In brief

  • As recently announced in the press, the Fair Work Ombudsman has commenced legal proceedings in the Federal Court under the ‘sham arrangements’ provisions of the Fair Work legislation.
  • In addition, a group made up of Australia’s major unions has been formed to focus, with the Federal Government, on workers who claim to be contractors in a bid for favourable tax treatment.
  • The Ombudsman is acting to ensure compliance by business with the legislation for the protection of individuals. The issue for the Government is maximising tax revenue, and for the unions, maximising job opportunities and security for their members and potential members.
  • Given this renewed focus on ‘sham’ independent contractor arrangements, employers should consider reviewing the make-up of their workforce with a view to ensuring they are not purporting to engage individuals as ‘independent contractors’ in circumstances where they should be classified as ‘employees’.
  • This article is a reminder of some of the key factors relevant to determining whether an employment or independent contractor relationship exists, as well as providing an overview of a number of other legal issues relevant to this area (but does not deal with tax related issues).  

Factors relevant to classifying independent contractors and employees

When deciding whether a worker is a contractor or employee at common law, a court will assess the totality of the relationship between the parties. While no one factor is necessarily conclusive, a court will take into account a number of factors, including:

  • Contract: The terms of the contract between the parties, including in relation to the issues set out below.
  • Intention: The intention of the parties at the time of entering into the relationship and throughout the course of the arrangement.
  • Corporate relationship: Whether the contract is with an individual or with a company that employs the individual. A contract with an individual tends to indicate an employment relationship.
  • Degree of control: Which party exercises control over the worker’s day to day activities? For example, can the worker delegate the performance of the services to another person and/or determine their own hours of work? Is the worker required to provide their own tools and equipment? The higher the degree of control and direction exercised by an employer/principal, the more likely it is the relationship will be deemed to be one of employer and employee.
  • Degree of separation: Are the independent contractors a distinct group or are they working along side and treated in the same way as employees?
  • Payment: How is the worker paid for their services?
  • Taxation and Insurance: What arrangements are there for taxation, superannuation and insurance payments?
  • Other work: Does the worker also perform services for other organisations?
  • Duration and stability: How long has the worker been engaged? Longer and more regular arrangements tend to suggest that an employment relationship exists.  

Ultimately, whether an employment relationship exists depends on the circumstances of the individual case and may vary from worker to worker.

Statutory deeming of employees

Businesses should also be aware that even if a purported independent contractor is not an employee at common law, they may nevertheless be deemed to be an employee for the purposes of specific legislation. Superannuation, workers compensation and payroll tax legislation contain expanded tests of who will be an employee for the purposes of that legislation.

The consequences of a worker being an employee

The consequences of a worker who is purportedly engaged as an independent contractor being held to be an employee at common law is that they become entitled to various legislative and award or agreement based benefits. These may include:

  • entitlements under an industrial instrument, such as an enterprise agreement or award
  • entitlements to annual leave, personal leave, long service leave, redundancy pay—where applicable—and parental leave, and
  • access to remedies for termination of employment, such as unfair dismissal, if the contract is terminated.

In addition, an employer may have statutory liabilities to the worker including liability to:

  • make superannuation contributions
  • withhold income taxation
  • pay fringe benefits tax
  • pay payroll tax, and
  • obtain workers compensation insurance.

Potential penalties for sham arrangements

In addition, the purported engagement of an employee as an independent contractor could expose employers to liability under the ‘sham arrangements’ provisions of the Fair Work Act 2009 (Cth) (FW Act). This is an area that is increasingly being targeted by the Fair Work Ombudsman.

Under the FW Act, an employer may be fined for certain conduct, including:

  • misrepresenting to an employee or future employee that they are or will be an independent contractor, when in actual fact they are or will be an employee
  • dismissing or threatening to dismiss an employee to engage them as an independent contractor to perform the same or substantially the same work under a contract for services, and
  • making a false statement attempting to persuade an employee or former employee to become an independent contractor to provide the same services or substantially the same services as were provided by that person pursuant to their employment with the same business.

Penalties of up to $6,600 per breach can apply to companies as a consequence of sham arrangements, and a company may also be ordered to pay an additional pecuniary penalty of up to $33,000 per breach.

Action items for employers

Given the renewed focus on ‘sham’ independent contractor arrangements, employers should consider:

  • conducting a review of their existing contractor arrangements to ensure that workers are properly classified and to identify any areas of potential risk, and
  • developing a policy for the engagement of contractors to minimise the likelihood of future issues arising.