Independent Contractor or Employee – There Are Financial Consequences If You Get It Wrong And Sham Contracting can Lead to Fines for Employees Involved in the Contracting Practices.

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Independent Contractor or Employee – There Are Financial Consequences If You Get It Wrong And Sham Contracting can Lead to Fines for Employees Involved in the Contracting Practices.

There are significant ramifications for companies and businesses that seek to classify employees as independent contractors when they get it wrong.

When determining whether an individual is an employee or an independent contractor it is important to consider the nature of the relationship as an employment relationship creates obligations in relation to annual leave, long service leave, sick pay and superannuation.

In addition, obligations to pay payroll tax and workers compensation premiums impact on a business’ decision to engage independent contractors instead of employees.

So how does a dispute arise?

Generally a person classified as an independent contractor who contends they are an employee will claim employment related benefits, seek workers compensation benefits or allege a breach of the Fair Work Act and underpayment of statutory entitlements such as wages, sick pay and annual leave.

Further a charge may be issued by the ATO for payment of a superannuation charge for non-payment of compulsory superannuation benefits. Alternatively a Union or the Workplace Ombudsman may prosecute a business and its directors and employees that participate in arranging the contracting practices for breaches of the Fair Work Act stemming from the failure to pay statutory entitlements.

There have been two recent decisions that provide guidance on what may occur when a person treated as an independent contractor claims to be an employee.

The recent Federal Court decision in On Call Interpreters & Translators Agency Pty Limited v Commissioner of Taxation (No.3), provides useful guidance on the way that the Court will approach the examination of the relationship between a business and the persons it engages to provide services.

On Call provided interpretation and translation services. It received requests from clients and then matched jobs with interpreters or translators on its panels. The interpreters were free to accept or reject jobs and undertake work provided by rival companies. The interpreters wore name badges provided by On Call and were not permitted to swap jobs amongst themselves.

In 1989 On Call had asked the ATO whether it considered these interpreters to be employees or independent contractors and the ATO had accepted they were independent contractors. The ATO however changed its mind and a superannuation guarantee charge was issued upon On Call for failure to pay prescribed superannuation contributions for the benefit of the translators.

The Federal Court was then called on to determine whether or not the translators were independent contractors. It was necessary for the Court to examine the nature of the relationship between the parties and Justice Bomberg noted that a number of factors needed to be taken into account.

Justice Bomberg noted that the Court uses what he called “the “smell test” or a level of intuition”.

The issue was whether the person performing the work was an entrepreneur who owns and operates a business and in performing the work, was the person working in and for that person’s business as a representative of that business and not of the business receiving the work.

Whilst the interpreters regarded themselves as independent contractors, they did not generally use business names, advertise their services, subcontract or hold their own insurance. On Call had in excess of 2,000 people on its books and no employees.

Applying the smell test and considering the relevant factors, Justice Bomberg concluded that the translators were employees.

Even though the translator could accept or reject assignments, this was only one consideration to determine whether or not On Call had the level of control of an employer engaging casual employees.

Accordingly, there was an obligation to pay compulsory superannuation payments for the translators.

On another level in a case before the Federal Magistrates Court, The Fair Work Ombudsman sought to prosecute Centennial Financial Services a director of the company and its HR manager for his role in sham contracting practices of the company.

Centennial Financial Services engaged a number of employees as “corporate associates”. The employees were terminated and re-engaged as independent contractors. A sham contract occurs when an employer tries to disguise an employment relationship as an independent contracting relationship.

The Workplace Ombudsman sought to prosecute the company and its HR manager for a sham contracting arrangement resulting in breaches of the Fair Work Act and non payment of entitlements including wages and annual leave.

That prosecution was successful as the corporate associates were employees and the contracting practice was implement to create savings for the business.

The Court noted the workers were engaged to sell and distribute the company’s financial products and the new consultancy agreement did not reflect the nature of the relationship.

In the Centennial Financial Services case, whilst the director was the controlling mind of the company, the HR manager was essentially involved in the arrangements. The HR manager was responsible for ensuring the company complied with relevant Workplace Relations Laws and was therefore centrally involved in the unlawful activities.

Federal Magistrate Cameron determined that both the director and the HR manager had breached the Fair Work Act and imposed fines totalling $3,750.00 on the HR manager and $13,200 on the director and ordered the proceeds be paid to the employees whose underpaid benefits were in the order of $50,000.

In this case a company, its director and its HR manager were liable for their involvement in sham contracting arrangements.

The Centennial Financial Services case sounds a clear warning to employees that they may be liable for breaches of workplace relations law when they participate in an employer’s attempt to disguise an employment relationship as an independent contracting relationship arrangements Its not as simple as arguing that the HR manager simply did what they were told as that argument failed in the case.

Employers who breach the Fair Work Act can be fined up to $33,000. Actions can be brought by a worker, a union or the Fair Work Ombudsman.

The ATO can issue a charge to recover unpaid superannuation benefits.

As can be seen, not only can a company but its directors and HR managers may be held liable for breaches of the Fair Work Act when it comes to non payment of statutory benefits to employees. Sham contracting has serious consequences.

The risk is there for businesses, directors and HR managers who get the classification of employees wrong. Will you be looking at a claim for unpaid wages, sick leave, holiday pay, long service leave or compulsory superannuation benefits.

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