When is a contractor really an employee?

Tuesday 1 December, 2015 | By: Colin Fruk | Tags: HR, regulation, sham contracting

You'll be hard-pressed to find an employer who enjoys paying leave loading, workers' comp, super or tax. But the law takes a dim view of bosses who try to pass employees off as contractors to avoid these costs.

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To protect the rights of workers, there's a well-defined line between how an independent contractor should work and when they deserve the extra entitlements that legally belong to an employee. The Fair Work Act 2009 calls crossing that line "sham contracting" - when an employer attempts to disguise an employment relationship as an independent contracting arrangement to avoid these entitlements.Our business world runs on flexible workplace resourcing models like contractors and casuals.

If you run a workforce that ramps up or down with demand, then this aspect of the law is well worth mastering. Getting caught sham contracting can attract a penalty as high as $54,000, and ignorance of the law is not accepted as an excuse.

Employee and contractor: What's the difference?

The courts assess nine key indicators to define whether a person is a contractor or an employee. While every workplace is different, these indicators give a pretty good working definition of how to employ someone:

  • Employees generally work under the direction and control of their employer, while independent contractors exercise more personal control.

  • Employees carry no financial risk, while contractors bear the risk of making a profit or a loss from the job.

  • Employers are paid superannuation and leave; contractors generally aren't.

  • Employees get tax deducted by their employers but independent contractors pay their own PAYG and GST.

Remember, just because the workers you engage bring their own tools to work and have their own ABN, it doesn't mean a court will rule they are a contractor. Even if a worker is happy to call themselves a contractor, ignorance of the law is no excuse and it's the employer who will be penalised. Trade-based businesses are notorious for passing off labourers as sub-contractors and the newspapers are filled with stories of small firms being caught. 


Rules to live by

Keep in mind that the Fair Work system was designed to protect the rights of workers, not bosses. The Fair Work Act defines three clear actions which are bound to get employers in hot water. Break these rules and you're looking for trouble.

  • Don't tell an employee that he or she is an independent contractor.

  • Don't dismiss or threaten to sack an employee so that you can hire them again as an independent contractor, especially if it's to do similar work.

  • Don't lie to an employee - or a former employee - to persuade them to do much the same work on a contractual basis.

Like many other aspects of employment law, sham contracting is something you need to know more about than the people who work for you. What might seem like a tax-effective decision today could spell the end of your business down the track.

CCIQ's Employer Assistance Service can help you understand your rights and responsibilities as a business owner. If you need help or guidance, we're here to look after you. Call 1300 731 988 or contact us onlineYou can also use the Australian Taxation Office's decision tool to make sure you've set up your supply arrangements properly. This video explains:

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