The dangers of engaging contractors who are not really contractors
Engaging contractors — seek advice
Confusion over the difference between a contractor and an employee continues to result in employers being penalised for getting it wrong.
A recent decision at Fair Work Australia (FWA) has illustrated yet another possible consequence when a court or tribunal finds that a contractor should be treated as an employee.
Given the lack of clarity in this area, businesses should get advice about whether a person they call a ‘contractor’ is really a contractor at law.
Contractor found to be an employee for the purposes of the definition of a ‘small business’
In a recent decision of FWA, concerning an unfair dismissal application, Commissioner Jones has found that two persons engaged as contractors by a business, to provide IT and bookkeeping services, were actually employees for the purposes of determining whether the employer fell within the definition of a ‘small business’.
The Fair Work Act 2009 (the Act) defines a ‘small business’ as one that employs less than 15 employees. An employee of a small business must serve 12 months before becoming eligible to make an unfair dismissal application, with other employees having to serve only 6 months.
In the matter before Commissioner Jones, Chee v Renown Business Solutions Pty Ltd [2012] FWA 5137, the terminated employee argued that the employer was not a small business, as it employed more than 15 employees. The employer argued that two of the people that had been counted as employees were in fact contractors.
The two people in question:
- provided services to the business;
- supplied invoices to the business for those services;
- were paid gross amounts; and
- provided the same services to other companies.
Nonetheless, Commissioner Jones found that for the purposes of the Act the two contractors should be counted as employees.
The main factor that Commissioner Jones took into account in reaching her decision was that the two persons held themselves out as employees of the business, with business cards and email addresses that characterised them as working for the business rather than their own company.
Further, the business exercised a large degree of control over the activities of the two persons.
As a result, the terminated employee was successful in having his unfair dismissal application accepted for determination, as the 12 month exclusion did not apply.
What does this decision mean for employers?
This decision illustrates yet another danger of engaging contractors in circumstances where they may be found to be employees.
This is in addition to the more usual risks, such as:
- exposure to prosecution under the sham contracting provisions in the Act;
- possible liability for underpayments and annual leave if a contractor is found to be an employee;
- liability for superannuation guarantee charge if the contractor falls within the category of workers who are entitled to have superannuation contributions paid;
- liability for pay as you go (PAYG) withholding obligations and payroll tax if the contractor falls within the extended definitions in the tax legislation.
The Fair Work Ombudsman has been particularly active in investigating and prosecuting businesses who fall foul of the sham contracting provisions in the Act. In one case, an HR Manager was found personally liable for sham contracting and fined of $3,750 (Fair Work Ombudsman v Centennial Financial Services [2011] FMCA 459).
Similarly, the ATO has recently announced that it intends to audit 20,000 businesses in this financial year in a bid to stop sham contracting, and has warned that it would impose penalties on businesses who fail to manage the risks.
The experience of some clients has been that simply being subject to an FWO investigation is a significant drain on resources, and is likely to result in legal costs being incurred just in responding to the FWO.
Manage the risks to minimise your exposure
The best way to manage the risks associated with contractors is to get professional advice prior to engaging them to ensure that they are actually contractors at law.
Some other tips when engaging contractors are:
- Even if a so called contractor has an ABN or a trading name, this alone does not mean they are not your employee at law;
- It can assist to have properly drafted contractor agreement in place, although the courts will look beyond the written agreement in making their assessment; and
- Normally, contractors should not be engaged to perform services that would ordinarily be performed by a direct employee.
This is a complex area of law, and the penalties for getting it wrong can be significant. Penalties for breach of the sham contracting provisions in the Act are up to $33,000 per breach for a corporation and $6,600 for an individual.
The ‘accessorial liability provisions’ in the Act mean that company employees, officers and directors are also exposed to prosecution and penalties for these breaches.
More information
For more information about managing the risks involved in engaging contractors, please contact a member of our Employment and Workplace Relations team on (03) 8600 8888.
Note: This update is a guide only and is not intended to constitute legal advice.