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Employees or Contractors? Navigating the minefield ….

Risks of wrong classification

Business owners and managers can easily be confused whether a worker is really an employee or an independent contractor. If they make the wrong assessment, and if the Fair Work Ombudsman or the Australian Tax Office comes calling, the mistake can be very costly.

Wages and entitlements must be back-paid to employees wrongly classified independent contractors.


Investigations by Fair Work Ombudsman

For example, the large hotel chain Oaks Hotels & Resorts used its subsidiary company, Housekeepers Pty Ltd, to hire cleaners. It incorrectly classified the cleaners as “independent contractors” when they were employees. There was underpayment of cleaners’ minimum wages and superannuation, with unlawful deductions including for public liability insurance, chemicals and equipment, administration fees, payroll tax and uniforms, among others. Back-pay of $1.9million had to be paid to the cleaners following a Fair Work Ombudsman investigation.

In a recent case, a physiotherapist was able to bring an unfair dismissal claim after the Fair Work Commission ruled he was an employee and not a contractor. The physiotherapist had himself opted to be classified as a contractor rather than an employee. When the business later terminated his services, he was allowed to commence an unfair dismissal claim. Despite the agreement of the parties to call him a contractor, the Commission looked at the substance of the relationship and ruled that he was actually an employee and not an independent contractor.


Sham contracting

Some employers engage in “sham contracting”, the deliberate misrepresentation to workers they will be working as independent contractors rather than employees. This is prohibited by s357 of the Fair Work Act and large fines can be imposed on an employer found breaching the law.

There is no simple and easy way to determine whether a person is an employee or a contractor but there is guidance from the regulatory authorities.

The Fair Work Ombudsman, the Australian Tax Office and the Australian Business Register (the government body where a person applies for an Australian Business Number) all provide guidance. And there is case law, such as Jiang Shen Cai where there is a general statement of law that a contractor is someone who can be fairly regarded as carrying on a business of their own, and the work being done forms part of that business. An employee, however, is the “servant” of another person in the other person’s business.

The full bench in Jiang Shen Cai stated:

“It should be borne in mind that no list… is to be regarded as comprehensive or exhaustive and the weight to be given to particular [item] will vary according to the circumstances. Features of the relationship in a particular case which do not appear in this list may nevertheless be relevant to a determination of the ultimate question.”

In short, the correct classification depends on the specific facts and circumstances of the worker.



This article was written by Margaret Miller, partner at Bell Legal Group. It is general in nature, is not legal advice and must not be relied on as such. If you need assistance relating to the topics discussed, please contact Margaret to obtain advice specific to your circumstances. Call 07 5597 3366 or send an email to mmiller@belllegal.com.au