2 min read

Distinguishing between an employee and an independent contractor

The Case Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (2015) Quest South Perth Holdings decided to convert its workforce from employees to independent contractors by engaging Contracting Solutions as a labour provider. The Fair Work Ombudsman (FWO) commenced proceedings against Quest, alleging that its conduct contravened the sham contracting provisions of the Fair Work Act 2009 (Cth). These provisions prohibit an employer from misrepresenting an employment relationship as an independent contracting arrangement. The Verdict In the first instance, a single judge of the Federal Court found that Quest had not breached the sham contracting provisions. The FWO appealed this finding. On appeal, the Full Federal Court applied the ‘business test’, focusing on whether the workers were engaged in the conduct of their own business or whether they were simply working in Quest’s business. Applying the business test, the Full Federal Court held that the workers were employees of Quest. None of the workers were operating their own business and none had any real understanding of what it meant to be classified as an independent contractor. The evidence showed that all the workers wanted to do was to continue their work with Quest. Nevertheless, the Court dismissed the FWO’s claim that Quest had contravened the sham contracting provisions. This was because the representations made by Quest about the nature of the working arrangements were not between the workers and Quest, but between the workers and Contracting Solutions. The FWO has appealed the decision to the High Court.

The Lesson

It is extremely important to correctly characterise the nature of a working relationship.

If the worker is an employee, you will need to withhold and remit income tax, make superannuation contributions and pay payroll tax, among other things.

If the worker is an independent contractor, the worker will usually be responsible for their own insurance, income tax and, in some cases, their superannuation contributions.

If your business is structured on engaging workers as independent contractors, this characterisation needs to be sound from the outset in order to avoid penalties and claims.

You also need to carefully consider and construct the terms of the engagement. Seek legal advice if you are unsure.

Please note: Case law is reported as correct and current at time of publishing. Be aware that cases in lower courts may be appealed and decisions subsequently overturned.

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