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If it looks like a duck and quacks like a duck...! – sham contracts and the pitfalls of wrongly labelled relationships

Posted on August 15, 2019

Employers and Employees often mistakenly believe that the terms of their contract reflect the true nature of their employment relationship. This is not the case, and in reality, the Court will look at the relationship as a whole; what the parties do, not what the contract says.

Courts are able to look behind the terms of the contract at the totality of the relationship to decipher whether a worker is in fact an employee or an independent contractor. In doing so, no one factor will be determinative. Further the intention of the parties is immaterial in deciding if a worker is an employee. As such, even though a worker might genuinely want to be an independent contractor, the Court will look at the actions of the parties, and the relationship as a whole, not what they ‘intend’ the relationship to be.

In a recent decision[1] the Fair Work Commission (FWC) found that an employee, Mr Nguyen, was in fact an employee and not an independent contractor. Mr Nguyen began working for Prestige Automotive Services Pty Ltd (the employer) on 9 May 2016. He was dismissed on 5 February 2018. Mr Nguyen was contracted to provide emergency mechanical roadside assistance services to customers of the employer. The FWC upheld the well-established indicia to consider when determining whether or not a worker is an employee or a contractor.

In particular, the FWC considered the following factors to be relevant when deciding that the worker was in fact an employee:

  • The worker did not work for any other company other than the employer.
  • The worker did not employ any other person in any business conducted by him, and did not have the ability to delegate the tasks that were assigned to him by the employer.
  • The worker was required to wear a uniform.
  • The worker used a vehicle provided by the employer which bore the employer’s signage.
  • The equipment used by the worker was predominately owned and supplied by the employer.
  • The employer exercised a high degree of control and there was no practical capacity for the employee to delegate or subcontract work.
  • The worker worked according to a roster prepared by the employer and was paid for the whole period while rostered on rather than on a job by job basis.

The FWC reinforced that the terms of the contract was of no relevance in determining whether or not the worker was in fact an independent contractor. Further, the method of taxation and whether or not the worker was registered for GST was not a relevant factor.

Risks

The risks of getting an employee and contractor relationship wrong is that the employer may be liable for the following:

  • Underpayment of wages claim;
  • Underpayment of superannuation pursuant to section 12(3) of the Superannuation Guarantee (Administration) Act 1992;
  • Workers compensation for any employee of that worker, pursuant to the Return to Work SA Act;
  • Payroll tax;
  • Civil penalties for either a corporation, or an individual as a director.

In another case[2] a company was fined $100,000 and its director $24,000 for a sham contracting arrangement which resulted in an employee being underpaid just $8,000.

Generally, if there is a risk that a ‘contractor’ is in fact an employee, an employer is far better off obtaining specialised legal advice and when applicable, engaging the worker as an employee.

If you require assistance in reviewing your current independent contractor arrangements please contact the employment law team at Lynch Meyer on 08 8223 7600.

[1] Tong Van Nguyen v Prestige Automotive Services Pty Ltd [2019] FWC 93

[2] FWO v ASAP & Anor [2013] FCCA 1502

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