The risk of sham contracting: independent contractors vs. employees

What’s the difference between independent contractors and employees? Does your business utilise both? Have you unknowingly exposed yourself to large underpayment risks and other substantial penalties? The reality is that dealing with independent contractors is tricky, and the line between employees and contractors is often blurred.

In this article, we explain everything you need to know so you can spot the differences and protect your business.

Employee or contractor? What’s the difference?

While there’s several factors that may be relevant to assessing the employer-employee relationship or independent contractor relationship, there has been a shift from the traditional approach. The previous approach looked at a holistic consideration of all formal and practical aspects of the working relationship, focusing mainly on who had control of the way work is performed. While these factors are still considerations that courts will have in deciding whether a relationship is that of an employee or contractor, the new focus is on the drafting and content within written contracts and agreements.

Businesses should be paying attention to specific clauses within written agreements concerning indicators like:

• Are the hours of work set or negotiable?
• Is the individual engaged to complete specific work?
• Is there an ongoing expectation of work?
• Does the employer pay superannuation?
• Does the employer deduct tax from the individual?
• Does the individual have access to leave entitlements?
• Does the employer pay the individual regularly?
• What are the termination clauses?

In addition, the contractual agreement issued should explicitly state whether the contract’s one of an employer-employee relationship or a principal-independent contractor relationship. This involves a consideration of whether the contract is one for service or one of service. Since employees and contractors have different rights and obligations, the question of which relationship an individual falls under has massive implications for an individual’s entitlements, including leave, minimum wages, and access to unfair dismissal claims. In addition, a business that engages in sham contracting can be fined $582,500 per contravention!

Sham contracting is becoming more and more common in Australia with at least one law firm reportedly considering legal action to determine whether technology services such as Uber, Foodora, and Deliveroo (which recently ceased operating in Australia) are using sham contracting to evade minimum rights and entitlements. It’s now more important than ever to ensure you’re correctly engaging individuals in your business.

How can you minimise risk? 

Citation HR Software is our innovative Human Resources Information Solution (HRIS) and it’s included in every Citation HR subscription! It contains all the tools and checklists you’ll need to ensure you’re lawfully engaging independent contractors. Our checklist contains an array of documentation, including:

• Robust Independent Contractor Agreements;
• Confidentiality Agreements;
• A suite of company policies and procedures; and
• A place to upload and store the person’s insurance details, including Workers Compensation Insurance, Public Liability Insurance and Professional Indemnity Insurance.

About our author 

Amanda Curatore is a qualified Solicitor and Senior Associate at Citation Legal. Based in our Melbourne office, Amanda is highly experienced in providing workplace relations advice and assistance to clients in a wide range of matters. Amanda is a dedicated professional and frequently supports both Citation Legal and Citation HR with various marketing initiatives including hosting webinars, writing blog articles and preparing content for various events and publications.