Sometimes, people choose to work as Independent Contractors rather than Employees as it suits them to have the flexibility that being an Independent Contractors provides. Independent Contractors are not part of a business’ PAYG obligations and are responsible for their own taxation. They are not paid superannuation and aren’t eligible for leave. However, they are often able to set their own work schedules and have the flexibility of contracting into other roles with different organisations. Remuneration is often set, so the relative advantage is shared between the business and the Independent Contractor.
However, just because both parties agree to these arrangements doesn’t mean they will automatically stand up to the scrutiny of Fair Work Australia or the ATO. According to the law if an individual is working in the capacity of an Employee, it is an offence under the Fair Work Act (2009) to deprive them of these rights by creating a ‘sham’ contract specifying that they are Independent Contractors. Under s539 of the Act, people who commit this offence may be liable for hefty fines.
In the recent case of Fair Work Ombudsman v Global Work And Travel Co Pty Ltd, Global employed numerous individuals. The contracts specified that they were Independent Contractors, not Employees. However, the workers performed many of the ordinary duties of Employees. They were not required to bring their own materials to work, and instead relied on Global to provide materials for them. When answering the phone, they would identify themselves as ‘emanations’ of Global Work and Travel. These factors assisted the court in their decision to name the individuals as Employees, rather than Independent Contractors.
Businesses should exercise caution, as there is the potential for a disgruntled Independent Contractor to apply to Fair Work Australia for action if they have been improperly classified as a Independent Contractor and not as an Employee. Similarly, the ATO may look to the situation as a potential scheme to obtain unfair advantage and reduce costs associated with employing individuals. Anyone can report a business that they suspect is incorrectly treating their Employees as Independent Contractors.
Some important factors to consider when deciding between Independent Contractor and Employee are:
- Do they have their own ABN?
- Do they pay their own insurance?
- Do they identify as an individual or as part of the employer’s business?
- Can they take holidays or set their own work hours?
- Do they provide their own equipment?
- How are they paid? (i.e. wage or invoice)
- Can they work for others or delegate work to sub-contractors?
Not providing an Employee with the benefits they are entitled to by labeling them a Contractor is a serious offence and can lead to hefty fines. For peace of mind, ensure you distinguish correctly between Employee and Independent Contractor