Sham contracting – why it pays to know whether you’re an independent contractor or an employee

 In Employment Law

The growing popularity of mobile apps providing transportation, food delivery and like services has created a surge in independent contractors performing work traditionally performed by employees.

Whilst independent contracting is a legitimate form of work, sometimes employers engage workers as independent contractors rather than employees in order to avoid responsibility for their legislative and award entitlements. Such an arrangement is known as sham contracting.

Sham contracting is unlawful under the Fair Work Act 2009 (Cth). An employer will be subject to serious penalties if they:

  • misrepresent an employment relationship as an independent contracting arrangement;
  • knowingly make an untrue statement to persuade an employee to become an independent contractor; or
  • dismiss (or threaten to dismiss) an employee so that they can be re-engaged as an independent contractor.

There have recently been a number of sham contracting cases before Australian Courts. For example, Uber and Deliveroo drivers have alleged these companies use sham contracting, and complain of being paid significantly less than the minimum hourly rate under the relevant award. In these sorts of cases, Courts will consider the actual nature of the workplace relationship, not just the written terms of the contract, to determine whether the workers are employees or independent contractors.

Understanding the difference – independent contractors vs employees

Courts have identified a number of factors to be considered in determining whether a worker is an employee or an independent contractor. No factor alone is determinative. They include the following:

1. Hours and expectation of work

Independent contractors’ hours of work are determined by their contract, and are usually definite. They will often be paid for completing a specific job rather than based on the hours they have worked. By contrast, employees (other than casual employees) usually work set hours, or hours based on a roster-type arrangement, and are paid based on the hours they work. Importantly, employees expect that their work is on an ongoing basis.

2. Control over work performance

Independent contractors have significant control over how they perform their work. While employees have varying degrees of autonomy in different industries and workplaces, employers can typically direct or control the way in which employees perform their work.

3. Integration or independence

Independent contractors are not integrated into or held out to be part of the business, and are generally free to enter into work arrangements with others at the same time. They are also free to delegate, or sub-contract, their work to others. Employees are integrated into and held out to be a part of a business. They are often expected to wear a uniform and cannot delegate their employment responsibilities.

4. Equipment and tools

Independent contractors usually use their own equipment and tools to complete their work. Employees have equipment and tools (or an equipment and tool allowance) provided to them by their employer.

5. Risk

Independent contractors bear the risk in relation to profits, losses, quality of work and workplace injuries. For this reason, they often have their own insurance. Employees generally do not bear risk, as the risk is borne by the employer.

6. Payment method, superannuation and tax

Independent contractors have their own ABN and are generally paid upon completion of the work. They usually make their own superannuation contributions and pay their own income tax and GST. Employees are paid on a regular basis (e.g. fortnightly). They have superannuation contributions paid by and income tax deducted by their employer.

7. Entitlements

Independent contractors do not have leave entitlements and time off of work is unpaid. Employees are entitled to paid leave under their relevant award.

Why does it matter?

It is important that workers understand whether they are employees or independent contractors because this will determine the extent of their entitlements.

While independent contractors do have some general protections under the Fair Work Act, employees enjoy more significant legislative and award entitlements. Unlike independent contractors, employees are entitled to paid leave (including annual leave, long service leave and personal/carer’s leave) and to be paid minimum wage under the relevant award.

For some workers, misunderstandings about the nature of the employment relationship and issues relating to entitlements do not arise until their employment comes to an end. This can cause unforeseen stress and uncertainty at an already difficult time.

We’re here to help!

It is not always clear whether a worker is an independent contractor or an employee, and it is important that you obtain legal advice if you are uncertain about the nature of your employment relationship or your entitlements.

Johnston Withers’ employment lawyers have a long history of acting for employees and we are experienced in providing advice about employment relationships and entitlements. If you need advice or direction from a lawyer, please contact us on (08) 8321 1110 or get in touch online.

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