Sham contracting - are you a contractor or an employee?

Friday, 23 Mar 2018

There are significant financial and managerial benefits for businesses relying on a workforce which consists of independent contractors (who can be engaged as required depending on the workload), rather than employees (who are engaged on a more permanent basis, irrespective of the workload).  Unfortunately, whilst a business may seek to engage someone as an independent contractor, and enter into an "independent contractors agreement" providing for commission-only payment, for example, that person may be considered at law to be an employee, and therefore entitled to minimum workplace entitlements under the National Employment Standards.

What is the difference between independent contractors and employees?

No single factor determines whether you are an employee or contractor.  It depends on the totality of the relationship between the parties when determining the status of a person’s employment.

Set out below are the various factors to examine when considering whether a relationship is one of independent contractor, or employer/employee.

 

Employee

Contractor

Nature of the relationship

Works in the employer’s business.  Is seen as a “servant” of another’s business.

An individual or business that is hired to carry out a specific function, and carries out a business on their own behalf.

Hours of work

Usually regular or defined hours (except for casual employees), with an ongoing expectation of work (unless engaged for a specific task or period).

Usually has the freedom to decide what hours are worked to complete the required task.

Ability to sub-contract or delegate

Cannot subcontract or delegate the work.

Can subcontract or delegate the work.

Payment

Paid either for the time worked, a price per item or activity, or commission, on a regular basis.

Paid for an end result, usually once the work is completed and an invoice is submitted.

Superannuation

Entitled to have superannuation contributions paid by the employer into a nominated superannuation fund.

Responsible for their own superannuation.

Tax

Income tax is deducted by the employer.

Pays own tax and GST to the Australian Taxation Office.

Equipment, tools and other assets

The business provides the employee with the tools required to perform the work (or provides an allowance or reimbursement for those tools if purchased by the employee).

Provides their own tools.

Commercial and financial risk

The business is legally responsible for work performed by the employee.  The employee holds no risk.

The contractor holds the commercial risk of poor work or injury sustained, therefore requires an insurance policy.

Degree of control over the work performed

The business can direct the way in which the employee carries out the work.

The contractor has a high level of control over how the work is done (subject to express requirements under the contract).

Independence

The employee is not working independently of the business.

The contractor operates their own business.

Why is this important?

An independent contractor has a degree of independence from the business, and therefore the terms of engagement are usually negotiated like a normal contractual arrangement.  An employee has certain levels of protection arising from any relevant Modern Award or enterprise bargaining agreement, and Minimum Employment Standards (such as leave entitlements).

Under the applicable award, an employee is entitled to Minimum Employment Standards, including weekly salary and leave entitlements.

Penalties

If a relationship is described as an independent contracting arrangement, but it is in fact an employment relationship, then the business is at risk of being penalised.

Ace Insurance Limited v Trifunovski

Where an agreement is framed as an independent contractor agreement, but the agreement is a true employment agreement, it is sometimes referred to as a “sham contract”.

A key case on this issue is the 2011 case of ACE Insurance Limited v Trifunovski.  The key points from that case were:

  • Look at the level of control, appearance and goodwill;
  • The sale of the insurance product was required to be undertaken by the personal efforts of the individual agents only;
  • The agents were trained in particular techniques of selling which the company had adopted as its own;
  • They worked under close direction, supervision and organisation with a view to selling insurance products in a way determined by the company; and
  • They had no real independence of action or true independence of organisation.

Relevant extracts from the case are reproduced below:

  • Paragraph 2:

This case concerns the question of whether five agents (‘the agents’), none of whom are any longer engaged by Combined, were in fact employees. Each was paid commission on the premiums which they collected; used his or her own vehicle; did not have income tax deducted from earnings; and issued tax invoices to Combined for the services each provided. On other hand, those tax invoices were generated by Combined and issued to itself; the agents accrued no goodwill in their own businesses; were in practical terms quite unable to work for any other insurer; sold only Combined’s policies to Combined’s customers; and were trained by Combined in a system of business devised and maintained by Combined. Having no goodwill, they had no business which could be sold. In real terms, as will be seen, they were also under Combined’s practical control.

  • Paragraph 79:

I have spent some time explaining the training arrangements to emphasise what should already be clear – that the structure of all of these arrangements was Combined’s structure. The training courses were conducted by Combined and the manuals were provided by it too. Territory representatives did not perform the tasks associated with that office because it struck them as a useful business structure – they performed it because it was the only way it could be done.

  • Paragraph 83:

… the act of selling by a sales representative to a new customer did not augment the sales representative’s (non-existent) client base, but, instead, increased Combined’s client base. 

  • Paragraph 84:

Those matters show that the sales representative had no goodwill in the activities they were carrying on. They also show that the activities did generate goodwill but that it ended up with Combined in the form of its lead system. That result is consistent with – and strongly corroborative of – the proposition that the business being carried on by the sales representatives was the business of Combined.

Further guidance on this issue can be obtained from the following websites:

Please note that the “independent contractor decision tool” asks the following questions:

Work conditions

  1. Does your payer have the right to tell you how you should perform your work?
  2. Who decides where you perform most of your work?
  3. Who sets your hours of work?
  4. Can you refuse work from your payer?

Responsibility for work

  1. Who is responsible for commercial risk and any other risks related to your work?
  2. Who supplies the tools and equipment you use to perform your work?
  3. Do you have a business that is independent of your payer’s business?

Expenses and entitlements

  1. Are you entitled to paid leave (such as annual leave and sick leave) from your payer?
  2. How are you paid?
  3. If you incur expenses while conducting your work, who meets these expenses?
  4. How is tax deducted from your pay?

Recruitment and dismissal

  1. How did you find your work?
  2. Can your payer suspend or dismiss you when they want?
  3. Is your contract with your payer task based?
  4. Can you subcontract your work to another person?
  5. Can you undertake work for more than one payer?

Contact Shire Legal if you have any questions about your employment or independent contractor agreement.



Back to Blog
Share on:

Blog

Be careful when you use the word ANZAC | 24.04.2018

On this eve of Anzac Day, we thought it was appropriate to look at the word ANZAC and the legal implications of using the word when naming a product, event or...

Read More

Blog

"I leave everything to my children" - does this include adopted children? | 16.04.2018

CASE UPDATE Last week, the New South Wales Supreme Court considered the issue whether the words "my children", when used in the context of the dec...

Read More

Blog

Know your rights as a beneficiary | 05.04.2018

If you are the beneficiary of a Will it is important to know what your rights are in regards to obtaining and protecting your entitlement. Right to Infor...

Read More