment of the original task and the other person to whom the task was reassigned hence missing the pay for the job done.
On the contrary, a person who is practising a contract for service has the freedom to reassign the given contract to another person with the qualifications for the job. This is because all that the client cares about is the submission of a complete and correctly done task. The client therefore will not keep track of the person performing the contract provided it is completed in the correct manner and at the time agreed upon. Furthermore, the contractor in this type of contract could be having other contractors below him or by his side who could be working with him as partners. However, the person doing the job will still be doing it under the name used by the original contractor in the terms of agreement of the contract.
Nature Of Pay And Benefits
This is yet another test that can be used to distinguish employment from self-employment. The difference is brought about by the stability and flexibility of the pay given for the performance of the task by the contractor. For a person who is engaged in a contract of service, the pay given for the completion of the task is constant. In other cases, the contractor is only paid a fixed monthly salary at the end of the month and does not earn anything from individual contracts. In others, the employee earns a commission from the employer for the job done. This commission is also fixed in form of a percentage.
An employee therefore benefit directly from the pay and other benefits of the contract. He or she only receives a fixed amount as the pay or benefit from the employer. The benefits or bonuses are also only received in cases where the employee has delivered an extraordinary performance of duties. The benefit could come in form of commissions which are calculated on the total value of the contract.
A person engaged in a contract for service benefits directly from the pay of the contract. Unlike the employee in the previous case, the contractor in this case receives payment directly from the client. The payment is not fixed because it varies on the type and nature of contracts that the contractor does. Moreover, the contractor does not have to wait and receive his or her payment at the end of the month. Instead, the payment is paid at the beginning or at the completion of each task.
In the case of exceptional client satisfaction, the contractor may stand a chance of receiving extra cash on the payment for the job as a token from the client. If this happens, the client pockets all the money unlike the employee. In the same manner, these tips from clients are not constant, nor are they calculated as part of the cost of the contract. This is another major difference between a person involved in a contract of service and that one involved in a contract for service.
Extent Of Financial Risk
The extent of the financial risk borne by the contractor can also be used as a principle for determining the kind of contract done by an individual. For a person in a contract of service, the financial risk encountered in the line of duty is almost zero. This is because the employee only has to avail himself or herself at the site of the contract and does have to invest anything or get into any deals. The pay of the employee is also fixed hence least affected by the outcome of the contract. In case of a poorly done task, the employee may only lose the commissions and other benefits.
On the contrary, a person who is self-employed bears all the financial risk in the contract. Some of these risks may be brought about by the dishonesty of the client. These may include failure by the client to pay for services done. The contractor may also encounter a financial loss if a person to whom he or she had assigned the task disappears in the course of the contract. In this case, the client may demand a refund of the cash and even a further compensation for the time wasted.
Conclusion
From the above discussion, it can be concluded that a contract of service and a contract for service are two entirely different contracts. It is evident from the foregoing that while a person who is self-employed works by his or her own rules, an employee is subject to the orders, instructions and directions from the employee.
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