Independent Contractor v Employee…can you afford to get it wrong?

A small business has been fined $47,520 for failing to pay entitlements pursuant to a modern award, on the basis that workers were independent contractors.[1] The Federal Circuit Court of Australia also found the Director of that business guilty of sham contracting and personally fined the Director $9,504. The penalties imposed were in addition to an order to repay employee entitlements of over $18,000.

Too often businesses choose to engage contractors opposed to employing staff. It is usually a decision based on what is [seemingly] easier, less administration, more cost effective and “common” in the industry. However, simply paying tax invoices to a contractor with an ABN opposed to wages is not enough to deem someone to be a contractor rather than an employee. If you get this classification wrong, your business could find itself in the center of a Fair Work Ombudsman investigation facing serious penalties and an order to pay compensation to workers for unpaid entitlements.

What is an independent contractor?

An independent contractor is a person who conducts their own trade or business by providing services under terms set out in a contract. Typically they receive work from multiple clients, they have a high level of control in relation to the way the work is done, when the work will be done, and how many hours of work is required to complete a specific task. They would also use their own tools and equipment, pay their own taxation, insurances and superannuation and bear the risk for making a profit or loss.

What is Sham Contracting?

Sham contracting occurs when a business arranges for an employee to form their own business and become a contractor instead of an employee to avoid meeting obligations that would exist if the worker were an employee such as penalty rates, worker’s compensation insurance, superannuation and leave entitlements.

Is it easier and cheaper to engage independent contractors?

Engaging independent contractors does not reduce your responsibility as a business and often it will not save you money, because your administration costs will increase to train, monitor and manage those contractors.

Although independent contractors conduct their own business, your business is still responsible for the health and safety of all workers in your workplace. Health and safety duties cannot be delegated to a contractor, nor can you argue that you relied on a contractor to identify hazards or to adopt a safe system of work, even if the contractor has been hired for their specialist knowledge and skills.

Employers should be aware that, like employees, independent contractors also have protections and workplace rights.

Independent contractors are protected by the Independent Contractors Act 2006 (Cth) which, amongst other things, ensures that the contract is fair. In doing so, the Court will consider:-

  • The bargaining strength of the principal and the contractor;
  • Any unfair tactics, undue pressure or influence used by the principal during the negotiations; and
  • How the fees payable to the contractor compare with salaries paid to employees performing similar work (including penalty rates, leave and other entitlements).

Independent contractors are also protected by certain components of the Fair Work Act 2009 (Cth), including General Protections. For example, it is an offence to refuse to award work to a contractor due to their union affiliation, race, physical or mental disability, religion or gender.

Misclassifying workers as contractors when they are really employees is the obvious danger of engaging contractors, however there are other dangers that are often overlooked by businesses, including:-

  • Risk management – Are the contractor’s insurances and licence fees up to date? Have you provided the contractor with work instructions? Is the contractor following the work instructions? Has the contractor trained their staff to follow those work instructions?
  • Quality Control – How can you control the quality of the service and the products/equipment being used? Being paid per job creates an incentive for contractors to cut corners, how do you ensure this isn’t happening and how many hours will be spent by your business to audit the contractor’s work?
  • Company image – How is the contractor promoting your company image? How does the contractor interact with your clients?
  • Competition – If the contractor is performing the work well, engaging with your clients and willing to do it at a slightly cheaper rate your business may have trained and mentored a competitor.

How can your business mitigate risk?

If your business chooses to engage an independent contractor, following these 6 steps may mitigate your exposure to risk:-

  1. Have a contract that clearly sets out the independent contractor’s obligations and your obligations as the principal;
  1. Regularly review the amount of work that is being done for your business – how many hours a week is the contractor spending doing your work, and is the contractor doing work for anyone else?
  1. Induct the contractor and their staff in relation to your policies, procedures and work instructions;
  1. Audit quality and safety compliance;
  1. Check and monitor insurances and licences; and
  1. Manage client relationships.

Misclassifying employees as contractors is not the only common misclassification that commonly occurs. Classifying employees as casuals when they work regular and systematic hours places businesses at risk of breaching industrial laws and potentially facing an investigation and penalties.

If you are a director or manager of a business, know what your obligations are, know what your workers are entitled to (not just the minimum hourly rate within the relevant Award) and regularly review each worker’s engagement.

If you are not sure whether you have got it right contact us at Cube Workplace Solutions.  For a fixed fee, we can review your current arrangements to ensure you are compliant with relevant legislation and Modern Awards and draft documents to clearly document those arrangements. 

The following links provide additional information:

 This publication is for informational purposes, it is not intended to be legal advice. Readers should obtain legal advice in relation to their specific circumstances before acting on the information in this publication.

[1] Fair Work Ombudsman v Jooine (Investment) Pty Ltd & Anor [2013] FCCA 2144