Employees, independent contractors and ‘shams’

It is common for builders and operators in the construction industry to utilise contractors to carry out specific trade skills such as concreting, plastering, bricklaying and plumbing.

Business operators however, need to be cautious when ‘hiring’ skilled or other labour to ensure that they are not in breach of provisions of the Fair Work Act 2009 (Cth) (the ‘Act’). The Act prohibits a person from misrepresenting ‘employment’ as ‘independent contracting’, otherwise known as ‘sham arrangements’.

These arrangements have been predominant in the construction industry and are illegal.

It is important for business operators to understand the difference between an independent contractor and employee.

Misrepresenting employment as independent contracting

Section 357 of the Act states that ‘…a person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.’

Essentially, an employer is prohibited from offering a person a role as an independent contractor when the position to be filled is effectively a contract of employment and should accordingly create an employer / employee relationship between the parties.

In practice, the employer would insist that the ‘contractor’ obtain an Australian Business Number (ABN) and create his / her own business before commencing work. The worker is generally responsible for paying his or her own taxes and insurances.

The worker is treated as an independent contractor and the employer circumvents the obligations that would normally arise form an employment relationship. Consequently, the worker foregoes access to employment entitlements such as payment for annual and sick leave, long service leave, compulsory superannuation contributions and protection from unfair dismissal or termination of employment.

For contractors who are genuinely running a business as a profit-making enterprise this is not problematic. However, in the case of a sham arrangement, the workers may earn a higher hourly rate, but perhaps not conducive to a profit-making enterprise, from which they must pay their own tax, insurance and superannuation. In such circumstances, the sham arrangement results in the employer ‘getting its cake and eating it too’.

Sham arrangements are illegal

It is illegal to inform an (otherwise) employee that he or she is an independent contractor or to dismiss an employee or threaten to dismiss an employee to ‘re-engage’ them in predominantly the same work as they performed whilst they were employed.

Similarly, a person must not induce a former employee to carry out the same type of work as when they were employed under the guise of an independent contractor.

Businesses entering sham arrangements risk significant civil penalties and potential claims for back-pay of employee entitlements such as annual leave payments, sick leave and superannuation contributions.

Example of a sham arrangement

Grant is a labourer and works five days per week, usually ten-hour days, for a plastering firm. He has worked exclusively for that firm for approximately twelve months and is given start and finish times and location details for each job. The plastering firm provides branded shirts for Grant to wear and he uses the firm’s tools.

Grant was told at the beginning of the arrangement that he would need to obtain an ABN and ‘take care of his own taxes and insurances’. He is paid $30 per hour inclusive and is not paid for days when he is sick or over the Christmas period.

The difference between an employee and an independent contractor

The distinction between an employee and independent contractor is not always easy to determine. Generally, a Court will look behind the label given to the arrangement by the parties to identify the factual substance of the relationship.

Primarily, an employment relationship is an exchange of labour (time, skill and effort) for remuneration – the employee serves the employer as opposed to carrying on a business in his or her own right.

If the worker is acting as an entrepreneur who owns and operates an enterprise and as a representative of its own business, then it is more likely that the worker is an independent contractor.

The entirety of the relationship is analysed which might consider the following factors:

  • the degree of control the employer has over the worker;
  • whether the worker works exclusively for the employer;
  • the provision of a uniform, business cards, etc. from the employer;
  • whether the worker undertakes work personally or is free to delegate to others;
  • the location of the work;
  • the method of payment for the work performed – whether at an hourly rate or on completion of a specific project;
  • the responsibility for acquisition and maintenance of equipment;
  • the creation of goodwill of saleable assets through the work performed;
  • the allocation of risk and profit associated with the work;
  • the degree of integration the worker has with the entity for which it works;
  • the existence of leave, taxation, superannuation payments, etc.

Why do businesses use sham arrangements?

A sham arrangement may result from simple ignorance on the part of the business owner or a desire to minimise costs. A worker may even indicate that he or she is ‘happy’ with the arrangement.

Sham arrangements may be prevalent during the start-up phase of a new business where cashflow is limited and the future success of the enterprise unknown. Conversely, businesses may have been running sham arrangements for some time.

The temptation to use ‘contractors’ instead of employing staff usually stems from a desire to circumvent the would-be employer from the financial and other responsibilities that arise from an employment relationship. The employer need not comply with nationally-recognised employment conditions, annual leave, sick leave, workers’ compensation or termination processes.

Conclusion

If you are considering engaging workers for your building projects, you should think carefully about the arrangements to determine whether your workers are truly independent contractors or employees.

The implications of not considering these issues could lead to significant costs.

If you or someone you know wants more information or needs help or advice, please contact us on 1800 640 509 or email mail@sajenlegal.com.au