Charlotte Black – Senior Associate
At Eales & Mackenzie, we are frequently approached by employers who are unsure how to classify their workers – are they independent contractors or employees.
We are also approached by individuals who have been working as independent contractors but now questioning whether they may in fact be an employee.
Companies will often classify workers as independent contractors as independent contractors are less of a burden on a company. A company is generally not required to pay an independent contractor superannuation, annual and personal leave and the taxation obligations falls on the independent contractor.
Just because you are called an independent contractor does not mean that you are in fact an independent contractor.
Sham contracting is becoming more and more prevalent so it is always prudent to consider whether the classification of the engagement of the worker by the company is really as an independent contract or not. It is also important for employers to properly consider how to classify their workers as the wrong classification can have substantial financial consequences for a company.
What is a Sham Contract?
A sham contract occurs when a company classifies a worker as an independent contractor in an attempt to disguise the real relationship. These contracts will often state that the relationship between the parties is one of a principal and contractor and will go further to say that the relationship is not one of an employee/employer relationship.
The mere fact that a contract makes this statement does not make is true. It is rather the circumstances of each case that will dictate the true relationship between the company and worker.
Independent Contractor or Employee
There is no ‘one size fits all’ analysis for whether a worker is an independent contractor or employee. Every situation has its own unique circumstances.
There are a number of factors that should be considered when determining if a worker is an independent contractor or an employee. Some of these are outlined below:
Independent Contractor |
Employee |
|
| Amount of control over how work is performed | Has a high level of control over the work they perform, including:
|
Performs their work under the direction and control of an employer. The employer will direct and control the:
|
| Financial responsibility and risk | Carries the risk of making a profit or loss on a job and will be responsible for things such as poor workmanship or an injury sustained on the job | Has no financial risks |
| Insurance | Will generally have their own insurance policy | Is generally not required to hold insurance |
| Tools and equipment | Generally uses their own tools and equipment although alternative arrangements can be made with the company | Tools and equipment are either provided by the employer or the employee is paid an allowance for tools by the employer |
| Hours of work | Decides what hours to work to complete a task in conjunction with the company | Is engaged to work specific hours by the employer |
| Ability to delegate work | Can delegate (or subcontract) work to another person however the responsibility to pay this person falls on the independent contractor | Is required to do the work themselves |
| Expectation of work continuing | Is generally engaged for a specific task or job | Generally has an ongoing expectation of work (although it should be noted that some employees may be engaged on a fixed term contract or on a casual basis) |
| Tax | Is required to pay their own tax and GST to the ATO | Income tax is deducted by the employee |
| Method of payment | Is required to submit invoices to be paid | Is paid on a regular basis |
| Leave | Does not receive paid leave (e.g. annual leave, personal leave etc.) | Is entitled to paid leave or in the case of a casual employee, loading in lieu of leave |
| Superannuation | Generally pays their own superannuation (although it should be noted that there are some circumstances where an independent contractor may be entitled to superannuation contributions) | Is entitled to be paid superannuation by their employer |
Consequences to Employers for Misclassifying an Employee
The consequences of classifying a worker as an independent contractor when they are in fact an employee can be substantial.
The Fair Work Act 2009 provides that it is illegal for an employer to:
- Misrepresent an employment relationship as an independent contractor;
- Dismiss or threaten to dismiss an employee so that the employee can be re-engaged by the employer as an independent contractor;
- Make a false statement to an employee in an attempt to persuade or influence them to become an independent contractor.
These breaches may result in the employer being prosecuted for breaches of the Fair Work Act which can include an order to pay substantial fines.
Further, if an employer is found to have incorrectly classified an employee as an independent contractor, the employer may be required to remedy the loss that the employee has suffered including making payment of unpaid superannuation.
Conclusion
Whether a worker is an employee or independent contractor is not a simple nor easy question to answer. It requires a detailed analysis of the circumstances of each individual case.
If you are a worker who believes they have been misclassified or you are an employer and require advice as to how to classify one of your workers, please contact Mr Dean Jones or Ms Charlotte Black on (03) 8621 1000 at our Melbourne office or on (03) 9331 1144 at our Essendon office or via email at advisors@emlawyers.com.au.
