There’s one thing I see businesses get wrong more than almost anything else in this area: they treat “contractor” as a status they can choose, rather than a description of what the relationship actually is.
At a very basic level, within a business context, contracting involves one business engaging another business to provide goods or services. That other business might operate as a sole trader, partnership, or company.
If a relationship doesn’t appear to have that character, and instead resembles a person working in and for your business, then it's worth looking further into whether that person should actually be engaged as an employee.
Consider the relationship
Whether someone is an employee or a contractor is determined by looking at the relationship as a whole. No single factor decides the question.
Depending on the circumstances, relevant factors can include whether:
- The person uses their own equipment
- They bear the cost of failing to deliver the work
- They can delegate the work
- They can work for other businesses at the same time, and
- The level of control over their working hours
This means businesses shouldn’t rely on a single aspect of the arrangement as evidence that someone is a contractor.
In particular, the fact that a worker:
- Asked to be engaged as a contractor
- Signed a contractor agreement
- Has an ABN
- Provides invoices for their work...
... does not, by itself, determine that they are a contractor.
The first point is worth dwelling on, because it comes up constantly and it’s genuinely dangerous. It's very common for a worker to ask to be engaged as a contractor, but the preference of the worker does not determine the legal nature of the relationship.
The Fair Work Ombudsman provides useful guidance on this (including examples of the factors businesses should be considering).
There can be significant consequences if the classification is wrong
If a business classifies someone as a contractor, operates on that basis, and it's later determined that the person was actually an employee, there can be significant pay implications.
The business may become liable for the employment entitlements that person should have received across that period.
Businesses should also be cautious about assuming that all amounts previously paid to the contractor can simply be offset against any employment entitlements that are later found to be owing.
The ability to offset those payments is not guaranteed, and the business may not be able to eliminate the full liability.
RELATED: Changing A Sponsored Worker’s Role, Salary, Or Conditions (What Employers Need To Know)
Businesses should also be aware of sham contracting laws
The Fair Work Act contains sham contracting provisions designed to stop employers avoiding employment obligations by treating employees as contractors.
If a worker is actually an employee, simply describing them as a contractor does not change the legal reality of the relationship. Breaches of the sham contracting provisions can result in significant penalties.
Some employers assume that saying they believed the worker was a contractor will be enough. In certain circumstances, a reasonable belief may provide a defence.
However, simply failing to turn your mind to the issue is unlikely to establish that reasonable belief. Businesses that engage contractors should understand why the relationship has been classified that way and ensure there is a reasonable basis for that classification.
Avoid creating confusion between employment and contracting
Businesses should also be careful about providing contractors with benefits, incentives, or working arrangements that resemble employment.
For example: I have personally witnessed businesses provide contractors with certain types of leave in line with the National Employment Standards (such as annual leave or personal leave) while continuing to operate the relationship as one between a contractor and principal.
Arrangements like this can create confusion about the true nature of the relationship. If a person is being engaged as a contractor, the way the arrangement operates should be consistent with that.
Review contractor arrangements periodically
I recommend that businesses periodically review the contractors they engage.
Relationships can change over time, and an arrangement that may have started as a clear contracting relationship can gradually begin to resemble employment.
A periodic review gives businesses an opportunity to identify whether any of their contractors are drifting towards employment and address the issue before it becomes a larger problem.
Just as importantly, seek advice before engaging a contractor (not after a claim lands). It's a far cheaper problem to prevent than to fix.
The key point is that calling someone a contractor does not make them one.
If there is uncertainty about how a contractor should be classified, Xemplo Legal can assist businesses in reviewing their contractor arrangements and identify any potential employment law risks.
This article provides general information only and does not constitute legal advice. It does not take into account your specific circumstances and should not be relied on as a substitute for advice tailored to your situation. For advice about your particular circumstances, please contact Xemplo Legal.
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