When you commence a new business generally the easiest way to obtain assistance is to employ someone as an independent contractor. This makes sense, the relationship is relatively simple. They do the work, they invoice you and you pay them. Simple! Unfortunately, because you are good at what you do, they start to work for you only. They have to let their other work go because they are too busy looking after your work. When more than 80% of their income comes solely from you, the relationship is no longer an independent one. They are for all intense and purpose an employee and should be treated as such.
You then need to decrease their hourly rate and start to accumulate their benefits – annual, personal carers leave (sick leave), long service, etc. You also need to start paying tax on their behalf and superannuation contributions to their relevant fund. This can be difficult to calculate and your contractor, who was receiving that lovely sum of money each week, and now looking down the barrel of earning a lot less. My suggestion is to employ people as a permanent part time relationship from the outset so that you don’t have to have the conversation and the burden of making them an employee after they have been a contractor for some time.
Can I tell you that this isn’t negotiable? Once they are working predominately for you, then you need to change them over. If they refuse to change over, you may need to terminate the relationship or alternatively obtain an agreement from them that they are aware that the relationship is one of an employer and employee, but they are happy to stay as a contractor. This isn’t ideal, but better than nothing. I can’t guarantee this will avoid fines, but, better than nothing.
The fines are quite substantial for having an independent relationship when you should have had an employment relationship. The reason for this is that you breaking 3 pieces of legislation – the Independent Contractors Act 2006, the Fair Work Act 2009 and the Award that they would have been employed under.
In addition to the fines, you will be required to pay the benefits that the employee did not receive from you, such as accumulated annual, personal carers leave (sick leave). There will also be charges under the Superannuation Guarantee.
Is ignorance a defence to sham contracting?
If both parties proceed on the understanding that they are party to an independent contractor relationship, and this understanding is later shown incorrect, most likely by the Court, then you do not have a defence against the underpayments for their minimum entitlements. (Minimum entitlements are set by the Fair Work Act 2009). If you are aware that the relationship is an employment relationship, then you need to provide the employee with those minimum requirements.
If, however, you were not aware it is unlikely that you will contravene the sham, contracting provisions of the Fair Work Act. Section 357 of the Fair Work act provides that an employer who employs an individual must not represent to the individual that the contract of employment is a contract for services of an in independent contractor.
If the employee forms his or her own view of the relationship and genuinely believes the engagement is as independent contractor, then it will be difficult to claim that you misrepresented an employment relationship to be a contractor relationship. Even if a misrepresentation did arise because the worker relied on your assurances that it was a contractor relationship, you will have a defence if you prove that at the time you offered the agreement to the worker, you did not know and you were not reckless as to whether the worker was in fact an employee.
Earlier this year the Court found that a company director was reckless when determining an employee to be a contractor because of the presence of circumstances that pointed towards the relationship being one of employment, such as the job advertisements, job descriptions, training and related materials. Despite these things, the director relied on legal advice and the fact that the contractor agreement ‘labelled’ the legal relationship as contractor. This was not enough to avoid the Court’s finding that he was reckless. My advice to you is that when you require assistance in your business employ that person as a permanent part time employee. Obtain a contract of employment for them and accumulate and pay their entitlements, tax and superannuation. As a permanent part time employee you can increase or decrease their hours as per your agreement with them. I have clients who have stated that they don’t want to employ someone as a permanent part time employee because it is more difficult to remove them from their employ if they don’t require their services anymore. Can I say that you have an Independent Contract with them and you terminate them, they may well have a case against you for unfair dismissal, if is found they their relationship was one of an employee and not an independent contract.
When you are employing staff, you should obtain assistance from the outset to ensure that you have the correct contracts and relationship in place and if you need to let that person go, you should also obtain assistance to ensure that you terminate that person correctly. The legislation is there for a reason to ensure that you treat them fairly, just as you would expect to be treated if you were in fact that employee.