Are your contractors ACTUALLY contractors?

By Portner Press on May 20th, 2019
  1. Industrial Instruments
  2. Fair Work Act

Last month the Federal Government announced it would be providing $20 million in extra funding to the Fair Work Ombudsman (FWO) over the next four years.

Out of that funding, $9.2 million will be used to establish a dedicated unit to specifically target employers engaged in sham contracting.

If the FWO suspects that you are involved in a sham contracting arrangement, you can face the following penalties:

  • up to $12,600 for individuals, per contravention; and
  • up to $63,000 for a company, per contravention.

You can also be liable to compensate the worker for any employment entitlements they would have otherwise accrued, such as annual leave.

If you hire independent contractors, it is essential you know that they really are independent contractors.

The line between an employee and independent contractor is often blurred and unwittingly entering into a sham contract can be surprisingly easy.

Even if your employee sees themselves as a contractor and is happy with the working arrangement, this doesn’t mean that you aren’t breaking the law.

In the table below, examine 17 indicators courts and tribunals will look at when determining if a contractor actually is a contractor or an employee.

Indicator Suggestive of employee Suggestive of contractor
1. You have significant capacity to control and direct the manner in which the contracted work is performed.

2. The worker has the right and capacity to perform work for others.  

3. The worker has a separate place of work and is able to advertise their services to others.  

4. The worker has the right to delegate or subcontract work.  

5. The worker is represented to be part of your business e.g. through a uniform or business cards.

6. You remunerate the worker with a regular wage-type payment based on time served.

7. You remunerate the worker based on and subject to completion of results.  

8. You can suspend or dismiss the worker.

9. The worker pays their own expenses associated with work.  

10. The worker has an Australian Business Number (ABN) and (if applicable) is registered for GST.  

11. You deduct PAYG tax in relation to the worker.

12. You dictate the rate you pay the worker for services.

13. The fee paid to the worker for services is negotiated  

14. The worker can increase the profit or net return on remuneration by changing the way services are provided to you.  

15. The worker is paid during leave from work.

16. The worker uses their own tools or equipment when providing services.  

17. The goodwill created by the worker’s activity is the worker’s goodwill, not the goodwill of your business.  

It is important to remember that no single indicator will clearly determine a worker’s status. Employers (and employees) can attempt to arrange their taxes to unlawfully claim a contractor relationship.

In the Employment Law Practical Handbook there is a an entire chapter dedicated to sham contracting which details what steps you can take to avoid sham contracting and what to do if you have to defend a sham contracting claim.

The Handbook is available on a free, no-obligation trial if you aren’t already a subscriber.

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