Independent Contractors for Employees

Fixed Fee Consultation
Over recent years the use of independent contracting arrangements in lieu of traditional employment relationships has steadily increased.

Independent Contractors for Employees

Over recent years the use of independent contracting arrangements in lieu of traditional employment relationships has steadily increased.

The Legal Issues around Independent Contracting

Over recent years the use of independent contracting arrangements in lieu of traditional employment relationships has steadily increased. In support of the rising proportion of independent contractor arrangements, the Australian Bureau of Statistics “Characteristics of Employment” survey found that of the 12.6 million workers in Australia as at August 2018, approximately 8% were classified as independent contractors.

To a large extent, the increase in use of independent contracting arrangements has stemmed from the need to engage a flexible pool of service providers in order to accommodate the ebb and flow of consumer demands. However, despite independent contracting arrangements becoming more common, there remains a high risk that arrangements labelled as “independent contracting” could indeed be deemed employment arrangements due to the complex law which governs the classification of employees versus independent contractors and the failure to properly consider that law when entering into contractual arrangements.

Quite apart from the risk that an independent contractor could in the future be deemed to be an employee for the purposes of a number of statutory entitlements (including workers’ compensation, National Employment Standards entitlements, superannuation and taxation), business owners must also have regard to the sham contracting provisions of the Fair Work Act 2009 (Cth) which impose considerable penalties for parties purporting to enter into “sham” independent contracting arrangements designed to avoid employee statutory entitlements, rather than reflect the true nature of the engagement.

Peters Bosel Lawyers has significant experience in advising parties to proposed independent contracting arrangements as to whether the proposed terms of engagement do indeed meet the criteria for a true independent contracting arrangement, and in assisting in the drafting of proper independent contracting agreements to maximise protection for businesses.

What is an independent contracting arrangement?

There are a number of different tests adopted by the Australian Courts and Commissions to determine whether a relationship is an independent contracting arrangement or in fact an employment relationship.

Most recently, the approach has been to adopt a multiple indicia test, which incorporates tests previously used and looks to various factors to determine the true nature of the relationship.

Some of the factors which are taken into account when determining the nature of the relationship include:

  • Does the head contractor exercise or have the right to exercise control over the manner in which work is to be performed, including place and hours of work? (the “Control Test”)
  • Is the worker presented to the world at large as an emanation of the business (that is, works at the head contractors premises, is branded with the head contractor’s logos on vehicles and uniforms etc)? (the “Integration Test”)
  • Is the worker engaged as an individual, or is the contract with a company, partnership or trust and payments made to that company, partnership or trust for services?
  • Is payment based on an outcome or predetermined result?
  • Does the head contractor pay on invoice only or by submission of a timesheet?
  • Who provides the equipment, tools of trade, plant or vehicles required to complete the contracted work?
  • Who is liable for the costs of rectifying defective work?
  • Does the agreement require the worker to exclusively work for the head contractor?
  • Who is responsible for income tax and insurance?
  • Does the worker carry the risk of loss or have the opportunity to profit from undertaking the work?
  • Does the agreement provide for annual leave or personal leave?
  • Can the head contractor suspend or dismiss the worker?

Importantly, the basis upon which an independent contractor relationship is defined varies to some degree between various statutory authorities. It is therefore integral that each proposed arrangement is firstly carefully assessed to determine the true nature of the engagement, and secondly, the agreement is properly documented to ensure that the true nature of the engagement is recognised.

The need for a well-planned contract

Much of the grey area, and resultant dispute, surrounding independent contracting arises from not only the failure to understand the true indicia of an independent contracting arrangement, but also the failure to properly document the agreed terms.

As the law in the area of independent contracting is complex and broad, it is integral that all necessary indicia of an independent contracting arrangement are properly documented. In doing so, the parties are also mitigating the risk for dispute during the course of the arrangement. A considered, clearly drafted contract provides parties with clear parameters for the performance of the contracted services and ensures that each party’s expectation is understood, thereby preventing misunderstanding.

Quite apart from addressing the indicia which determines whether the arrangement is in fact an independent contracting arrangement, it is also integral that an independent contract agreement contains common terms of an arm’s length commercial contract such as:

  • A clear and reasonable dispute resolution process;
  • Intellectual property rights;
  • Means by which the contract can be terminated; and
  • Any confidentiality obligations.

In summary

While independent contracting arrangements are attractive in many industries, caution must be exercised in order to ensure that any purported independent contracting arrangement meets the legal criteria. The consequences of incorrectly categorising workers as independent contractors, when they are indeed employees, has significant financial consequences including, but not limited to, back-payment of accrued employee entitlements and potential underpayment of Award entitlements along with penalty rates and other statutory penalties, including penalties associated with sham contracting arrangements.

Peters Bosel Lawyers regularly assist parties to proposed independent contracting arrangements to properly assess the true nature of the arrangement and clearly document the intended terms to minimise dispute and financial exposure.

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