Employees vs Independent Contractors and the Risks of Sham Contracting

[fa icon="calendar"] Jun 24, 2014 3:18:00 PM / by Robin Young

Who is an employee?

An employee performs work under the ‘control’ of another person in exchange for payment for the services he or she provides. A contract of employment may be express or implied, oral or in writing, but preferably in writing.The High Court of Australia in the leading case of Hollis v Vabu Pty Limited (2001) 207 CLR 21 adopted a ‘multi-facet test.Indicators of an employment relationship include:

  • Control by the employer, for example instruction as to how to carry out duties, uniform and hours of work, etc. – control indicates an employment relationship.
  • The expression of the relationship by the parties in writing, such as calling a contract an ‘Employment Contract’ or a ‘Service Agreement’ is persuasive but not determinative.
  • The Terms of the contract, for example, is paid annual leave provided? – Employment entitlements such as annual leave, long  service  leave  and  parental  leave  are  employment entitlements.
  • Was the worker in business on his/her own account? Were tax invoices rendered? Did the worker use their own ABN?
  • The  worker  operating  an  independent  business  indicates that the worker is an independent contractor.
  • Was the worker required to work exclusively for the organisation? Exclusivity of arrangement indicates an employment relationship.
  • Who provided the resources and equipment? An employer usually  provides  resources and equipment, whereas an independent contractor provides his/her own equipment.

The indicia of employment are not exhaustive and no one factor is necessarily conclusive.

Legal Obligations of the Employment Relationship

A relationship of employment gives rise to several obligations for an employer, including:
Industrial Relations Act 1996 (NSW) and Fair Work Act 2009 (Cth);

  • workers compensation insurance to cover injury to workers;
  • compliance with work, health and safety laws;
  • long service leave, annual leave and parental leave;
  • compliance with unfair, unlawful dismissal and adverse action laws;
  • compliance with Federal Modern and State Awards;
  • payment PAYE/income tax, payroll tax, fringe benefits and superannuation; and
  • compliance with anti-discrimination and anti-bullying laws.
The Independent Contractor Relationship

The independent contractor relationship is governed by the contract between the organisation and the independent contractor and not employment laws.

Independent contractors need to manage their own business and  procure  their  own  insurance  for  their  negligence  and income protection. They are often distinguishable from employees by the personal risk associated with their activities.

The Independent Contractors Act 2006 (Cth) can provide relief for unfair contracts.

Some laws apply to both the employment and independent contract relationship

These include laws relating to:

  • work, health and safety;
  • anti-discrimination;
  • anti-bullying;
  • adverse action claims;
  • workers compensation (in some cases); and
  • superannuation (in some cases).
What is Sham Contracting?

Under the Fair Work Act 2009 (Cth), which applies to the Commonwealth public sector and private sector, and employer must not tell an employee that they are being hired as a contractor if they are really an employee.

An employer is also prohibited from dismissing or threatening to dismiss an employee in order to hire them as an independent contractor doing the same or substantially the same work.

In addition to civil liabilities, penalties for a breach of these obligations are up to $51,000 for a corporation and $10,200 for an individual for knowingly being involved in a contravention.

Organisations must be aware of the difference between an employment  relationship  and  an  independent contractor relationship and the risks of sham contracting. 

Please contact Robin Young for any Workplace Relations questions.

Robin Young, Partner
P: +61 2 9390 8419
E: robin.young@holmanwebb.com.au



Topics: Workplace Relations

Robin Young

Written by Robin Young

Partner | +61 2 9390 8419 | robin.young@holmanwebb.com.au