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This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.


Defining Contractors

A recent Federal magistrate’s court decision is important for indicating the change happening under labour laws affecting the relationship between self-employed people and other businesses. The court has considered the first ever ‘Sham’ contract prosecution. It found that two alleged self-employed workers were in fact employees, but that no ‘sham’ had been conducted.

The decision is important because large numbers of the two million self-employed people in Australia have larger businesses as their clients. For these businesses it’s important also. The self-employed constitute 19 per cent of the workforce but 25 per cent of domestic economic activity (based on GST receipts to the ATO).

The court action, taken under a provision of the Rudd government’s Fair Work Act (FWA) also indicates a lot about the approach of the government to the self-employed, micro-business sector.

Is your client your ‘employer’ when you employ yourself?

In 2006 The International Labour Organisation passed a motion declaring self-employment to be legitimate. The ILO is a division of the United Nations and the peak international institution setting labour law principles globally. The ILO also declared that ‘sham’ contracts should be outlawed.

A sham contract exists according to the ILO if someone misrepresents what is actually an employment arrangement, passing it off as an independent contractor arrangement. Conceptually it involves a low level form of (non-criminal) fraud.

Sham contract legislation was created by the Howard government in late 2006. It’s a provision now of the Fair Work Act (FWA). The Howard legislation was certainly a global first and is possibly still the only law of its type in the world.

The Fair Work Ombudsman is charged with investigating and prosecuting shams, but in more than two years, it appears it hasn’t found a case where a prosecution could be concluded. The first prosecution was conducted by the construction union the CFMEU against Nubrick Pty Ltd.

In this case a manager had engaged two workers in a brick factory as ‘independent contractors’ (ie) self-employed. It seems that both the manager and the workers believed that having an Australian Business Number (ABN) secured their self-employment status. The judge however found the workers were in fact employees of Nubrick.

The judge ruled that for a sham to exist under the FWA, there must be an intent to deceive or misrepresent. In this case the manager at Nubrick and the workers genuinely believed that an ABN was sufficient for self-employment to exist. An error has been made and an error does not constitute a sham.

The judge’s decision drew on significant legal precedent in giving judicial interpretation to the FWA sham contract provisions. It’s a sensible decision.

The law is quite settled on what constitutes the difference between an independent contractor and employment contract. At Independent Contractors of Australia we call it a ‘swinging pendulum’ test and have produced explanations and summaries of the tests. (See Both the Australian Taxation Office and the federal Department of Innovation have created online decision tools’ to help identify the difference.

But in practical application there can be confusion. Understanding the subtests (around 20) and applying them consistently requires managerial knowledge and attention to detail. I’ve looked at and advised on lots of arrangements and the level of accurate knowledge by Australian managers is low. They persistently get it wrong even if the intent is good.

Most common misunderstandings relate to the use of ABNs, which has been highlighted with this Nubrick case. Another myth, in particular held by accountants, is the supposed 80/20 rule which is in fact irrelevant to common law. Too many managers and businesses rely on a lawyer’s standard form contract in a ‘set and forget’ process. Unfortunately this doesn’t help because the courts will always ‘look through’ the written word to find truth in the behaviours of the parties.

The Rudd government has applied similar sham contract provisions in the FWA to that established by the Howard government. There’s cross-party political agreement on the type of law needed consistent with the ILO declarations and with common sense. Ordinarily you don’t convict someone for making a common mistake. The best thing to do is correct the mistake.

There’s an Australian culture of very poor management performance in applying correct procedures for engaging the self employed. Corporate managers ‘get it wrong’ and it’s in this area where there’s a big need to lift performance.

People might make genuine errors which the courts will understand. But at some point courts will become impatient with real or particularly feigned ignorance on matters which businesses should make themselves aware of. Sham contract convictions are inevitable if businesses fail to upgrade their behaviour.

This is not something that can be ignored. The self-employed make up 28 per cent of the private sector workforce. It’s normal now for independent contractors to provide services to all sorts of businesses. There’s a strong need for improvement in this area and the sham contract laws create an added legal need for improvements.

Ken Phillips
My Business, November 2009


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