To avoid legal ramifications, employers should
clearly define whether they are entering into an employment
relationship or an independent contractor relationship with an
Theoretically, the distinction between an employee and a
contractor is simple - employees work in your business and are part
of your business, contractors run their own business and provide
services to your business.
In practice, however determining whether an employed person is
an employee or a contractor is a far more complex issue. The
consequences of getting it wrong are considerable for an employer
and its directors.
'Sham contracting', where an employer claims there is an
existing independent contractor arrangement with an employee when,
legally, there is an employment arrangement in place, is an offence
under the Fair Work Act 2009 (Cth).
Employers found guilty of 'sham contracting' can be
fined up to $51,000 (for a company), per offence. Company directors
and other 'persons', such as HR Managers, can also be
prosecuted, the fine for each offence is $10,200.
There are also taxation withholding issues and superannuation
guarantee legislation requirements to be considered.
The TattsBet Case
In a significant decision, the Full Court of the Federal Court
(the Court) recently reversed a first instance decision and held
that the relationship between a former TattsBet agency operator,
Mrs Morrow, and Tattsbet Limited (Tattsbet), constituted an
independent contractor relationship rather than an employment
In its decision, the Court made the following propositions
while respective parties' beliefs about their relationship
(i.e. employer-employee relationship or independent contractor
relationship) is of some weight, it is not necessarily
no single factor is likely to be able to consistently indicate
whether a particular relationship between two people is that of
employer and employee. Some factors will attract more weight in
particular cases than they will in others; and
the "test", if there is one, is said to be
multi-factorial. All of the relevant circumstances need to be
weighed and the totality of the relationship identified.
In its decision, the Court pointed to the following factors as
indicators that the operator at the betting agency, Mrs Morrow, was
an independent contractor rather than employee:
The agreement. The agreement with TattsBet
provided that Mrs Morrow was an independent contractor by way of
acknowledgment by Mrs Morrow and this was consistent with the
arrangements Mrs Morrow set up for herself as a business
Remuneration. Mrs Morrow was renumerated by
reference to the value of the business transacted at the premises
Ability to employ others. Mrs Morrow was free
to employ others to assist her or, on occasion, to work in place of
her. She employed the staff working at the agency, and undertook,
as principal, the conventional obligations of the employer such as
paying the required workers' compensation;
Personal net income. There was a striking
divergence between the gross remuneration received by Mrs Morrow
for operating the agency and her personal net income from the
Superannuation and Tax. The absence of PAYE
deductions and the presence of GST collections by Mrs Morrow and
her general compliance with the GST regulatory requirements, such
as the preparation of the relevant BAS returns.
Although Mrs Morrow's actual work requirements left little
distinction between her position and that of an employee manager,
the Court determined that these features, in combination, meant
that Mrs Morrow was a contractor.
This decision marks a movement away from a recent emphasis in
several court decisions as to whether the employee, in performing
the work, was operating as an "entrepreneur" who owns and
operates a business.
The Court held the so-called "entrepreneur" test was
no more than one of the various factors to be considered in all of
the relevant circumstances which needed to be weighed to identify
the totality of the relationship.
The decision also highlights the significance of taxation
arrangements such as the deduction of PAYG instalments or the
remittance of GST.
This decision is a good result for employers who enter into
genuine independent contractor relationships where the other party
is aware that they are not entering into an employment
As an employer, if you have any unclear employment arrangements
with staff or contractors, to avoid hefty fines associated with
sham contracting, it is very important that you assess each
employment relationship in terms of all factors the courts will
take into account.
(Tattsbet Limited v Morrow  FCAFC 62)
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.Madgwicks is a member
of Meritas, one of the world's largest law firm
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An employee that refused a reasonable offer of settlement was ordered by the FWC to pay his ex-employer's legal costs.
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