Engaging Independent Contractors

Before engaging an independent contractor it is important to determine whether they would be more appropriately classified as a staff member of the University.

Employee and/or Independent Contractor

There are different types of working relationships under the law in Australia. Most people working for the University in a teaching and research capacity will be considered employees at law and are seen to have entered into a contract of service with the University. They have set minimum entitlements that are provided to them under the University of Adelaide Enterprise Agreement 2010 – 2013 (Enterprise Agreement).

A person who is an employee of the University will usually report to a supervisor who will be responsible for that person’s work direction. Work undertaken by an employee needs to be carried out in a particular way in accordance with the University policies, practices and procedures. Ordinarily, the University would control how the work is performed throughout an employee’s engagement.

An independent contractor is usually a person who has established their own business and puts themselves out into the marketplace in a commercial capacity undertaking work for a variety of different clients. An independent contractor will enter into a contract for services with the University and is usually paid to achieve agreed results within an agreed timeframe. An independent contractor generally controls how and when the work is performed. 

What is a ‘Sham’ Contracting Arrangement under the Fair Work Act 2009?

A ‘sham’ contracting arrangement occurs when an employer deliberately disguises an employment relationship as an independent contracting arrangement, instead of paying the person as an employee. This type of unlawful contracting arrangement may mean that a person misses out on a range of entitlements that would be available to them under the University’s Enterprise Agreement. It may also mean that other legal obligations that are binding on the University are being avoided, for instance, legal obligations pertaining to the proper payment of taxation and/or superannuation.

Sections 357, 358 and 359 of the Fair Work Act 2009, protect employees from ‘sham’ contracting arrangements and impose significant civil penalties on employers, as well as individuals, who are found to have deliberately misrepresented to a person an independent contractor arrangement. Further, the University must not dismiss or threaten to dismiss an employee in order to reengage them (or another person) as an independent contractor undertaking the same work. Nor should an employee of the University be asked to establish themselves as sole traders, or incorporated bodies, in order to perform work ordinarily performed by employees of the University.

The ‘sham’ arrangements provisions of the Fair Work Act 2009, are a relatively new feature of the workplace relations legislative framework that has been in place since 1 July 2009. It has always been the case that an employer faced risks associated with incorrectly engaging an independent contractor, but this is the first time a legislative prohibition of this kind has been created, imposing civil penalties for offenders.

If the University is found to have contravened the Sham Arrangements provisions of the Fair Work Act 2009, then the court may impose a number of civil penalties which include;

1.  fines for Bodies Corporate of up to $33,000 per instance;
2. fines for individuals of up to $6,600 per instance;
3. order of reinstatement for a dismissed person;
4. order for compensation to be paid to an affected person.

In cases of misrepresentation, the University will be required to prove that it did not misrepresent the relationship as an independent contractor arrangement. Therefore, University Consultancy Services Agreements need to be registered as a Legal Document through the Records Management Office, and must evidence that the arrangement is truly commercial in nature.

Where there is no written commercial agreement (i.e. no University Consultancy Services Agreement entered into) between the University and a person undertaking work for the University, there may be strong argument that the person is as a matter of fact an employee of the University and should be engaged and paid in accordance with the terms of the University’s Enterprise Agreement.

In Fair Work Ombudsman -v- Centennial Financial Services Pty Ltd [2011] FMCA 459, the Office of the Fair Work Ombudsman successfully prosecuted an organisation and some of its senior staff for implementing sham contracting practices. Individuals within the organisation were held personally liable and ordered to pay penalties despite some of those senior staff not actually being directly responsible for having implemented sham practices.

How do I know if a person is an ‘employee’ or an ‘independent contractor’?

There are several tests that courts tend to apply when considering the nature of an engagement of an independent contractor. A court will consider the totality of the circumstances as to how the independent contractor arrangement has been structured.

In order to help clarify whether a person is an independent contractor it is worth considering the following. Does the person who will be engaged;

1. control how and when the work needs to be performed?
2. have other clients, or a variety of different clients they provide services to?
3. advertise their services and attempt to attract other clients in the way businesses ordinarily would?
4. provide their own tools and equipment in order to perform the work?
5. have the ability under the arrangement to assign the work to others to perform?
6. bear the risks associated with fixing faulty work (i.e. are they themselves insured against possible acts of negligence)?

If you find yourself answering ‘no’ to a number of the above questions, then you may be dealing with a person who should be engaged as an employee and should be engaged and paid in accordance with the University’s Enterprise Agreement.

Checklist - Contractor v Employee

Engaging Independent Contractors - Additional Resources