Businesses that don’t fully understand the legalities of working with independent contractors run the risk of creating what is in fact an employment relationship – with all of the associated employer obligations and expenses.

As the nature of commerce has evolved, many companies have turned to the option of independent contracting as a way to meet their commercial requirements. Independent contractors may be able to do project work and provide specialist skills that are outside the scope of a current employee pool. Independent contracting may also be more cost efficient than employment.

For these reasons, the use of independent contractors is a growing trend in this country. Independent Contractors Australia estimates that more than 17.2 percent of the Australian workforce is made up of independent contractors. Independent contractors are also covered by their own legislation, the Independent Contractors Act 2006 (Cth).

How can you tell if someone is an independent contractor or an employee?

It is a common myth that if someone has an ABN and they are called a contractor, for example in an agreement, that this person is a contractor. To determine whether a relationship between two parties is that of an employer or a contractor, the Court looks to the substance of the arrangement.

The Court will do this by examining the facts of the case. It will then do a comparison of a number of factors to weigh up whether the relationship is one of employment or one of contracting. These factors include the following:

 What is ‘sham contracting’?

Sham contracting happens when a person is engaged under an ‘independent contractor agreement’ but is in fact in an employment relationship. This might happen when a business calls a person a ‘contractor’ but has total control over how, when and where the person works / does not allow the person to do work for anyone else.

This kind of relationship is subject to legal scrutiny because the person doing the engaging is getting all the benefits of an employee, without having to provide employment benefits like superannuation or leave. If a person or business does engage in sham contracting, it faces penalties for breaches of the Fair Work Act.

 What can happen when an employer gets it wrong?

Freestone v Morris & Partners Pty Ltd

In the case of Freestone v Morris & Partners Pty Ltd [2009] AIRC 223, a business argued that a book keeper was an independent contractor because she was paid by issuing monthly invoices and had her own business on the side.

However, the Court weighed up all the factors in the situation and decided the book keeper was in fact an employee. This was because she worked at the employer’s workplace, she was paid at an hourly rate, she used the employer’s tools and materials to do her work and she mostly did work just for the employer.

As a result, the employing company had to pay the book keeper compensation because they had not given her statutory notice when they ceased using her services.

ACE Insurance Limited v Trifunovski

In the case of ACE Insurance Limited v Trifunovski [2013] FCAFC3, the Full Bench of the Federal Court found that five insurance sales agents were employees and not independent contractors. This was because (among other factors) the company did exercise some control over how the agents did their work, including control over the structure of the work and the agents’ training and incentive scheme.

Most importantly, the court found that the insurance agents weren’t actually each conducting a separate business within the company. The agents’ work was instead a part of the company’s business.

This meant the employing company had to pay more than $490,000 in unpaid employee entitlements to the sales agents.

What does this mean for you?

Recent Australian cases have shown that there is no hard and fast rule when it comes to determining whether a worker is an employee or an independent contractor. Instead, the Court has decided these kinds of cases on the facts, by weighing up the factors that determine whether make a relationship is either that of employment or that of contracting.

The nature of work is becoming more sophisticated, with different kinds of workers, in different kinds of workplaces, doing different kinds of work related activities. It is important to seek guidance to ensure you have exactly the kind of legal arrangement you want with your workforce.

How can we assist?

 If you use / are thinking about using independent contractors and need legal advice about how to best define this kind of relationship legally, please feel free to contact our office to arrange a private consultation with our employment team.

About the author:

This article has been authored by Shzan Plandowski, law graduate at Lynn & Brown Lawyers.  Shzan has experience in corporate and property law.