How do you determine if a worker is an employee or a contractor?

Sham contracting is where an employment relationship between a worker and employer is misrepresented as an independent contracting arrangement. Some employers do this to falsely lower labour costs and to avoid paying annual leave, holiday pay, superannuation and pay as you go (PAYG) withholdings. This is a serious offence and the Fair Work Ombudsman is targeting particular industries and investigating sham contracting as part of the new education and compliance campaign for employers.

Many businesses enjoy the flexibility of engaging contractors for certain projects or to assist during busy periods. However, confusion often arises as to whether these so-called contractors are regarded by the law as such. The fact that there is a contract between a company and a person where that person is described as a “contractor” will not in itself be determinative of whether the person is a contractor. Whether a person is a contractor or an employee will be a question of fact to be determined on a case-by-case basis, taking into account all the relevant factors of the relationship. There is no magic formula as to how many of these factors are required for a person to be considered a contractor or an employee.

The following factors suggest that a person may be an employee:

• The employer has the right to control the manner in which the worker performs the work, including: (i) the employer usually sets processes or requires that processes be in accordance with the employer’s requirements; (ii) the employer usually sets the worker’s hours of work.
• The employer supplies the worker with materials, tools and equipment to perform the work.
• The relationship is generally for an ongoing or fixed term.
• The worker works exclusively or mainly for the employer.
• The worker does the work himself or herself, rather than having the freedom to delegate it to others.
• The employer pays the worker’s business expenses.
• The employer pays the worker periodically (eg, weekly, fortnightly, monthly).
• The employer withholds taxation from payments made to the worker and makes superannuation contributions on the worker’s behalf.
• The worker is paid on an hourly basis regardless of how the work is performed.

The following factors suggest that a person may be a contractor:

• The contract is with an interposed entity (eg, a company or trust) who provides the worker to perform the work.
• The worker controls his or her own work, including: (i) the worker works independently; and (ii) the worker is free to keep his or her own hours subject to contractual deadlines.
• The worker supplies his or her own tools and equipment, sets his or her own processes and supplies his or her own materials (although the client may supply the materials).
• The worker is usually paid a fixed sum, although that sum may be divided into progress payments over the contract period.
• The worker is responsible for meeting his or her own tax obligations and making its own superannuation contributions (in the case of a contractor that is a company).
• The worker is free to perform other work.
• The worker is free to delegate work to a delegate or subcontractor unless expressly provided otherwise in the contract.
• The relationship ends at the completion of a job or expiry of the contract period.
• The worker is responsible for taking out their own policy of insurance.
• The worker is responsible for the rectification of work.
• The worker is paid by results rather than time and issues an invoice in order to get paid.

Employer or contractor for other puposes

A difficulty arises from certain legislation that tends to ‘deem’ certain persons as ‘employees’ and ‘workers’ when they are not employees at common law. For example, the following legislation at state and federal level often deems certain types of independent contractors as employees for the purpose of entitlements and obligations: payroll tax legislation; superannuation legislation; workplace health and safety legislation; and workers compensation legislation.

Deeming a person to be an employee for one purpose (eg, taxation) does not necessarily make him, or her, an employee for all other purposes (eg, workplace relations). Therefore, it’s important to always get information from the relevant body that administers the legislation or seek legal advice. This need for advice is highlighted by the crackdown by the Fair Work Ombudsman on sham contracting.

Sham contracting is where an employment relationship between a worker and an employer is misrepresented as an independent contracting arrangement. Some employers do this to avoid paying entitlements such as leave, superannuation and minimum rates of pay.

Under the sham contracting provisions of the Fair Work Act 2009, an employer cannot:

• misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement;
• dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor;
• make a knowingly false statement to persuade or influence an employee to become an independent contractor.

The Fair Work Act 2009 provides serious penalties for contraventions of these provisions. The Fair Work Ombudsman has been targeting particular industries and investigating sham contracting as a part of the new education and compliance campaign for employers. Industries involved in the audit include hair and beauty, cleaning, construction and call centres. Sham contracting is a serious offence and can expose a business owner and a company to up $33,000 in fines. Employers must seek professional advice if unsure of any employment arrangement.

*By Patricia Ryan, the Practice Manager of EI Legal and a solicitor with more than 30 years’ experience in both private practice and in-house roles.