Sham contractor arrangements for employees

You would think it would be easy to figure out who are your employees. However, this is not always the case.

Hiring empoloyees means you take on costs and responsibilities beyond just their wage. Superannuation, payroll tax, workcover — there are a lot of additional expenses of having an employee and sometimes this means businesses are tempted to contract someone to do the work rather than hire them and so avoid the expenses you incur with hiring an employee.

It's not just that simple. The "contractor" themselves or regulatory bodies may later want to argue that what a business managed as a contract was actually an employment relationship — which can have significant cost and legal ramifications.

The principle behind deeming a contractor to be an employee is to avoid the concept of sham contracting — where employers attempt to disguise employment agreements by forcing employees to be independent contractors, which is usually done for the purposes of avoiding the responsibility for employee entitlements. The Fair Work Act provides serious penalties for any employer who tries to create a sham contracting arrangement with employees.

Additionally if a contractor is deemed to be an employee, this could have a significant financial effect on the business as you may be required to pay superannuation, accept a Workcover claim on their behalf or have to pay other entitlements, such as annual leave, long service leave, redundancy pay or even costs associated with unfair dismissal.

So, how do we know if someone would be considered an employee or a contractor? The key indicators taken into consideration include:

1. The Uniform
2. Degree of Control by you
3. Hours of Work
4. Who held the responsibility for risk and insurance
5. Superannuation
6. Tools & Equipment
7. Method of Payment and Tax
8. Whether the "contractor" was working solely or predominantly for the one business

These elements are indicative only and any one or a number of them may suggest that a contractor is actually an employee depending on the circumstances.

So, expanding on those criteria the sorts of things that are taken into consideration are:

The Uniform

• If a contractor is required to wear a uniform, they may be considered a representative of your company and may be deemed an employee.

Degree of Control by you

• If your contractor performs work under your direction and control on an ongoing basis, they may be deemed an employee.
• Characteristically, a contractor has a relatively high and independent level of control when it comes to the way in which they carry out work. For example, a contractor can send who they like to complete the work, can negotiate or liaise with you in regard to timeframes or completion of work, may source their own product or materials and are not specifically dictated to in the way in which the work is done by the person who has engaged them. By comparison an employee is directed how to complete work and when it is done.

Hours of Work

• A contractor is able to set their own hours and decide when and how to complete a specific task. They are not required to be at a job, for example between certain hours, unless they choose to be there in those hours themselves.
• Characteristically, employees are directed to be at a specific job or undertake a specific task for a directed period of time by you. Say for example, you direct a person to be a job from 9.00 am–5.00 pm on a regular basis, your contractor may in fact be deemed an employee.

Risk

• A contractor takes the responsibility as to whether or not they make any money at all from a specific task, takes responsibility for any poor workmanship, has their own Workcover, Public Liability and other insurances in place for work.
• An employee by comparison bears no financial risk at all for their work. It is completely the employer's responsibility to rectify poor workmanship, to ensure that all insurances are in place and that employees are covered.
• If your contractors are covered under your insurances, this may be one indicator that they are in fact employees and not independent contractors.

Superannuation

• Employees are paid superannuation by their employer. Contractors by comparison are not paid superannuation and are responsible for their own superannuation contributions

Tools & Equipment

• Independent contractors generally supply their own tools and equipment for the task they have been engaged to perform.
• By comparison, employees are provided with a tool allowance or given all tools and equipment required to complete a job at the direction of their employer.

Method of Payment and Tax

• Employees have their tax paid by their employer and receive a net amount into their nominated account.
• By comparison, a contractor pays their own tax and GST to the Australian Taxation Office.
• Employees are paid at regular intervals, either weekly, fortnightly or monthly. They are usually paid at a set rate per hour or on salary and are entitled to annual leave, personal leave, long service leave, leave loading, days in lieu and other workplace entitlements.
• Contractors have their own ABN and submit an invoice for work completed before they are paid. While they may on occasion charge a per hour rate depending on the service provided, usually they are paid per item.

So what should a business do to avoid problems in this area?

If you are entering into a contract for ongoing services with a contractor, make sure you have us advise you regarding the proposed contract terms to make sure it doesn't expose you to the risk of the arrangement later being challenged to be a employer/employee relationship

If the information provided in this article gives you concern about any of your current arrangements, make sure you immediately seek individual advice from our business lawyers so we can work with you to review the situation and put an effective arrangement into place

If you are concerned that any of your current arrangements or agreements need further scrutiny to ensure that they are in fact as they are required by the parties, please feel free to contact us on 03 5445 1000 to discuss further.