By Stephen Booth, Principal; Anna Ford, Lawyer and Enza
Engaging staff as contractors rather than as employees raises
some difficult issues.
Firstly, the law regarding whether a particular person is
"really" a contractor or an employee is notoriously
difficult to apply, so the risk of a "contractor" being
found to be in fact an employee, with award pay entitlements
(including overtime and penalties) and accrued entitlements to
leave, is ever present.
Secondly, whatever the general legal position may be, specific
legislation regarding income tax, superannuation, payroll tax and
workers compensation contains varying rules regarding liabilities
of the employer/principal, some depending on whether the person in
question is a contractor or not under common law rules, and some
applying even if the person is a contractor under those rules.
The Fair Work Act has added to this mix another area of
difficulty in relation to "sham contracting". The Act
provides that it is an offence (penalty up to $33,000 per offence
for a company) to engage in the practice of "sham
contracting", which is essentially:
misrepresenting to a person that they were engaged as a
contractor when "really" they were an employee (applying
this rule in turn depends on the notoriously vague common law test
referred to above and whether the alleged offender knew or was
reckless as to whether or not someone was actually an
dismissing or threatening to dismiss a person in order to
re-engage them as a contractor
making false representations to induce an employee or
ex-employee to become a contractor.
Traditionally, the best way to confirm a person's status
as a contractor has been
to have a written contract in place which includes provisions
demonstrating that the substance of the relationship is
implementing the work and the relationship in such a way that
it is in fact contractual rather than employment in nature.
The relevant factors include who controls the work and supplies
tools, materials, skills and so on, whether the contractor is a
company or an individual and has business outside this particular
relationship, and how you treat issues usually incidental to
employment such as paid leave, deduction of tax, and insurance.
The Fair Work Act makes it even more important to pay attention
to these sorts of issues and to manage arrangements with
contractors properly. The Fair Work Ombudsman has announced that
sham contracting will be one of its enforcement priorities in 2011,
citing situations where relatively unskilled workers such as
security officers, receptionists, cleaners and casual retail
assistants are engaged as contractors (and implicitly exploited
relative to their entitlements were they employed) and their
engagement is, pretty clearly, really one of employment.
For assistance with advice on applying the distinction
between employees and contractors in particular circumstances,
preparing effective contractor agreements and managing contracting
arrangements, please contact Stephen Booth, Anna Ford, or Enza
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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