Sham Contracting: When is an independent contractor really an employee?

Many people think that if they engage a worker who has an ABN and who provides them with invoices for their work, that they are an independent contractor and employment laws do not apply to them. While this may sometimes be the case, it is not always so.

The Fair Work Act 2009 (Cth) protects workers from “sham” contracting arrangements.  A sham contract is one where an arrangement is set up to look like an independent contractor arrangement when in reality the arrangement between the business and the worker is more like an employment relationship.

These sham contract arrangements are often set up by a business owner thinking that they can avoid having to pay the worker for entitlements under the Fair Work Act or any relevant award (such as annual leave entitlements, or overtime allowances), and avoid having to pay the worker superannuation.

Sometimes the business does not deliberately set out to avoid paying the worker his or her entitlements but is simply not aware of the sham arrangement provisions in the Fair Work Act.

This can prove disastrous for the business if the employee makes an application to the Fair Work Commission (or a Court) for an order declaring that the independent contractor arrangement was a sham, and in reality, the worker was an employee.

If this happens, the employer may be ordered to back pay the employee for all of the employee’s entitlements including superannuation, annual leave, long-service leave, overtime allowances, meal allowances, etc.  The employer may also be ordered to back pay the worker for the difference between the amount that the employer was paying to the employee and the minimum wage (at the appropriate level) under any relevant award. An employer can also be fined under the sham contracting provisions.

Also, where a business terminates an independent contractor, who is later found to be an employee, the business might also face an unfair dismissal claim.

A worker can apply under the sham contracting provisions, even if the worker agreed that he or she will be an independent contractor, or even if the worker was the one who asked to be an independent contractor.

So, when will an independent contractor arrangement be considered a sham?

The Commission will look behind an independent contractor arrangement and make its own decision whether the arrangement is really an independent contractor arrangement, or if the worker is, in fact, an employee of the business.

The Commission will consider the factors set out below (among others), in coming to its decision.

Control over the worker

The main factor that the Commission will consider is the level of control that the business has over the worker.  If the business directs the worker how to complete the work, this suggests that the worker is an employee.  If, however, the business does not provide much direction to the worker it is more likely that the worker is an independent contractor.

Hours and expectation of work

Another important factor that the Commission considers is whether or not the worker has set hours or work.  If the worker generally works standard or set hours, then this suggests that the worker is an employee.  If, however, the worker chooses his or her own hours in which to complete the particular task then it is more likely that the worker is an independent contractor.

Similarly, if the worker is expected to be at the workplace whether or not he or she has any work to do, then it is more likely that the worker is an employee.  If the worker can leave the workplace when he or she does not have work to do, then this suggests that the worker is an independent contractor.

Financial risk

Another important factor in determining the true nature of the relationship is who bears the financial risk.  If there is a problem with the work that the worker has completed and it is the business’ responsibility to fix the work or refund the customer, then this suggests that there is an employment relationship.  If the worker must himself or herself fix the work or refund the customer for any poor workmanship, then this suggests that the worker is an independent contractor.

Tools and equipment

Usually, an independent contractor has his or her own tools, so if the worker provides his or her own tools and equipment to perform the work, it suggests that the worker is an independent contractor.  If, however, the business supplies the tools and equipment, or if the worker is given money to buy tools and equipment then this suggests that the worker is an employee.

Pay

If the worker is paid the same amount each week (or fortnight or month) then this suggests that the worker is an employee.  If the worker is only paid for the actual work that the worker completes, then the worker is more likely to be an independent contractor.  An independent contractor’s pay is usually not the same each week (or fortnight or month) but it will vary according to the particular work that has been completed by the worker in that period.

More information is available on the Fair Work Commission website.

Conclusion

The Commission will consider all of the above factors and anything else that might be relevant and make its own decision whether the worker is an independent contractor or an employee.  No one factor is determinative – all these factors (and any other relevant facts) will be considered and weighed up.

If the Commission decides that the worker is an employee, you may be liable to back pay the worker for thousands or tens of thousands of dollars in unpaid superannuation, leave entitlements, and any other entitlements that the worker is entitled to under the Fair Work Act or the relevant award.

If you would like some advice about your current or future workplace arrangements, please don’t hesitate to contact us.

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