Properly characterising your workforce

This is the first part of a series of employment law articles discussing some of the legal and practical matters small businesses ought to consider in relation to the employment life cycle of an employee, that is, from the recruitment stage to the employee in the workforce ceasing to be employed.

First and foremost, the business must consider whether the work to be performed requires the engagement of an employee or an independent contractor and ensure that the worker’s engagement is properly characterised. Failing to give sufficient attention to this important issue can lead to all sorts of problems.

A number of legal consequences flow from the characterisation of the worker’s engagement, which will be discussed in future parts. Furthermore, incorrectly characterising the worker, for example, as an independent contractor is likely to lead to underpayment of the worker’s entitlements and result in the business breaching legislation, such as, the Fair Work Act 2009 (Cth) (FW Act). The business could also breach the “sham contracting” provisions of the FW Act, which is discussed further below. Underpayment of wages claims can be made going back over a six-year period.

Importantly, while it can be of some relevance, how the business and worker believe the worker should be characterised is not determinative. In other words, merely because the parties believe and state that a person is engaged as an employee or as an independent contractor does not mean that they are in fact engaged in that way. After all, two people calling a duck a rooster does not somehow magically transform the duck into a rooster.

In determining if an employment relationship exists between two contracting parties a number of factors are considered and weighed up. This is known as the “multi-factor test.” Matters which are indicative of an employment relationship include where the performance of the work is at the control of the hiring business, the inability of the worker to subcontract their work and where the work performed is part of the hiring entity’s business rather than as part of a separate distinct business of the worker.

As the hiring business has less onerous obligations to an independent contractor and an independent contractor has less rights against it, a business can often be tempted to tell a worker who is really an employee that they are or will be engaged as an independent contractor or manipulate the multi-factor test indicia to bring about an independent contractor relationship.

However, by doing so the business places itself at risk of contravening the “sham contracting” provisions of the FW Act and incurring fines for that contravention. Unless the hiring business can show that it did not know that the worker was or would be an employee and was not reckless as to whether the contract was an employment contract as opposed to an independent contractor agreement, the business will contravene the “sham contracting provisions.”

In addition, even where a worker may be properly characterised as a contractor rather than an employee under the multi-factor test referred to above, in some cases the hiring business can still be required to pay superannuation contributions on behalf of the contractor and ensure they are covered under its workers compensation policy under legislation which broadens the ordinary meaning of “employee” for these purposes.

Part two of this series will discuss the recruitment process and entering into a contract.

Jeremy Cousins, Principal, Whitehall Workplace Law