You may have seen several cases in the news lately of independent contractors being found to be employees. For instance, last year an employment tribunal in the UK found that all Uber drivers were employees of Uber. You can imagine the headache this is causing for Uber’s management!
While the cases in Australia haven’t been as extreme, they are heading in a similar direction so it’s important to be across the law in this area.
Why does it matter?
Employees have far more rights and entitlements than independent contractors, such as:
- Award entitlements like penalty rates, overtime and allowances;
- annual leave, long service leave and personal/carer’s leave entitlements;
- superannuation contributions;
If someone you thought was an independent contractor is later found to be an employee, you will become liable for these entitlements and may have to back pay them for entitlements they should have received.
Sham contracting provisions in the Fair Work Act make it unlawful for an employer to misrepresent an employment relationship as an independent contractor arrangement, or dismiss an employee to re-engage them as an independent contractor. Penalties of up to $54,000 apply.
The Fair Work Ombudsman is aggressively pursuing sham contracting claims and cases finding that independent contractors are actually employees are on the rise.
How do I tell whether someone is an independent contractor?
Unfortunately, there is no clear-cut criteria. The courts determine this on a case-by-case basis by looking at the nature of the overall relationship. They will look past the terms of the contract, so you can’t label someone an independent contractor and expect that to stick.
Generally, independent contractors are supposed to be their own autonomous business, whereas employees are working for someone. Here are some of the factors the courts will look at:
- Control: An employee is subject to the direction and control of the employer on a day-to-day basis, whereas an independent contractor has autonomy in terms of how the work is done.
- Tools and Equipment: An employee is given tools and equipment to use by their employer, whereas an independent contractor usually uses their own.
- Ongoing work: Employees are usually employed on an ongoing basis, whereas independent contractors are often engaged for a specific project or task.
- Hours of work: Employees usually have set hours of work, whereas independent contractors determine how many hours they work and when they work those hours.
- Risk: With employees, the risk of liability for poor work product or third party injuries is with the employer, whereas independent contractors usually bear this risk themselves and maintain their own insurances.
- Payment: Employees are paid a set salary or hourly rate on a regular basis, whereas independent contractors tend to be paid per project and only after submitting an invoice.
- Tax: Employers withhold PAYG tax from employees, whereas independent contractors are responsible for submitting their own tax to the ATO, including GST if applicable.
- Superannuation: An employee has super contributions made on their behalf, whereas an independent contractor does not.
- Leave: An employee accrues and takes annual leave, personal/carer’s leave and long service leave, whereas an independent contractor does not receive these benefits.
The ABN myth: It is not true that someone must be an independent contractor if they have an ABN. Having an ABN is a factor, but it’s a minor one.
What can I do about it?
Having your independent contractor operate through a company adds protection because it puts an additional legal entity (the company) between your business and the contractor. However, this is not fail-safe and there have been cases where the courts have gone around these arrangements.
You can add clauses to your contract that specify that the contractor will not bring any claims against you for employment-related entitlements, and will indemnify you if they do. However, this won’t stop aFair Work Ombudsman investigation, and these types of clauses may be unenforceable because they override statutory entitlements such as Award benefits and superannuation.
The best protection is to conduct an honest assessment of your arrangement using the above factors. If you find that your independent contractors may be employees, you should seriously think about converting them to employees now to save future claims and the risk of an investigation by the Fair Work Ombudsman.
If you have concerns about your independent contractors, or are wondering whether to engage someone as an independent contractor or an employee, feel free to give us a call.