Navigation

Independent contractor vs employee: you need to get it right

A Roy Morgan Group Company was this week ordered by the Federal Circuit Court to pay penalties of more than $300,000 for numerous breaches of Australia's employment laws. One of the court's key findings was that the employer, Linkhill Pty Ltd (No), had engaged in 'sham contracting'.

This case is a timely reminder of the importance of correctly classifying each worker as either an employee or an independent contractor. This distinction is crucial, because independent contractors are not entitled to the ten National Employment Standards (including annual leave, personal/carer's leave and flexible working requests), and are not covered by Modern Awards and minimum wage entitlements.

Too many employers still assume that as long as a person has an ABN, they can safely be engaged as an independent contractor. This is simply not the case. During a recent discussion with an owner of a medium-sized business, I was told that both parties 'had mutually agreed to the arrangement being one of principal-contractor and not employer-employee so everything was all right'. Wrong.

Whether a person is an independent contractor or an employee is largely a matter of fact (and law) and not - as many employers still think - choice. This is why it remains entirely possible for courts to decide that an arrangement which on paper is one of principal-contractor is, in fact, one of employer-employee.

The Fair Work Ombudsman (FWO) has published a list of factors that will generally be taken into account when determining whether a person is a contractor or an employee - you can read that list here.

As noted by the FWO, no single factor is determinative. Instead, courts look at the overall relationship between the parties when deciding whether a person is truly an employee or contractor.

There is, of course, a world of difference between a highly-paid professional being incorrectly engaged as a contractor and an employee being forced into an independent contracting arrangement against their will. The courts have dealt with numerous cases of unscrupulous employers forcing their employees to obtain ABNs and then declaring their workers are now contractors and no longer entitled to leave, overtime, or minimum wages. It is these types of 'sham contracting' arrangements which get the FWO's attention, and rightly so.

One final word on contractors: many are entitled to receive compulsory superannuation contributions from the principal who engaged them. This often comes as a surprise to the principal, and non-payment of compulsory super can lead to heavy penalties. You can read more about this on the ATO's website.

At the end of the day, getting the classification right at the start is obviously extremely important.

Published: Friday, June 27, 2014 in The Switzer Daily

Need help with HR?

Contact Workforce Guardian or watch our 6 minute product tour video

Looking for a conference speaker

Looking for an expert opinion for media

About Workforce Guardian

Who is Workforce Guardian and how do we help employers manage HR and compliance?

Newsletter

Sign up for the Workforce Guardian Newsletter