Workers can be engaged as either independent contractors or employees. It is very important to determine the nature of a particular work relationship, as people who are employees have entitlements and protections under workplace laws that independent contractors do not.
A mistake or misrepresentation about the nature of a working relationship can be costly for employers in circumstances where a worker who was treated as an independent contractor brings a claim alleging that they were in fact an employee, and then makes a claim for entitlement to back-pay.
What is Sham Contracting?
A sham contracting arrangement is one where an employer misrepresents to a worker that they are an independent contractor, when they are in fact an employee. Employers may do this when they are trying to avoid being accountable for employee entitlements under workplace laws.
Sham contracting is illegal and prohibited under s 357 of The Fair Work Act 2009. This section defines sham contracting as:
• Misrepresenting an employment relationship as an independent contractor arrangement; or
• Misrepresenting a proposed employment relationship as an independent contracting arrangement.
It is also illegal for an employer to dismiss, or threaten to dismiss, an employee in order to then engage them as an independent contractor to perform substantially the same work they were originally undertaking as an employee.
Similarly, an employer cannot mislead an employee into entering an arrangement whereby they will become an independent contractor while performing substantially the same work which was performed whilst they were an employee.
If a worker engaged as an independent contractor is subsequently found to be an employee, the employer can be liable to pay them unpaid wages and benefits, and may also face harsh civil penalties in the form of monetary fines.
How do I know if I am an Independent Contactor or an Employee?
When determining whether a worker is an independent contractor or an employee, the courts will consider the totality of the relationship between the parties. There is no one single factor that is determinative, rather a number of factors are taken into account. Some of the factors that are often taken into account include:
• The degree of control over work performed: A person is more likely to be an employee if they perform work under the direction and control of their employer, on an ongoing basis. Contractors have a high level of control in how their work is done.
• The hours of work: Generally, employees work standard or set hours on an ongoing basis. A contractor will usually decide what hours to work to complete a specific task.
• Ongoing work v Specific Task: Contractors are usually engaged for a specific task, whereas employees usually have an ongoing expectation of work.
• Who bears the commercial risk of work performed: Employees usually bear no financial risk, whereas a contractor bears the risk for making a profit or loss on each task. Contractors would also bear responsibility and liability for poor work or injury sustained while performing a task.
• Superannuation: employees are entitled to have superannuation contributions paid into a nominated super account by their employer, while a contractor pays their own superannuation (however contractors are entitled to superannuation in some cases).
• Who provides the Tools and equipment? For employees, tools and equipment are usually provided by their employer. Contractors pay for and use their own tools and equipment.
• Tax: employees have income tax deducted by their employer. Contractors pay their own tax and GST to the ATO.
• Method of payment: Employees are usually paid on a regular and systematic basis (for example; weekly, fortnightly, monthly). Contractors may have an ABN and submit invoices for work completed, or are paid at the end of the particular contract or project they are working on.
• Leave: Employees are entitled to receive paid leave (annual leave, carers/personal leave) or receive a loading in lieu of leave entitlements in the case of casual employees. Independent contractors do not receive paid leave.
An example of sham contracting in Australia
In Fair Work Ombudsman v Joonie (Investment) Pty Ltd & Anor  FCCA 2144 a cleaning company was found to have engaged in sham contracting. The company hired a South Korean national as a cleaner. They represented to him that he was engaged as an independent contractor. They required him to obtain an ABN and submit invoices, however they directed all other aspects of his work including;
• His hours of work
• The type of work required to be completed; and
• The uniform to be worn, and the equipment.
The court found that it was the intention of the employer to misrepresent the worker’s status as an independent contractor to him so that it could avoid the protections provided to employees by the Fair Work Act.
The case makes it clear that even if someone is formally employed and described as an independent contractor, they may still be an employee.
The employer company was ordered to pay $47,520 in penalties due to their breaches of the Fair Work Act, and the sole Director and shareholder was ordered to pay a penalty of $9,504.
The employee also received damages for the underpayment of wages.
What can employers and employees do?
Employers should be careful and ensure that they are aware of their legal responsibilities regarding employees and independent contractors.
• They should ensure that the arrangements with employees and independent contractors fall clearly into their respective categories.
• They should determine what and if any remedial measures need to be taken regarding the arrangements so that they can comply with the Fair Work Act; and
• Determine what safeguards need to be built into contractor arrangements before they are entered into so that they cannot be construed as employment contracts.
Employees should pay close attention to the contracts under which they are engaged, and if they suspect that their employers have misrepresented the working arrangement, and engaged in sham contracting, seek legal advice.
If you have any concerns about whether your arrangement is a sham or not, please contact our employment lawyers.