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Workers can be engaged either as independent contractors or employees. Whilst there is no specific definition of what differentiates an independent contractor from an employee, it is important to determine the nature of the work relationship. This is because employees have entitlements and protections under workplace legislation that independent contractors do not.

A mistake about the nature of the relationship can be costly in circumstances where a worker who was treated as an independent contractor brings a claim asserting that they are/were in fact an employee and brings a corresponding claim for back pay of entitlements.

In determining whether a worker is an independent contractor or an employee, a Court will consider “the totality of the relationship.” Whilst no single factor is determinative, the following are some of the factors which are often taken into account:

  • who is responsible for directing work flow;
  • who bears the commercial risk for work performed;
  • who provides tools and equipment necessary for the job;
  • whether there is any ability to delegate or sub-contract tasks;
  • whether payment is based upon output versus hours of work and how payment is made (i.e. invoicing); and
  • whether there is any ability to perform work for others.

The Fair Work Act 2009 (Cth) (“FW Act) prohibits the entering into of ‘sham arrangements’ or ‘sham contracts’, whereby a worker is classified as an independent contractor but, in reality, is really an employee. Any attempt by an employer to enter into a sham contract with an employee is an attempt to relieve itself from providing the employee with the entitlements and protections to which they are entitled under the FW Act is prohibited.

Misleading an employee into entering into an arrangement whereby they will become an independent contractor whilst performing substantially the same work which was performed whilst they were an employee is also prohibited, as is dismissing an employee with the intention of re-engaging them as an independent contractor to perform the same work.

In Fair Work Ombudsman v Jooine (Investment) Pty Ltd & Anor [2013] FCCA 2144, an employer was found to have engaged in the following contraventions of the FW Act:

  1. Misrepresenting to the employee that his employment relationship with the employee was an independent contracting agreement (s.357(1) of the FW Act);
  2. Failure to pay minimum rates of pay to the employee (s.45 of the FW Act); and
  3. Failure to pay amounts required to be paid to the employee in relation to the performance of work in full (s.323(1) of the FW Act).

The employer was a cleaning business which engaged the employee, who was a South Korean national and who had limited proficiency in English as a cleaner. The employer, and the sole director, shareholder and company secretary of the employer (whom was also the sole recruiter and trainer) engaged the employee to work but represent to him that he was engaged as an independent contractor. The employer required the employee to obtain an ABN and to submit invoices, however otherwise directed all other aspects of the employee’s work including:

  • The employees hours of work;
  • The type of work to be performed; and
  • The equipment and uniform to be worn.

Upon an audit of the employer’s business by the Fair Work Ombudsman, the sham contract arrangement was discovered and the employer was subsequently prosecuted by the Fair Work Ombudsman.

In his judgement, Lloyd-Jones J Held that the intention of the employer:

“in the way that he had structured both his business and contracting arrangements was to avoid a substantial part of the operation of the FW Act by not retaining people in a normal employer-employee relationship, thereby avoiding a significant and important part of the protections provided by the FW Act to employees and responsibilities of their employer.” 

Further, his Honour held that: 

“This can only be seen as a deliberate attempt to avoid substantial and protective provisions of the FW Act. Consequently, the penalty made in this matter should be a strong and specific deterrent to [the employer] and to others who seek to pursue this type of contacting versus employment structure. The deterrent should also extend to the advisors who have facilitated the orchestration of these scams, to prevent their further proliferation of such advice and facilitation.” 

The company employer was ordered to pay $47,520 in penalties in relation to breaches of the FW Act and the individual sole director and shareholder was ordered to pay $9,504. These penalties were in addition to damages payable to the employee in relation to underpayment of wages.

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