Workers are not independent contractors unless they work as ‘entrepreneurs owning and operating a separate business’. Is your employer ‘sham contracting’ its’ own employees?
Why does it matter if you’re a contractor or employee?
While there are some benefits to being a contractor, employees receive many benefits and protections under employment law that contractors are not covered by.
Employees are covered by the National Employment Standards and Fair Work Act 2009 (Cth) and depending on their position, may be covered by a Modern Award.
This means employees are:
- Entitled to paid leave;
- Superannuation;
- May make an application for Unfair Dismissal;
- May make a General Protections claim;
- Have some guarantee of regular working hours (may vary for casual employees).
‘Sham-contracting’ is employers treating employees as contractors, often to avoid the responsibility of providing the above benefits.
Entrepreneurs or Employees?
Most employers know that they need to undertake a ‘multifactorial assessment’ in order to determine whether or not a worker is an employee or an independent contractor. We have set out some of the factors which are relevant to that assessment below.
| EMPLOYEE | CONTRACTOR |
| The worker is only allowed to work for the employer. | The worker is allowed to work for people other than the employer. |
| Tax is deducted from the payment made by the employer to the worker. | Capital is supplied by the worker. |
| The worker wears a uniform. | Tools are supplied by the worker. |
| Tools are supplied by the employer to the worker. | The employer exercises limited or no control over how, when and where the worker carries out work. |
| The worker is allowed to take paid leave. | The worker’s pay is calculated with reference to results produced. |
| The worker is supervised closely or required to comply with detailed workplace policies. | The worker generates goodwill in a business that is independent of the employer’s business. |
| The worker’s pay is calculated with reference to time worked. | The worker issues invoices to the employer. |
| The worker represents the employer. | The worker conducts a business-like operation with his or her own systems, policies and manuals. |
| The employer bears the risk associated with loss or damage to the stock or business. | The worker bears the risk associated with loss or damage to the stock or business. |
| The worker is required to perform their duties themselves. | The worker is allowed to sub-contract the performance of his or her duties. |
Control is the Most Significant Factor
As Bromwich J reminded employers in Putland v Royans Wagga Pty Ltd [2017] FCA 910 (‘Putland’) not all of those factors will have the same weight.
Bromwich J explained that, although it is important to undertake a multifactorial assessment, the control exercised by the employer over the worker will often be a ‘dominant consideration’, even if less weighty considerations point in the opposite direction.
Some of the factors which indicated that the employer in Putland exercised a significant degree of control over its workers are set out below.
- The workers asked for increases in fees in a manner which was more akin to a request by an employee for approval of a pay rise, rather than ‘in the manner of a variation of an independent contractor’s terms and conditions of contract’.
- The employer sent emails directing workers to do things which were more akin to ‘directives to an employee’ than ‘the enforcement or negotiation of a term of a contract with an independent contractor’.
- The employer reviewed and signed off on documents prepared by the workers in the course of their provision of services to the employer.
- The employer directed that the workers provide services at a particular location.
Bromwich J explained that other considerations, such as the fact that the workers in Putland provided services to the employer from their home and that the workers were not required to wear uniforms, were of limited significance.
Key take aways
Putland is a reminder that the courts will look closely at the substance of the relationship between a worker and an employer when determining whether the worker is an employee or an independent contractor. It will not conduct a simplistic box ticking exercise nor give every factor equal weight.
The bottom line is that an employer cannot attempt to pass off an employee as an independent contractor by doing minor things that will tend in their favour in the multifactorial analysis. It is not enough to call the workers contractors, remove the requirement that they wear uniforms, and allow them to work from home.
As Bromwich J explained, the question in every case is whether, as a matter of substance rather than form, the workers perform ‘work as entrepreneurs owning and operating a separate business’ from that of the employer. If they do, they will likely be independent contractors. If they do not, they will likely be employees. The practical degree of control that the employer can and does exercise over the worker is likely to be particularly important in this context.
How can we help you?
If you are working as a contractor but believe you may be an employee or if you are an employer concerned that some of your agreements with your independent contractors may not be legally compliant then, call us on (02) 9199 8597 or email us.
The information contained in this post is current at the date of editing – 29 August 2024.
