Independent Contractors or Employees? An important distinction

21 June 2018

Transport companies often have people working for them, or providing services to them, in a number of different capacities. In addition to full-time, part-time and casual employees, transport companies may engage drivers or other workers who are described as independent contractors and who may rely exclusively on the transport company for work and income and be subject to significant control of their activities by the transport company.

Engaging workers as independent contractors rather than employees, or substituting employees for independent contractors, might seem attractive for a business on the face of it because independent contractors are predominantly excluded from the workplace laws set out in the Fair Work Act 2009 (Cth) (Fair Work Act). True independent contractors do not accrue paid leave entitlements, are not covered by awards (or enterprise agreements) that may impose a range of loadings, allowances and penalty rates and are not able to make unfair dismissal claims.

However, wrongly classifying a worker as an independent contractor when they are really an employee means that all the benefits and entitlements contained in the Fair Work Act are available to the worker, and could be retrospectively credited to them. In addition to having to retrospectively compensate the worker for up to 6 years of unpaid accrued paid leave entitlements and wage underpayments, the misclassification could also result in penalties of up to $63,000 per breach (or up to $630,000 for serious contraventions) being imposed on the organisation for breach of the National Employment Standards, any applicable award/agreement and for engaging in ‘sham contracting’. Additional penalties of up to $12,600 per breach (or up to $126,000 for serious contraventions) may also be applied personally against individuals (including directors and managers) who have been involved in, aided, abetted, induced or caused the ‘sham contracting’ and any related breaches of the Fair Work Act to occur.

Note: This article only considers the distinction between an employee and independent contractor for the purposes of the Fair Work Act. Under workers compensation, superannuation and taxation laws, even genuine independent contractors can be ‘deemed employees’ for those purposes.

Independent contractor v employee – the test

Unfortunately, there is no definitive test to determine whether a worker is an independent contractor or an employee at common law. It is only when the relationship is considered in its totality that the legal nature of the relationship can be ascertained. Just because a worker has an ABN and invoices the organisation or has signed an ‘independent contract agreement’ does not necessarily mean that they are an independent contractor.

On occasions when the distinction between independent contractors and employees has been tested in the Courts, judges have recognised that the distinction may be finely balanced. The Courts will look at a range of factors to characterise the true nature of the relationship. A non-exhaustive list and how they are generally viewed is summarised below.

  • The greater the degree of control that an organisation exercises over the worker, the more likely it is that the worker is an employee and not an independent contractor.
  • If a worker has an obligation to work, rather than choosing whether or not to accept the work, the more likely it is that the worker is an employee and not an independent contractor.
  • If a worker is able to delegate work to others outside of the organisation, it is more likely that the worker is an independent contractor and not an employee.
  • If a worker is responsible for providing their own tools and equipment the more likely they are to be an independent contractor and not an employee.
  • A worker who is represented to the public as part of an organisation (for example by wearing a uniform with the organisation’s logo, using the organisation’s business cards or email account) is more likely to be an employee than an independent contractor.

Sham contracting and the multiplier effect

Sham contracting is the deliberate or reckless misrepresentation by an organisation to a worker that an employment arrangement is an independent contractor arrangement. It is specifically prohibited by the Fair Work Act and attracts the penalties mentioned above.

The effect of engaging in sham contracting or misclassifying employees as independent contractors is that it can cause breaches of workplace laws by an organisation to multiply quickly and exponentially.

For example: if an employee has been misclassified as an independent contractor the organisation will inevitably not have paid the employee annual leave or personal leave, or penalty rates and allowances that may be applicable under a modern award or enterprise agreement. Each of these matters are separate contraventions of the Fair Work Act that can each attract separate penalties.

In some circumstances the multiplier effect of misclassifying employees as independent contractors can be so substantial that it can threaten the viability of the business to continue operating.

How are claims for breaches of the Fair Work Act, including for sham contracting, brought by employees against organisations?

Claims of sham contracting, and related allegations of non-compliance with the Fair Work Act, will generally be pursued against organisations in one (or a combination) of the following three ways:

  • a worker obtains legal advice, often after their contract has ended, and pursues the organisation directly with the assistance of their personal representative (and sometimes without their assistance);
  • a Union brings a claim on behalf of a worker or group of workers; and/or
  • the Fair Work Ombudsman commences an investigation (generally after receiving a complaint) that may lead it to prosecute the organisation for breaches of workplace laws.

The Fair Work Ombudsman has received a large injection of government funding in the preceding 12 months. Recent legislation has increased its powers as well as increasing the maximum penalties tenfold that may be sought by individuals, unions and the FWO against organisations1.

If you are unsure or have doubts about whether your workers may really be employees compliance with workplace laws generally in the transport sector, please contact our Workplace Relations team.