Australia: Contractors v Employees: The differences and why it matters - Part 1

Industrial and Employment Law
Last Updated: 8 March 2011

Article by Andrew Tobin, Partner

1. Introduction

The aim of this paper is to provide an overview of the regulatory considerations facing employers/principals who enter into contracts for service with contractors, or who are considering doing so as an alternative to a typical employment arrangement.

The paper has been divided into the following subject areas with the view to providing a practical perspective to employment law practitioners and HR professionals:

  • Contracting arrangements over employment arrangements: What's the attraction?
  • 'Rights' of contractors
  • 'Employer' obligations and liabilities in relation to contractors
  • Tax considerations
  • Contractor or employee? Tests for telling the difference
  • 'Failing to plan': The decision in Ripley v Ingles Marketing
  • Drafting a contracting agreement: Considerations

2. Contracting: What's the attraction?

2.1 Employers/principals

The perceived lack of regulation of, or government interference in, contracting arrangements, in contrast to employment relationships, is attractive to prospective employers. The primary alleged typical attractions include the ability to avoid:

  1. unfair dismissal and related employment-type claims; and
  2. various costs and administration issues associated with typical employment arrangements, including:
    1. the obligation to comply with statutory entitlements applicable to employment, such as those prescribed by the National Employment Standards under the Fair Work Act 2009 (Cth) (eg to provide paid sick, carer's, annual and other kinds of paid and unpaid leave);
    2. the obligation to comply with industrial instruments, such as awards and the various obligations they impose on employers relating to such things as rates of pay and payment for work outside ordinary hours and overtime;
    3. the obligation to withhold and remit tax under the PAYG system; and
    4. liability for statutory superannuation.

Other considerations which may be less apparent, or are not always considered by prospective employers, include:

  1. Workers' compensation: If considered at all, employers promoting contracting arrangements will generally conclude that they have no obligations to contractors in relation to workers' compensation matters.
  2. Vicarious liability (ie employer/principal liability for loss or damage caused by a worker): Our experience is that most employers are not concerned about, nor appreciate, the prospect of vicarious liability when pursing a contracting arrangement over an employment relationship. The common assumption – that a principal will not usually be vicariously liable for loss or damage caused by a genuine contractor – is not necessarily a safe assumption to make. At best, contracting may involve some 'risk shifting', including the prospect for avoiding vicarious liability.
  3. Payroll tax: Historically, employers in Queensland were not liable for payroll tax on remuneration paid to contractors. However, amendment of the Queensland payroll tax legislation in 2008 as part of the national payroll tax harmonisation process saw the introduction of 'contractor provisions' which deem parties to certain kinds of contracts to be employers and employees, and therefore payments made under such contracts to be 'wages' subject to payroll tax.

2.2 Workers

The major attraction for workers to undertake contracting arrangements, as opposed to entering into a contract of employment, is the (perceived) capacity to achieve tax benefits, such as:

  1. income tax deductions for work related expenses, not available to regular PAYG employees; and
  2. income splitting potential to reduce overall taxation liability.

2.3 Is the nature of a particular engagement up to the parties?

Having identified the attractions of a contracting arrangement, the next question is whether characterisation of a proposed engagement as a contracting arrangement – or contract for services – as an alternative to a typical employment arrangement – or contract of service - is optional?

While the intention of the parties to an engagement as to its character will be relevant – and often very important to the determination of that character1 – it is not the sole determinant.

Ultimately, the true nature of an engagement is a question of law. This is where the difficulty arises, because parties often try to squeeze what they want to look, feel and operate as a contracting engagement into a box of fact and circumstance that may not easily lend itself to that characterisation.

3. 'Rights' of contractors

3.1 Unfair dismissal claims

Genuine contractors cannot access the unfair or unlawful dismissal jurisdictions provided for in the Fair Work Act 2009 (Cth) (FWA). Employers therefore do not have to worry about fair or lawful dismissal of people engaged to work as contractors. Only an 'employee' can be 'dismissed' - fairly, lawfully or otherwise - and no categories of workers, other than employees, can be treated as employees for the purpose of the statutory dismissal jurisdictions. For these purposes the classification of a worker as an 'employee', rather than something else, is determined by the common law (discussed below).

However, the status of a worker as a contractor will sometimes be disputed (after termination by the principal of the contract) by the worker bringing (among other possibilities) an unfair dismissal claim. Proceedings of that kind in these circumstances will require a determination, as a preliminary issue, of the status of the worker.2 The risk of this type of claim can be substantially ameliorated by proper consideration of the issue before or at commencement of the relationship.

The risk of exposure to claims of this kind is elevated to some extent by the fact that, at least in the preliminary stages, access to the unfair dismissal jurisdiction does not require significant expense or formality.

But even where the characterisation of a worker as a contractor is not disputed, the contractor may still have access to other potential remedies if aggrieved by circumstances surrounding termination, or other aspects, of their contract.

3.2 Common law claims

Termination of a contracting arrangement, like any other contract, might result in some kind of common law claim for damages based on an alleged breach of the contract. Expense, complexity and cost/benefit considerations will, in many circumstances, mitigate against the possibility of a common law claim. Furthermore, in most circumstances, it should be possible to reduce the risk of exposure to common law claims arising out of a contracting arrangement through appropriate documentation of the engagement at its commencement (eg through the contract termination provisions).

3.3 Unlawful discrimination claims

A contractor may bring a claim for unlawful discrimination if the basis for termination of their contract was a ground upon which discrimination in the 'work area' is prohibited, such as race, sex, age, disability, family responsibilities, and so on.3 As with unfair dismissal claims, and at least in the early stages, proceedings of this kind can be initiated without substantial complexity or expense. However, the range of remedies available for unlawful discrimination is much wider than those available in either the unfair dismissal jurisdiction or at common law.

3.4 Unfair contract claims

Until commencement of the Work Choices reforms in March 2006, contractors in some jurisdictions, including Queensland, had access to statutory jurisdictions for relief from 'unfair' contracts.4 These jurisdictions were largely relegated to irrelevance by the Commonwealth march, initiated by the Work Choices reforms, into the regulation of industrial matters generally, and largely manifested today in the State/federal cooperative scheme constituted by the Fair Work legislation. In their day, the unfair contract jurisdictions were a powerful tool in the hands of disgruntled contractors.5

The Work Choices reforms included the Independent Contractors Act 2006 (Cth) (ICA), which introduced a national unfair contracts regime operating largely to the exclusion all existing unfair contract laws in force under State legislation. The ICA, largely unaffected by the Fair Work reforms, is based on the premise that commercial, not industrial, law should govern genuine contracting relationships.

Under the ICA, some types of services contracts can be reviewed by the Federal or Federal Magistrates' Court upon either or both of the grounds that the contract is 'unfair' or 'harsh', and the Court can make a range of orders to redress any deficiencies found.6

The introduction of the ICA was a major departure from State unfair contract provisions, which traditionally provided for significant compensation where contracts were found to be unfair. Although the applicability and remedies provided under the ICA appear to be limited, employers contemplating contracting arrangements should be familiar with the potential for claims under the ICA.

Like the unfair dismissal jurisdiction, at least in theory, the unfair contract jurisdiction is more 'approachable' than the common law jurisdictions. Among other things, it has some costs advantages for prospective claimants, as the exposure of the parties to costs orders in proceedings under the ICA is limited.7

However, the jurisdiction is also limited in other ways. Significantly, while it is available to both natural persons and corporate contractors, in the latter case relief can only be sought where a company director or members of their family are performing the relevant work (ie generally to smaller owner-operator type businesses).8 The jurisdiction also does not extend to the review of services contracts for the performance of work for private or domestic purposes.9

When determining the issue of fairness, the court may take into account, among other things, the relative bargaining strengths of the parties and whether the total remuneration provided under the contract is, or is likely to be, less than what would have been paid to an employee performing similar work (ie under the terms of an award that would have applied to the work if performed by an employee).10

In an appropriate case, the court has the power to order that terms of the contract be re-written, that parts of the contract have no effect, or the contract be set aside, provided in all cases that the relief ordered is limited to that which is required to undo that aspect or those aspects of the contract found to be 'unfair' or 'harsh'

While the remedial provisions in the legislation do not expressly refer to awards of compensation, compensation can be awarded to remedy established unfairness. In the recent Federal Magistrates' Court decision in Keldote Pty Ltd & Ors v Riteway Transport Pty Ltd11, the court awarded compensation to several successful claimants, amounting in total to $100,000.

The ICA unfair contracts jurisdiction has not seen significant litigation since it became available in early 2007 and, as at March 2011, the Keldote decision is the only material example of how the jurisdiction might be used.

Potentially, the utility of the jurisdiction might be also be eroded by the general protections jurisdiction introduced by the Fair Work reforms from mid 2009, through which contractors acquired a range of additional rights and access to remedies.

3.5 General protections: Claims to enforce 'workplace rights'

The FWA provides contractors and potential contractors with protections relating to what the Act calls 'workplace rights'.12 These provisions are contained in Part 3-1 of the FWA which deals with a range of 'general protections', most of which will usually apply or relate to employment rather than contracting situations.

The effect of the provisions relating to 'workplace rights' – in relation to both employees and contractors – is that one person cannot take 'adverse action' against another person for a reason related to a 'workplace right' of the second person (eg because they have the right, have exercised it or proposed to exercise it; or to prevent exercise of the right).13

The concepts of 'adverse action' and 'workplace right' are broadly defined by the legislation.

'Workplace right[s]' extend to a range of potential industrial rights, including the potentially very broad and general right 'to make a complaint or enquiry' to an industrial regulator, such as the Fair Work Ombudsman14, to seek compliance with a workplace law or workplace instrument.

'Adverse action' in the case of contractors and potential contractors is defined to include such things as terminating a contract, altering the position of a contractor to their prejudice, refusing to use a contractor's services under an existing contract, refusing to engage someone as a contractor generally, or discriminating in the terms or conditions of engagement offered to a prospective contractor.15

A breach of the adverse action provisions has two potential consequences.

The first is liability in the person or persons who engaged in the action to a civil penalty – up to $33,000 for a corporation and up to $6,600 for individuals.

The second is that, in the current context, an aggrieved contractor, or industrial inspector on their behalf, can commence proceedings in the Federal or Federal Magistrates' Court seeking a range of remedies, extending to 'any order the court considers appropriate'. The applicant can seek not only compensation, but also recovery for their own benefit of any civil penalty ordered by the court to be paid.16

The impact that the availability of remedies to contractors or those seeking work as contractors in the general protections jurisdiction remains to be seen. The jurisdiction is, however, generating significant interest, and seemingly increasing numbers of claims, in the employment context.17

Those engaged in contracting workers would be very well advised to develop some understanding of workplace rights and adverse action as they relate to contracting arrangements.

3.6 Claims for employment entitlements

A true contracting arrangement will usually eliminate the prospect for award coverage or for the applicability of default statutory entitlements associated with employment (eg in relation to rates of pay, hours of work, penalty provisions, paid and unpaid leave, entitlements upon termination and so on). These entitlements generally depend upon the existence of a contract of employment.

Contracting principals may, however, experience problems where:

  1. the contracting arrangement is a sham, undertaken to disguise what is, in truth, a contract of employment (discussed further below);
  2. the nature of the engagement is uncertain and a claim is made, during or after the end of the engagement, for unpaid employment-based entitlements (eg under an award, enterprise agreement, or National Employment Standard). The risk of such claims can be relatively enduring; they can be brought at any time within six years after the potential liability arises18; or
  3. it is clear that the engagement is a contracting arrangement, but the worker later claims that the terms of the contract are unfair, having regard to award entitlements that would otherwise have applied had the work been performed under an employment contract. This situation is specifically contemplated by the unfair contracts jurisdiction under the ICA discussed above.19

3.7 Claims for relief from 'sham arrangements'

Division 6 of the general protection provisions in the FWA prohibit sham contracting arrangements.20

The specific conduct prohibited by the sham contracting provisions is:

  1. misrepresenting an employment contract as a contract for services;
  2. dismissing or threatening to dismiss an employee in order to re-engage them as a contractor to perform substantially the same work; and
  3. making a false statement to an employee, or former employee, in order to persuade or influence them to enter into a contract for services to perform substantially the same work.

Contravention of any of the prohibitions can attract liability for a civil penalty (up to $33,000 for corporations and $6,600 for 'involved' individuals), and entitle the worker, or an industrial inspector on their behalf, to commence proceedings in the Federal or Federal Magistrates' Court for other civil relief in the general protections jurisdiction.

The risks of these kinds of claims were recently demonstrated in a successful prosecution by the Fair Work Ombudsman of a corporate employer, its sole director and Human Resources Manager for a contravention of what is now s357 of the FWA, which prohibits misrepresentation of an employment contract as a contract for services: Fair Work Ombudsman v Centennial Financial Services Pty Ltd & Ors.21

1. See, for example, the recent decision in Vella v Integral Energy [2011] FMCA 6 (31 January 2011) where, upon an interlocutory basis, the Federal Magistrate's Court characterised a 37 year work arrangement between the parties as a contracting, rather than employment, relationship. In reaching that decision Driver FM expressed the view that "[l]eaving aside taxation shams and arrangements imposed by duress and a gross inequality of bargaining power I see no general reason to deconstruct the fundamental nature of the relationship which the parties intended." (emphasis added).

2. See Barrett v Create (Geelong) Inc T/as Create [2010] FWA 5576; Freestone v Morris & Partners Pty Ltd [2009] AIRC 223; Kennedy v Oceania Aviation Services Pty Ltd (2003) 174 QGIG 196; Doe v Sunlourve Pty Ltd (2003) QGIG 114.

3. See, as one example among others, the Anti Discrimination Act 1991 (Qld), ss7, 14, 15 and 15A and the definition of 'work' in the Dictionary to the Act which extends to 'work under a contract for services'.

4. See Industrial Relations Act 1999 (Qld), s276.

5. See eg the decision in Tomac Enterprises Pty Ltd v Newmont Pajingo Pty Ltd [2005] 178 QGIG 35 (23 December 2004). In that decision, in the exercise of the unfair contracts jurisdiction then available to contractors in Queensland, the Queensland Industrial Relations Commission awarded a corporate contractor compensation of more than $400,000. The decision was upheld on appeal to the Queensland Industrial Court.

6. ICA, ss12, 15 and 16.

7. ICA, s17.

8. ICA, s11(1)(b).

9. ICA, s11(1)(a).

10. ICA, s15.

11. [2010] FMCA 394.

12. FWA, ss340-345.

13. FWA, s340.

14. FWA, s341.

15. FWA, s342.

16. See FWA ss539, 545 and 546.

17. For a recent wider ranging discussion see The General Protections Provisions of the Fair Work Act 2009', by Claire Howell, delivered to the Union Lawyers and Industrial Officers NSW - Annual Labour Law Conference, February 2011 available online at (accessed by the author on 25 February 2011).

18. FWA, s544.

19. ICA, s15(1)(c).

20. FWA, Division 6 of Part 3-1 – Sham Arrangements, ss357-359.

21. [2010] FMCA 863.

© HopgoodGanim Lawyers

Gold Employer of Choice - ALB magazine, April 2010
Finalist, Brisbane Law Firm of the Year, ALB Australasian Law Awards 2010

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click Contractors v Employees: The differences and why it matters - Part 2 for the next article.
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