a. Laws and Guiding Principles
As outlined above, the existence of an employment relationship is a question of fact, not law, and is circumstantial in nature. As such, in the absence of a substantive change in the nature of the work performed, ‘re-characterisation’ is procedural, providing redress to interested parties for any loss arising from misclassification.
In circumstances where a genuine independent contractor is engaged by its Principal under a contract of employment, it is assumed that there will have been a fundamental change in the terms of engagement between the parties. In those circumstances, the company’s duties and obligations with respect to that employee will be the same as its duties and obligations in relation to any other employee. In addition, any period of service to the company by an independent contractor does not count as continuance service for the purposes of the FW Act, limiting the newly engaged employee’s access to accrued paid leave (annual, personal, parental and long service leave), and affecting the employee’s entitlement to notice on termination and redundancy entitlements.77
Companies wishing to re-engage contractors as employees should take care to document their reasons for changing the employment status of the worker, as well as keeping re-cords of any discussions and agreements reached between the company and the putati-ve employee. It is also recommended that the company identify in writing, any characte-ristics of the new position that distinguish it from the role that the person previously performed as an independent contractor.
b. The Legal Consequences of Re-Characterisation
The risks and consequences of unlawfully engaging workers as independent contractors, in circumstances where the true substance of the working relationship is an employment relationship, can be devastating to a business.
The main source of legal exposure arising out of a situation where a business engages the workers as independent contractors in circumstances where the workers are in fact em-ployees is in respect to unpaid employee entitlements (potentially leading to significant claims for back-pay) and liability in respect to non-compliance with statutory obligations. These potential liabilities are detailed as follows:
i. The workers would be entitled to receive unpaid statutory benefits and award entitlements, plus interest78, backdated to the date their contract of employment is deemed to have commenced.79 Such benefits include paid leave, their base salary as prescribed under an industrial award80, any allowances provided under an award, such as payments for overtime or reimbursements, payment for public holidays and superannuation payments;
ii. The employer may be liable for penalties of up to $54,000 per contravention of the civil remedy provisions of the FW Act, which include:
• failing to provide employment entitlements under an industrial award;
• failing to provide paid leave in accordance with the National Employment Standards of the FW Act;
• failing to maintain proper employment records;
• failing to withhold PAYG tax;
• failing to pay superannuation; and
• misrepresentation in relation to the use of sham contracting arrangements.
iii. The company may be penalised for having failed to hold complying policies of insurance for Workers Compensation81 and would be required to pay backdated workers compensation premiums;
iv. Large companies with a monthly payroll of $750,000 or more could be liable to State taxation offices and could be required to pay penalty tax82 for default on any payroll tax payments;
v. The company may also face significant penalties from the Australian Taxation Office, in-cluding penalty interest, for non-payment of superannuation83 and non-compliance with PAYG withholding and reporting obligations;84
vi. A company may also suffer considerable damage to their reputation, if it is found to have been a party to a sham contractual relationship intended to avoid liabilities associ-ated with employment. 85
Unfair Dismissal and General Protections
A worker may be able to access the unfair dismissal provisions of the FW Act on the basis that she was actually an employee.
Under the FW Act, a worker is not permitted to access the unfair dismissal jurisdiction unless he or she has worked the “minimum employment period” specified in the legisla-tion. The minimum employment period is a period of 6 months. If a worker is found to be an employee, and his or her total earnings are less than the prescribed remuneration cap (currently $138,800), the worker may seek reinstatement or compensation of up to six months’ remuneration.
Similarly, a claim could be made under the general protection provisions in the FW Act, which prevents employers from taking “adverse action” against an employee for their exercise of a workplace right in accordance with a workplace law.
As noted above, the general protection provisions of the FW Act are also specifically available to independent contractors.
Penalties Under the Sham Contracting Arrangement Provisions of the FW Act
The sham arrangements provisions contained in the FW Act impose penalties on employers who misclassify employees as independent contractors. Employers must not:
• misrepresent an employment relationship as an independent contracting relationship – that is, by representing to a person who is actually an employee that they are an independent contractor; or
• dismiss or threaten to dismiss an employee in order to engage the employee as an independent contractor to perform the same, or substantially the same, work.
If an employer makes representations to workers that they are independent contractors in circumstances where they are employees, the company could be liable for a penalty of up to $54,000 and $10,800 per occasion for any individual involved in the contravention (such as a director or relevant manager).
In 2013, an airport shuttle bus service company and its managing director were fined a total of AUD$295,000 for engaging seven of its drivers as independent contractors.86 The penalties imposed included penalties for misrepresenting employment contracts as independent contractor arrangements and for failing to meet award entitlements. The penalties imposed were in addition to the employment entitlement underpay-ments owed to the individual drivers. The Fair Work Ombudsman initially identified the breaches after the business was selected for auditing in April 2011.
The FW Act does provide a defence to the sham contracting provisions. An employer will not have engaged in sham contracting if the employer did not know about the independent contractor relationship and was not reckless to the fact that the workers were employees rather than independent contractors. However, the burden of proof in relation to this defence rests with the employer.
c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status
A person engaged as an independent contractor may seek a declaration that they are or were an employee from the Fair Work Commission or from any Court or Tribunal exercising common law jurisdiction. Underpayment and sham contracting cases typically involve persons seeking declarations covering the period of their engagement. Where a person is successful in obtaining declaratory relief, the person may then seek an award of damages from a State or Federal Court in respect of any forfeited entitlements that would otherwise have accrued during the course of their employment.
Individuals can also lodge a complaint with the Fair Work Ombudsman, which is a Federal statutory body that functions as both advocate and umpire in relation to compliance with workplace laws. The Fair Work Ombudsman will ordinarily investigate claims of sham contracting in response to a complaint received by a worker, however, the Ombudsman is empowered to investigate and commence civil proceedings against a company of its own volition (that is, without the workers’ involvement).
The Australian Taxation Office is also similarly empowered to investigate and determine an individual’s taxation liabilities and superannuation entitlements of its own volition. In such circumstances, the ATO may disregard the form of contracts between the parties and assess their respective tax liabilities on the basis that the relationship is one of em-ployment. The ATO does not, however, have the power to bring civil claims on behalf of employees in relation to employment entitlements generally.
Independent contractors should also be mindful that in the event they are deemed to be employees, they may suffer a detriment if they are reassessed by the ATO and ordered to pay the difference between the company tax rate they already paid, and the individ-ual tax rate they should have paid. This can be further compounded where a contrac-tor’s gross income is readjusted to include amounts previously deducted or offset under relevant company tax provisions.