A recent sham contracting case involving a cleaning company is a reminder to employers that incorrectly characterising workers as independent contractors can be a risky business.

Employees or independent contractors – what is the risk?

The law imposes serious sanctions for the misclassification of a worker as an independent contractor if the true legal nature of the relationship is really one of employment.  These sanctions, or risks, include:

  1. The Fair Work Act2009 (Cth) (FW Act)prohibits sham contracting.  Sham contracting is an attempt to disguise an employment relationship as an independent contracting relationship, thereby avoiding obligatory rates of pay and other entitlements.  Employers found to be in contravention of the prohibitions against sham contracting can be ordered to make payment to the worker for unpaid wages and other employment entitlements that should have been paid or provided, along with civil penalties up to $51,000 for companies and $10,200 for individuals;
  2. Penalties for non-payment of appropriate tax and superannuation;
  3. If a worker is injured, inadequate workers compensation may be in place; and
  4. Exposure to civil penalties under the Independent Contractors Act 2006 (Cth) if a worker claims that their independent contractor arrangement is unfair because it is designed to, or does, avoid provisions of the FW Act.

In addition, a worker who is misclassified as an independent contractor, but who is really an employee at law, may be eligible to bring an unfair dismissal claim on termination and/or claims for unpaid entitlements, such as annual leave, long service leave and superannuation.

Sham contracting in the spotlight

In a recent case, the Court imposed a penalty of $47,520 on a cleaning company for its unlawful activity in relation to sham contracting, and $9,504 on the company director involved in the contraventions.  The Court also made an order for back pay.

In an earlier case, the Federal Magistrates Court fined a HR manager employed by a financial services company $3,750 for his personal involvement in forcing employees to enter into sham contracting arrangements, despite the fact that the HR manager argued that he had merely been following the instructions of the company director.

The question of whether a worker is engaged as an employee or an independent contractor is a question of law, to be determined on a case-by-case basis.  No single factor determines whether a contractual arrangement is consistent with the relationship between an independent contractor and a principal or between an employer and employee. 

To determine the legal status of a relationship, the courts apply a multi-indicia test.  The application of the multi-indicia test involves an examination of relevant factors, including but not limited to the degree of control exercised over the worker, whether the worker may perform work for others and whether the work may be delegated, to make an assessment as to whether, on balance, they point to a relationship of employment or independent contractor and principal at law.

This can be a complex question, so legal advice is recommended where the proper characterisation of the legal relationship is unclear.