Independent Contractors vs Employees: Easier said than done

As more and more businesses look to move their operations toward more agile structures, the prevalence of procuring the labour needs of a business’s operations through independent contractor relationships rather than traditional employment relationships has grown significantly in recent times. Many businesses have looked towards using independent contractor relationships as they look for arrangements that better suit their operations. However, as some have unfortunately found out, the benefits that may be enjoyed by using such an arrangement can only be legally enforced if the relationship is found in law in the first place.

There is an old adage repeated time and again in this area: “If it looks like a Duck, quacks like a Duck and walks like a Duck; then it’s probably a Duck”. Hence, the danger that often lies in this area of law for businesses and their suppliers of labour alike is that merely intending that an arrangement be one of independent contractor rather than employment may be insufficient. Whether a particular arrangement in law will be one of independent contractor or employment will generally depend not only on the intention of the parties but also on the actual arrangement itself as a whole. So, how does the law distinguish between the two?

For general purposes, the law currently uses a ‘multi-factor’ approach to determine whether a particular arrangement as a whole is one of independent contractor or of employment. Common factors that are looked at include (but are certainly not limited to):

• the degree of control over those carrying out the work;
• the mode of remuneration and provision of entitlements like leave (sick and/or annual);
• whether equipment is provided by those carrying out the work;
• taxation arrangements;
• the ability to delegate work to others;
• whether one is allowed to work for others;
• the percentage of time spent working for a particular employer during the period in question; and
• whether the provider of labour can be said to be “in business” for themselves.

Ultimately, an overall impression of the arrangement will be found by weighing the factors pointing one way against the factors pointing the other – with the relative importance of a particular factor against another being dependent on the unique circumstances in each case.

Further, it should be noted that for specific purposes and some professions, a number of laws made by parliaments (at the state and federal level) have in combination made certain arrangements automatically ones of employment despite an application of the multi-factor test mentioned above finding to the contrary. The arrangements covered (and those not covered) are numerous and are designed to apply to specific purposes from workers compensation and health & safety to taxation arrangements.

As can be seen from what has been mentioned above, determining whether one’s arrangement is actually what one thinks it is can be is no small feat. It has been said that the process of distinguishing between the two in law, for general purposes, is “notorious for the imprecision of its application”[1] and once the effect of legislation is thrown into the mix, the process of categorising a relationship can be become very confusing and resource-intensive task.

Why does it all matter? The risks of getting it wrong are not only numerous but also can be heavy in some cases. Potential liabilities include: employee entitlements in full (e.g. leave, superannuation, other entitlements under industrial awards, etc.), unfair dismissal claims, penalties for breaches of taxation legislation and even penalties of up to $54,000.00[2] per breach of the Fair Work Act 2009 (Cth)[3]. Even arrangements structured to place an incorporated  company in between a procurer and a supplier of labour may not be sufficiently full proof to give rise to a relationship of contractor if found to be a “sham”. A recent case, Fair Work Ombudsman v Quest South Perth Holdings^[4], saw a scheme placing some of its cleaning staff into a labour hire firm not only being declared as ineffective to implement a relationship of contractor as intended, but also the imposition of penalties under the Fair Work Act 2009 (Cth) for misrepresenting the arrangement as being one of contractor rather than employment.

In light of this, it is perhaps advisable that one not only thinks carefully about the nature of their arrangement but also the need to have an individual contractor arrangement in the first place. Ultimately, schemes that try to blend elements of both individual contractor relationships and traditional employment relationships can be difficult to assess and may not hold up to expectation if subjected to the rigours of legal action. Nevertheless, procurers and suppliers of labour should not be discouraged from pursuing independent contractor relationships (and enjoying their benefits) if they can be justified and are arranged and operated properly according to the law.

Unsure of your arrangements? Don’t be caught out! Whether you need to verify an existing arrangement or are looking to implement a new arrangement, Austin Giugni Martin can help you ensure that only hard part is asking whether the independent contractor or employment route is right for you.

[1] Baker v Markellos [2012] SASCFC 114 at [89]

[2] As of 31 July 2015. Relates to fines against Corporations. Value rises by virtue of rises in value of a penalty unit under the Crimes Act 1914 (Cth).

[3] Penalties can be imposed not only on the businesses itself but also on its principals/directors and employees of the business personally that are found to be “involved in a contravention” of the Fair Work legislation.

[4] [2015] FCAFC 37 & [2015] HCA 45

 

If you would like to discuss the above, please contact us on (02) 8076 4539.

This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. The publication reflects the law at the date the publication was written, which may differ at the date the publication is being read. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.

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