Independent Contractor Update

Do you really need this worker to be an Independent Contractor: the heavy and unnecessary price for mischaracterising Employees as Independent Contractors

What is the problem?

Businesses are often attracted to the idea, and specifically requested by individuals, to engage people as Independent Contractors instead of Employees.  For businesses, the drivers are usually the perceived benefit of reducing traditional employee costs such as: superannuation, workers compensation and leave arrangements.  Individuals requesting such arrangements are usually driven by purported taxation advantages for items such as: work cars, smart phones/IT and home office expenses.

Unfortunately none of these purported benefits/savings outweigh the significant risks of mischaracterising an Employee as an Independent Contractor.  Failing to engage an individual, regardless of the intent or their request, as an Employee, may result in significant fines and other penalty orders (under employment, payroll tax, superannuation and workers compensation legislation – Roy Morgan Research recently was order to pay over 300K in penalties) not to mention having to compensate Employees for items such as: leave, penalty/overtime rates and allowances (Ace Insurance was ordered to pay former employees entitlements of over 500K).

The further complicating factor in all of this is that claims are unlikely to be made during the employment relationship.  They are most likely to occur after an individual has left the organisation and – usually after some form of unresolved dispute.  As a result, businesses may find themselves having historically large claims that they have no ability to otherwise resolve or recover should adverse findings be made against them.

How are the courts treating this?

This area of the law is highly technical and the case law is generally of little specific precedent value given each decision materially turns on the particular facts of each engagement for a given business.  Having said that, decisions such as the recent High Court case of Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45 consistently demonstrate that for an individual to be characterised as an independent contractor they must demonstrate the primary hallmark of the individual separately running their own business – not being part of an existing business.  Practically this means it will almost be impossible to properly characterise individuals as Independent Contractors if they are performing the same work as they had previously performed as Employees, even if they have their own ABN and their wages are paid by a labour hire organisation.

In a further worrying trend, the decision of The Director of the Fair Work Building Industry Inspectorate v Robko Construction Pty Ltd & Anor [2014] FCCA 2257 indicates the increasing willingness of courts to make orders personally against specific individuals, including directors, in such cases.

What can you do to control your legal risks?

To mitigate the risk that a court/regulator will find that an “independent contractor” is an employee, businesses should:

  1. Assess what is really valued by the business – as what is valued may determine the initial choice and future options.  If it is control/integration that is valued, an employment relationship is likely to provide better protections around restraints, confidentiality and day to day direction.  If on the other hand flexibility/termination is valued, an independent contractor arrangement may be the key but don’t overlook the options of casual or even specified term/task arrangements available for employees;
  2. Take advice – from a workplace relations specialist upfront before entering into a specific relationship, particularly with high risk areas such as individual/sole traders.  As we identified earlier, intent and even requests from a particular individual to enter into such an arrangement, are largely irrelevant when a court/regulator comes to determine this issue;
  3. Utilise tailored documents – to bolster and/or remove doubt for critical indicators which are likely to be relied on by regulators and/or courts if in dispute.  Whilst it is almost impossible for ‘legal drafting’ alone to change the fundamental characteristics, there are many circumstances where the ‘true picture’ may not be so clear and businesses may benefit from additional legal drafting to more accurately explain the position and remove ambiguity;
  4. Be ‘Upfront’ – with reasons (ie legal, operational and/or strategic) as to why you can (or cannot) engage a particular person as an Independent Contractor.  This may later form valuable evidence as to the legitimate reasons behind the decision, particularly where it is supported by other ancillary evidence;
  5. Critically assess and ensure that any documents such as contracts, information statements and training reflect the true nature of the engagement – avoid a “cut and paste” from your existing employment related documents for an independent contractor.  Documents must fit the ‘horses for courses’ mantra.  Using the same documentation usually identifies the same relationship;
  6. Train your personnel – to identify and understand the differences between an employee and a contractor and make them aware of the risks of mischaracterisation; and
  7. Continue to perform audits – on your existing relationships and be prepared to make changes where unreasonable risks are identified.

If you have any queries or would like further information, please contact:

Joe Mullavey
M: 0416 794 061

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