Failing to classify workers correctly as an employee or an independent contractor can land business owners in hot water and in breach of Fair Work(FW) laws.
In a recent decision of Erin Shay v Christopher Shannon  FWC 2815 published 21 May 2021, Deputy President Gostencnik found that a worker was an employee, despite the worker being engaged under an ABN and providing an invoice for payment.
Determining whether your worker is an employee or independent contractor will impact the obligations you owe as an employer, as well as what rights the worker is entitled to receive. So, it is essential to ensure you have correctly classified your worker to avoid harsh penalties from Australian Taxation Office (ATO) and/or Fair Work Ombudsman (FWO).
Importantly, the first step towards protecting your business is understanding the difference between whether a worker is an employee or independent contractor. We’ve set out some key indicators to help you making this determination, remembering that the FWO looks at the entire relationship.
Some of the differences between employees and contractors that will be taken into consideration:
- Control: Do you have the right to exercise detailed control over the way work is performed, or does the worker have full autonomy?
- Advertising the business: Do you require the worker to wear a uniform or display material that associates them with your business?
- Providing and maintaining significant tools and equipment: Do you require the worker to supply and maintain any tools or equipment (e.g. laptop, software, mobile, vehicle)?
- Right to delegate or subcontract work: Is the worker free to work for others at the same time? Can the worker subcontract or delegate work to others?
- Income taxation deductions: Do you deduct tax from the worker’s pay?
- Payment: Do you pay the worker according to task completion, or pay wages based on time worked?
It’s against the law to call a worker a contractor while treating them as an employee. This is called ‘‘sham contracting”.
There are serious penalties if you mischaracterise workers to avoid your employment obligations – e.g. you will be required to pay the worker any unpaid wages or leave entitlements.
As business owners, you should ensure you take proactive steps to protect your organisation against such breaches.
WHEN IS AN INDEPENDENT CONTRACT DEEMED TO BE AN EMPLOYEE?
In the very recent decision detailed above, a jurisdictional objection was raised by Mr Christopher Shannon (the “Respondent”) who contended Ms Erin Shay (the “Applicant”) had not been “dismissed” as she had been engaged as an independent contractor and not an employee.
The Respondent contended the Applicant was engaged as an independent contract for services. This question had to be decided before an adverse action claim by the Applicant could continue.
It is important to note the work was described as “hosting work”:
– there was no written contract;
– the Applicant :
- was required to attend a venue and set up and host a “Pick a Box” game;
- was required to visit different venues and work for approximately 2hrs each shift
– The Applicant would submit an invoice for the work performed under her ABN. It was also accepted this ABN was primarily used for the services she provided when performing in a band and the Applicant did not regard the work she performed for the Respondent as part of her business.
Deputy President Gostencnik referred to the authority of Jiang Shen Cai trading as French Accent v Do Rozario  FWAFB 8307 (“French Accent”) for the approach to examining the difference between employees and contractors. In French Accent, the Full Bench summarised the approach as:
(a) the objective character of the relations by considering the terms of the contract and the totality of the relationship;
(b) the nature of the work performed and the manner in which it is to be performed;
(c) the terms and terminology of the contract; and
(d) considered the various indicia identified in Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 which were whether the:
(i) putative employer exercises, or has the right to exercise, control over the manner in which work is performed, place or work hours and the like;
(ii) worker performs work for others (or has a genuine and practical entitlement to do so);
(iii) worker has a separate place of work and/or advertises his/her service to the world at large;
(iv) worker provides and maintains significant tools or equipment;
(v) work can be delegated or subcontracted;
(vi) putative employer has the right to suspend or dismiss the person;
(vii) putative employer presents the worker to the world at large as an emanation of the business;
(viii) income tax is deducted from remuneration paid to the worker;
(ix) worker is remunerated by periodic wage or salary or by reference to completion of tasks;
(x) worker is provided with paid holidays or sick leave;
(xi) work involves a profession, or trade or distinct calling on the part of the person engaged;
(xii) worker creates a goodwill or saleable assets in the course of his or her work; or
(xiii) worker spends a significant portion of his remuneration on business expenses.
The Full Bench’s approach in summary of Stevens indicia at paragraph  noted “it should be borne in mind that no list of indicia is to be regarded as comprehensive or exhaustive and weight to be given to a particular indicia will vary according to the circumstances. Features of a relationship in a particular case which do not appear in this list may nevertheless be relevant to determination of the ultimate question”.
DETERMINING THE RELATIONSHIP
Deputy President Gostencnik stated at paragraph  that “the proper approach to ascertaining whether the contractual relationship is one of employee or of principal and contractor requires an examination beyond the mere consensual label attached to the relationship by the parties” and as such, “requires one to look at relationship the parties have actually brought into existence”. Deputy President Gostencnik added further that “mere labels coloured by perfunctory devices such as invoices for ‘services’ rendered often do no show the whole picture and so one must look beneath them to the real substances of the relationship”.
In determining the relationship, Deputy President Gostencnik compared the substance of the relationship to the established principles, including:
(a) Control: The Applicant did not have practical control over the way in which the services were conducted, and it was the Respondent who controlled when the work was to be performed, where the work was conducted and instructed on how the work was to be carried out;
(b) Provision of tools and equipment: The Applicant did not supply any tools or equipment and the Respondent supplied all equipment necessary for the work. The Applicant only used her vehicle for going to the workplace which is the usual practice for employees to arrive to the designated workplace;
(c) Entitlement to delegate or subcontract the work: The Applicant could not delegate the work;
(d) Uniform, branding and integration: The Applicant was required to wear a branded shirt with her name embroidered on it as well as black pants and shoes. The shirt was branded “Shannon Entertainment” which showed the association the Applicant had with the Respondent;
(e) Goods and services tax: The Respondent did not deduct tax from the payments made to the Applicant which demonstrated the Applicant was responsible for her own tax;
(f) Provision of invoices and periodic payments: The provision of an ABN on an invoice did not weigh very heavily in favour of the contractor relationship. This is not because the Applicant operated under an ABN for this service, though rather it was because of how the Respondent required the process to be done. Furthermore, the invoice was paid at an hourly rate, not at completion when the work was done;
(g) Paid leave: The Applicant was not paid leave, but this is the same for a causal employment relationship;
(h) Nature of the work: The Applicant did not need a specialist skill or profession to carry out the work; and
(i) Proportion of remuneration spent on business expenses and exposure to losses: There was no evidence that the Applicant spent money on the business as all advertising, equipment and uniforms were paid by the Respondent.
MORE PRACTICAL IMPLICATIONS AND TIPS
There are different legal and taxation consequences which arise from employer-employee relationships and principal-contractor relationships.
For example, the Fair Work Act 2009 (“Act”) prohibits “sham contracting”. This refers to a situation where an employer disguises an employment relationship as an independent contracting relationship, to avoid their employment obligations. Where an employer is found guilty of breaching the Act with regards to the sham contracting provisions, they may face penalties per contravention and be liable for the full range of employment obligations in respect of the employee.
The decision highlights the importance for employers to correctly engage employees and independent contractors. The Courts have well-established principles to determine whether a person is engaged under a contract of services and a contract for services. Each type of contract has differing rights and responsibilities. A contract of service is when an employer engages a person to perform roles as an employee within their organisation whilst a contract for service is strictly a business-to-business engagement.
Employers must not just only look at one element of the relationship but at all the elements that make up the relationship that has been created between the parties.
If you require any assistance with ensuring you are engaging people correctly to avoid you breaching your legal obligations and facing consequences, please with Akyra for advice and assistance.
Akyra can provide you with a review of contractor and staffing arrangements, employment agreements, wages and entitlements to ensure you are compliant with the Fair Work Act.
Every industry and business will have unique requirements and for further guidance or advice on Human Resource Management.
Contact us now to book a time to discuss your areas of potential HR concern, thereafter we will provide a way forward where it might be needed.
Contact us on 07 3204 8830, for an obligation-free conversation or to discuss any queries you may have.
Disclaimer – Reliance on Content
The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.
Source: HR Law 02.06.2021
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