If your business uses independent contractors as part of its workforce you need to be careful that your contractors are indeed contractors and not employees.
Emily Shoemark, Senior Associate at Snedden Hall & Gallop explains the distinction between a contractor and an employee and discusses a recent case that may affect you in your business.
The basic distinction between and employee and a contractor is:
Employees work under a contract of service:
- The employee works for the employer and is obliged to carry out duties as directed by the employer; and
- The Employee is paid for the time that is spent performing those duties;
An independent contractor works under a contract for services:
- The contractor is usually engaged to carry out a specific piece or work or project; and
- The relationship ceases once those services are performed.
The distinction can have important implications for your business.
Whether a worker is an independent contractor or employee will have specific statutory implications depending on the nature of the profession. Employers need to provide an employee entitlements contained in the Fair Work Act 2009 (the Act) and any applicable award. An employer will also be liable vicariously for the negligence of employees, whilst, in general and depending on the terms of the contract, not for the negligence of independent contractors.
Unpacking the differences
The distinction between employees and independent contractors is not always clear. In Australia, the courts have developed criteria for distinguishing between the two. The importance of each criteria will vary from case to case, and so there is no black and white test.
Currently, the most important case in Australia on this point is Stevens v Brodribb Sawmilling Co Pty Ltd (1986). The key test the Court applies is the level of “control” that the person who engages another to perform work has over the person engaged. In determining the relationship and the level of control, the Court will look at these factors:
- The mode of remuneration;
- Which party is responsible for the provision and maintenance of equipment;
- Obligation of work;
- Hours of work;
- Holiday and leave arrangements;
- Superannuation; and
- Deduction of tax.
The multi-factor test has been supported by the High Court since then. However, the courts will not address the factors in a mechanical method, like a running checklist of items, but rather, “paint a picture from the accumulation of detail”.
The recent case of Fair Work Ombudsman v Grouped Property Services Pty Ltd (Fair Work V Grouped) provides an illustration of the factors that the Federal Court of Australia applies in determining the nature of an employment relationship. This case involved the Fair Work Ombudsman bringing proceedings against a large cleaning company on behalf of 51 employees who had brought complaints regarding unpaid penalty rates, annual leave, personal leave and superannuation. At issue in this case was whether the workers were employed by the company, or merely independent contractors as the company had argued.
Justice Katzmann concluded that the relationship was that of employer and employee, rather than independent contractor. Crucial to this finding was the fact that the cleaners had no degree of control over their work. All of the direction in relation to work practices was provided by the company, with the Court paying particular attention to the fact that the company set the hours for work, organised insurances for the cleaners, and provided all materials required. There was also minimal scope for bargaining over wages or working conditions. The fact that some cleaners were required to carry an ABN was irrelevant. The Court further highlighted that the company presented itself to the world at large as an employer of cleaners, evidenced by an “Employee Handbook” bearing the company logo which was provided to clients.
Ramifications for your business
Under the Act it is prohibited to engage someone under a ‘sham’ contract which the Act explains is an employment contract that says that a worker is a contractor, when in reality the worker is an employee.
The penalty for sham contracts can be up to $54,000 per breach for corporations and up to $10,800 per breach for individuals.*
In Fair Work V Grouped, Justice Katzman issued the company a penalty of $35,000, noting that it was a “clumsy attempt to create relationships of principal and contractor”. Justice Katzman further went on to declare that it was “critically important that the penalty be sufficiently high to deter employers in general… from behaving in this way again”.
As an employer, you need to be assured that you have no sham contracts. Fair Work can impose penalties for contraventions of sham contracting arrangements.
How can Snedden Hall & Gallop assist?
If you are an employer that requires assistance drafting contracts to avoid penalties under the Fair Work Act, the experienced Employment Team at Snedden Hall & Gallop can advise you on the best solution for your needs and on the distinction between a contractor and an employee. Please call us today for assistance with any aspect of your business, including policy and contract creation, on (02) 6285 8000 or by email.
*Figures are valid at date of publication.