Tuesday, 11 March 2014

Employee v Independent Contractor – Beware Of Sham Contracting

What is a sham arrangement?

A sham arrangement, according to the Fair Work Act, is where an employer falsely represents to a worker that the worker will be employed as an independent contractor under a contract for services, as opposed to a contract for employment.

Whilst the Act does not definitively specify what is, or is not, an independent contractor, cases over the years have developed an array of indicia including (but not limited to) –

  1. Terms of the contract;
  2. If the worker is being paid by the hour or as a lump sum for a particular task or job;
  3. Intention of the parties;
  4. How the worker is paid;
  5. Whether tools are supplied;
  6. Whether sub-contracting is permitted;
  7. Whether the worker performs work for others; and
  8. The extent of control etc

Case study: The Director of the Fair Work Building Industry Inspectorate v Linkhill Pty Ltd (No. 7)

In this case, Linkhill (a subsidiary of Roy Morgan Research Pty Ltd) was found guilty of engaging in sham contracting and was ordered to pay its workers over $175,000 in unpaid wages and entitlements.

Linkhill had engaged 10 workers to undertake renovation works to properties being rented by Roy Morgan. These workers were hired as ‘independent contractors’ and signed contracts to that effect. They were required to generate their own tax invoices and provide their own ABNs.

Despite this, the Federal Circuit Court looked at the “totality of the relationship” and concluded that “there is no single criterion that will necessarily be determinative”. It held that the terms of the contract entered into between Linkhill and the workers were not indicative of the true nature of the employment relationship.

The Court examined over 15 indicia and held that ultimately, the workers:

  • Did not have the right to exercise control over the manner in which the work was performed, as Linkhill directed the workers as to the location, time and manner in which they were to perform their tasks;
  • Were provided with tools;
  • Could not delegate work; and
  • Did not promote to the public their services whilst employed with Linkhill

Whilst each worker had to provide an ABN, the invoicing arrangements were actually imposed on the contractors by Linkhill and the invoices stated the amount of hours worked, as opposed to which tasks or jobs they had completed.

The Court ultimately held that Linkhill had represented to the workers that they would be employed as independent contractors.

Any defences?

The Roy Morgan Group had previously been engaged in litigation (and lost) against the State Revenue Office regarding the employment status of their research workers and its obligations regarding superannuation for those workers.

In this case, Linkhill sought to rely on a defence contained within the Act whereby it stated that it did not know that the contract was a contract of employment rather than a contract for services. The Court disagreed, stating that “given the history of the involvement of Mr Morgan and the Roy Morgan Group in litigation on the issue of independent contractors, it is more likely than not he was aware of the possibility of ramifications if a worker was wrongly categorised”.

Linkhill then attempted to downgrade its level of liability by arguing that in the event that the workers were found to be employees (which they were), the employees were engaged as casual employees and therefore were not entitled to certain entitlements. The Court again disagreed, as it had been proven that the workers mostly worked a 40 hour week, and were required at the construction site between 7am-3:30pm everyday. Therefore, as there was no “informality, uncertainty and irregularity of the engagement” it was held that the “weight of evidence was of regular and systematic work”.

What does this mean for employers?

Employers must objectively assess the categorisation of their employees in order to avoid running into trouble and being subject to hefty damages and fines. As can be seen above, the intention of the parties will not be sufficient to convince a Court or Tribunal that the worker is an ‘independent contractor’ – regard must be had to the total relationship between the employer and worker.

HR Legal can assist you if you are having trouble assessing the status of your workers.


This article was produced by HR Legal. It is intended to provide general information only in summary format on legal issues. It does not constitute legal advice, and should not be relied on as such.

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