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Independent contractors: It's a sham! Or is it?

Independent contractors: It's a sham! Or is it?

Recent development in technology and increasing pressures continue to blur the line between employees and contractors, but courts continue to look at the substance of the relationship, not the form.

BY ROD MARSHALLPartner at FCB Workplace Law

 

Australia’s labour market is, in many ways, undergoing a fundamental paradigm shift. Nowhere is this more evident than in the context of independent contracting. For many businesses, this work arrangement plays a vital role in driving competitive advantage by providing both business and workers with the flexibility and cost certainty they mutually require to succeed. But it also comes with a range of inherent legal risks, and the consequences can be seriously costly for those who get it wrong.

 

Independent contracting on the rise

Much has been written about how the development of new technologies, combined with demands for flexible work practices and increasing commercial pressures, has driven the evolution of work and, recently, seen the so-called ‘gig economy’ thrive.

However the traditional independent contracting model of engagement, particularly in industries such as building and construction, continues to be a preferred model of engagement for a range of understandable reasons.

On the flip side, the reach of regulation (and regulators) over contractor arrangements seems to be ever more on the rise.

Contracting has long been a feature of Australian industry sectors where there is a demand for highly specialised tradespersons, operating their own businesses, providing their own labour and engaged to provide a defined service and result.

Through independent contracting, skilled entrepreneurs can leverage their bargaining power, grow their own businesses and retain control over their working arrangements. In this context, contracting is a legitimate work arrangement, as it has been for decades.

While the concept of independent contracting is not new, this form of work arrangement is no longer limited to a few highly specialised roles or industries. In recent years, we have seen the concept of contracting expand into other comparatively lower-skilled and lower-paid industries, where the arrangement often involves little more than the supply of a worker’s time and labour.

Unsurprisingly this has led to legitimate concerns around the protection of vulnerable workers from exploitation, and increased scrutiny from government regulators like the Fair Work Ombudsman (FWO).

 

Who is an independent contractor?

A common misconception still exists that if a worker has an ABN, issues invoices for services performed and is engaged under an independent contractor agreement, they will be a lawfully engaged contractor.

Courts and tribunals continue to make it clear that this is not the case, even where written contractor agreements contain clear statements confirming the parties acknowledge the relationship as that of principal and contractor. The parties cannot contract out of the true nature or substance of the relationship. The parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.

Traditionally, heavy reliance has been placed on the degree of control that a person who engages another to perform work can exercise over that person. Unsurprisingly, sham contracting arrangements tend to involve a high degree of control being exercised over the worker.

While the degree of control remains a prominent factor, courts generally adopt a “multi-indicia” test, having regard to the totality of the relationship.

Despite the fact that in some instances a more general approach has been taken based on whether the contractor is conducting their business essentially for their own reward as an entrepreneur, courts generally acknowledge that there is no one-size-fits-all definition of a contractor, thereby providing flexibility to make a decision on a case-by-case basis.

But this flexibility has also resulted in considerable uncertainty. Faced with inconsistent decisions by courts and tribunals, how do you know whether you have a genuine contracting arrangement or are inadvertently engaged in sham contracting?

There will of course always be businesses and end-users benefiting from labour who set out to deliberately engage in sham contracting. Those who do should expect that both regulators and courts will be ever less tolerant and that penalties and sanctions will only increase. But even where contracting arrangements are entered into mutually on agreeable terms, the inherent risk of being held liable for the inadvertent non-payment of minimum wages and other entitlements often cannot be completely ruled out.

 

Sham contracting

The Fair Work Act 2009 strictly prohibits “sham” contracting.

Specifically, employers are prohibited from intentionally or recklessly misrepresenting an employment relationship as a contracting relationship, from dismissing an employee to engage that individual as an independent contractor and from making a statement that the employer knows is false in order to persuade or influence a current or former employee to enter into a contract for services.

Those caught contravening these provisions face hefty penalties of up to $63,000 for a corporation or $12,600 for an individual who is found to have been involved in the breach.

However where the creation of sham contracting is part of the underlying business model (such as systematic engagement of workers in sham contracting) a business faces massive fines ($126,000 for individuals and $630,000 for a corporation) due to changes in the Fair Work Act introduced in September 2017.

 

Seek proper advice

The possibility of being held inadvertently liable for the non-payment of minimum wages and other entitlements and the imposition of hefty penalties is an inherent risk of contracting. But those businesses who fail to seek proper legal advice face a range of other unintended consequences, even in the context of a genuine contracting relationship.

Of particular concern to many businesses is the possibility of being ordered to pay superannuation to contractors. Under the Superannuation Guarantee (Administration) Act 1992 (Cth), a person who “works under a contract that is wholly or principally for the labour of the person” is deemed to be an employee for superannuation law purposes, irrespective of whether the arrangement is a genuine contracting arrangement or not.

It is important to consider whether the arrangement exposes the business to risk under the Independent Contractors Act 2006 (Cth) or the Australian Consumer Law. Legislation such as this affords protection to contractors against unfair contractual terms.

For anyone who is considering engaging contractors, it is essential that you seek proper legal advice concerning your risks – particularly where contractors may be working in roles that are also, or have traditionally been, performed by direct employees. 

If you already engage contractors, the time to assess your risk and take steps to protect your business is now. Especially where contractor arrangements have been in place for a significant period of time and/or have not been reviewed for a significant period of time.

Rod Marshall is Partner at FCB Workplace Law and an Accredited Specialist in Employment & Industrial Law with The Law Society of NSW. FCB Workplace Law regularly advises and acts for real estate agencies in post-employment disputes and litigation. He can be contacted at rmw@fcbgroup.com.au.

This article is intended for general use only and should not be considered to be complete or definitive. Readers should obtain professional legal advice before acting or relying on any material contained in the article. Your use of this information is not intended to nor will it create any relationship of client and solicitor.



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