Problems At Work

Contractor Issues

Difference Between Employees And Contractors

This is one distinction that has proved difficult for businesses to get right and has seen many individuals taken advantage of and deprived of numerous entitlements.

An error in correctly classifying an employee or independent contractor can result in hefty penalties for business and numerous missed entitlements for individuals so this is a very important distinction to make, and to make correctly.

At a very basic level, an employee is a person who is employed by a company or business to work for wages or salaries while a contractor provides services as a business owner.

Being Engaged As A Contractor Or Employee

Employees have numerous entitlements that a contractor does not benefit from including superannuation guarantee, annual leave and workers compensation insurance.

The costs of these additional employee benefits to an employee are quite significant and it is not surprising that some employers either knowingly or unknowingly will take advantage of what they see as a way to cut back on these costs.

If a business enters into a contract with an independent contractor they will have less costs and less obligations than if they hired an employee for the same work.

It is important that you are aware of the differences between an employee and a contractor so that you are not unwittingly taken advantage of and so that you can benefit from the entitlements of an employee if that is the true nature of your work relationship.

How Do I Know If I Am An Employee Or A Contractor?

Just because a contract is signed rather than an employment agreement and the individual holds an Australian Business Number does not automatically mean that they are a contractor. MKI Legal can help you understand whether you are a contractor or an employee.

Reviewing Contractual Terms

The High Court handed down key decisions in 2022 that changed the approach that courts now take for deciding if a worker is a contractor or employee.

The court will first look at the terms of the written contract. Provided the written contract is not a sham and was genuinely entered into by the parties, the court will consider the terms of the contract to determine whether it points to an employment relationship or a contractor relationship.

The court will consider the extent of control that the worker has over how, where and when the work will be performed. It will consider whether it can be said that the person is running their own business as opposed to merely working within the principal's business.

Multifactorial Approach (An Alternative)

If there is no contract in place, or if it is proved that the contract was simply a sham arrangement (e.g. designed to avoid paying the employee their lawful entitlements), then the multifactorial test would apply.

Under the multifactorial test, the court will assess all factors to determine the actual nature of the relationship. To gain an understanding of what the court will take into account when weighing up the facts, some of the main questions you should ask yourself are as follows:

Tools and equipment: Generally, a contractor will provide their own special tools or equipment necessary for completing the labour. An employee uses equipment provided by the employer or is reimbursed if they purchase their own.
Subcontracting: A contractor may delegate the labour to others, while an employee is the sole individual performing the work.
Exclusivity: An employee is considered part of the business and they do not operate independently outside of the business. A contractor can provide their services to multiple clients at once.
Control over work: A contractor will generally decide how the work is performed, while an employee will be given direction by the employer.
Liability: Any defects in the labour performed and subsequent remedy expenses are usually the obligation of the contractor. If an employee is at fault, the liability is that of the employer or business, rather than the individual.
Payment: An employee will be paid hourly award rates, commission, or per piece/activity performed. Contractors typically get paid based on the quote they give for the specific task, once it is completed.

This test is certainly multi-layered and just because you have been given the label of independent contractor does not mean that this is necessarily correct.

“The parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck”: Re Porter; ex parte TWU (1989) 34 IR 179 at 184. There is no one size fits all and each test will turn on the facts of that particular relationship.

For example, in the matter of Damevski v Giudice and Others (2003) 133 FCR 438, the court determined that the Applicant was an employee as he did not have independence in conducting his own business; the company determined his rates and directed exactly how the work was to be performed.

Superannuation Contribution Payments

Even if you are labelled as a contractor and you are genuinely operating as one, you might be still entitled to superannuation because of the extended definition of employee under section 12 of the Superannuation Guarantee (Administration) Act 1992 (Cth). This section states that if a person works under a contract that is wholly or principally for the provision of labour, then that person is entitled to superannuation even if they are a genuine contractor.

This provision does not apply to a contractor providing services through another entity such as a company. This provision only applies to contractors providing services as natural persons, e.g. sole traders.

Secondly, for this provision to apply, the contractor must be providing primarily labour. If the contractor is providing equipment or materials, then this may not apply.

Contractor Rights

Whilst as a contractor you do not have employee entitlements, nevertheless there are three main rights that you do have.

You may have the right to make a claim on the basis that your relationship is truly that of an employee and not a contractor and seek remedies as a relief for an unfair dismissal claim or a general protections claim.
If you are truly an employee, you can seek repayment of your employment entitlements including annual leave, long service, personal leave, superannuation, award entitlements etc.
You can seek a remedy under the sham contracting provisions of the Fair Work Act 2009 and have a civil penalty imposed against the business.
Finally, breach of contract can be claimed and pursued in the common law courts.

Protections For Contractors?

Under the Fair Work Act 2009 there are general protection provisions protecting contractors from adverse action, coercion and abuse of freedom of association.

As these are limited workplace rights, there are protections under the Fair Work Act to prevent employers abusing these limits by engaging someone dishonestly as an independent contractor rather than an employee. This is by way of provisions surrounding “sham contracting”. Gray J aptly summed up this concept as “the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck”: R e Porter; ex parte TWU (1989) 34 IR 179 at 184

The employer will not be able to disguise a genuine employer/employee relationship by merely labelling an employee as an independent contractor, nor dismiss an employee to “rehire” them as an independent contractor, or make misrepresentations to an employee so that they enter into an independent contractor arrangement. These protections are set out in sections 357-359 of the Fair Work Act.

A sham contract is unlawful. Generally, it is entered into by the employer with the intention to avoid paying employee entitlements such as superannuation, leave entitlements, workers compensation and payroll tax. The avoidance of these costs can mean a financial saving to an employer and therefore an incentive to enter into a contractual arrangement.

In most employee/ employer relationships, the employer is usually in a position of power and may attempt to coerce, threaten or mislead an employee to enter into a contract to perform work as an independent contractor.

Any contravention of the sham contracting provisions is treated seriously and penalties can include significant fines and compensation payments to employees. The courts can make orders to have the employee reinstated or to prevent the employer from dismissing an employee simply to re-hire them as an independent contractor.

Contractors Making An Unfair Dismissal Claim

If you believe that your contract has been unfairly terminated by the employer, then you may have actually been unfairly dismissed by the employer. If you are labelled as an independent contractor but your relationship with the employer is truly that of an employee then you will be entitled to make an application for unfair dismissal.

The Fair Work Commission will consider the nature and circumstances surrounding your working relationship to determine if you are eligible to make an application. You should be aware that any application must be made within 21 days of your dismissal.

Independent Contractors Act 2006

The Independent Contractors Act 2006 provides further protection to you if you are a contractor who is covered by this legislation.

An unfair contract is a contract where you, as the contractor, is required to perform work on ‘harsh’ or ‘unfair’ terms. If you believe that the terms of your contract are unfair or harsh then mediation or negotiation is your first step to deal with an unfair contract. In fact, your contract may set out the dispute resolution process to follow.

However, if alternative dispute resolution does not resolve the dispute, then you have the right to lodge a claim under unfair contracts provisions of the Independent Contractors Act 2006.

In making a determination, the courts will consider the contract and the nature of the relationship as a whole and will take into account the terms of the contract, the bargaining positions of both parties, any undue influence, tactics or pressure, if the remuneration is equivalent to that of an employee and any other matters they determine.

Reviewing Your Contractor Agreement

MKI Legal has extensive experience in advising contractors in respect to their rights and obligations regarding contractor agreements. MKI Legal also has experience in preparing contractor agreements.

Some of the matters to take into account when reviewing or preparing a contractor agreement are:

Ensuring the indemnity provisions are fair and reasonable, and ensuring that the contractor understands the indemnity risks.
Advising on whether the contractor arrangement is genuine and any risks associated with being declared an employment relationship.
Any restrictions on undertaking work for other people or entities.
Advising in respect to insurance obligations.
Advising in respect to procedures regarding delegation of work.
Advising in respect to any unfair contractor terms.
Advising in respect to payment obligations, timeframes, invoicing and other associated matters.
Advising in respect to superannuation.
Advising in respect to any issue on intellectual property.
Advising in respect to termination.
Advising in regard to confidentiality and any restraint provisions.