As more and more employees seek autonomy and flexibility in their working conditions, there is a move away from the traditional employee/employer relationship and a sharp increase in the use of independent contractor agreements in various industries. Of course, there are pros and cons to the self-employment model; however, whether or not it is suitable for you and your business is not only an important consideration but could be a crucial consideration for the health and longevity of your business.

Suppose you’ve made an employment offer to an individual, but they request to be hired as an independent contractor instead; however, they insist that they will still perform their duties as contained in your letter of offer. In that case, this should trigger an immediate red flag for you as an employer. In essence, if you hire someone as an independent contractor yet they perform as an employee, it doesn’t matter what the written contract says. In effect, that written contract could be a ‘sham contract’. It may be deemed as the employer trying to shirk its responsibilities to the employee concerning their entitlements and can carry heavy penalties.

Think of the adage, “if it looks like a duck, walks like a duck, and quacks like a duck, then it may be a duck”, even if you try and call it a pigeon. So if it looks a like an employee, walks like an employee, and talks like an employee, irrespective of whether you’ve called it an independent contractor, it is still an employee.

Independent contractors do not obtain the same benefits and entitlements as an employee under workplace laws with respect to superannuation, workers’ compensation, leave entitlements, and other employment benefits. The significant risk here is to the employer, which could ruin its business.

Below is an example:
“Company A enters into an independent contractor’s agreement with John Smith for a 4-year period. During the 4 years, John Smith attends to his work how, where, and when Company A tells him to. Further, John Smith attends networking events as a representative of Company A and is paid a commission on successful sales through that representation. John Smith is not permitted to delegate his work, and Company A provides him with all the tools and equipment necessary to perform his duties. Because John Smith is an independent contractor, Company A pays him only the amounts agreed to in his contract, excluding employee entitlement such as superannuation. After 4 years, the engagement ends, and a friend of John Smith tells him that it appears that John Smith was actually an employee all this time.

John Smith makes a complaint to Fair Work, stating he thinks he is an employee. On examination, it is determined that Company A and John Smith were actually in an employee and employer relationship because Company A had all the control, John Smith served Company A in its business, John Smith was remunerated by way of time worked and commission, was unable to delegate his work, was supplied with all the tools and equipment necessary and Company A carried all the risk.

As a result, Company A had to pay John Smith his entitlements as an employee (including superannuation) over the last 4 years, plus the deficit in earnings he would have received under the applicable award and a penalty”.

The moral of the case study is, before you enter into an independent contractor’s agreement, make sure that it is not, in fact, an employee/employer relationship and contact us for assistance if you are unsure.

Remember, contracts are in place for when everything goes wrong, not when it is going right.