Fair Work Ombudsman (FWO) Sandra Parker issued a statement on 6 January warning employers that they face penalties and back-payments if they’re found to have misclassified independent contractors as employees. This comes as the FWO launches a crackdown on employers who illegally treat workers as contractors, even though their work relationships entitle them to be regarded as award-governed employees.
It’s relatively common for businesses to erroneously classify workers as contractors. This is, in large part, because businesses don’t know the difference between an employee and a contractor. An appropriate contractor relationship might be defined slightly differently depending on all the various aspects of the relationship. There are a surprising number of grey areas, leaving much up for interpretation. To deal with this, the government is attempting to develop a tool for classifying workers, however for now businesses need to educate themselves and work with the government directly to avoid potentially costly mistakes.
Grey areas cause persistent confusion among employers
Hiring a contractor instead of an employee comes with both advantages and disadvantages. However, there are no clear and detailed rules for what a relationship with a contractor should look like. Because of this, it’s natural for businesses to try to shape that relationship to mitigate any disadvantages as much as possible. Subsequently, many contractors are left in a grey area, where they act as employees in a few limited ways, while mostly retaining their independence.
Contractors who are in this type of situation often don’t even realise it. Employers, on the other hand, tend to assume that they haven’t done anything wrong as long as the FWO doesn’t complain. However, it’s those businesses’ responsibility to ensure that their workers are classified correctly. If it later turns out that a contractor should have been classified as an employee, the business will be held responsible for back pay and penalties.
Drawing the line between employee and contractor
Employers mostly know enough to avoid blatant sham-contracting. That is, for example, coercing an employee into becoming a contractor, or simply claiming a normal employee as an independent contractor. There are, however, many more subtle issues that they need to watch out for. Fundamentally, a contractor is an independent business. That means that the hiring business isn’t responsible for their tax and superannuation payments, however it also means that they enjoy certain rights that employees do not. A worker should be classified as an employee when the relationship inherently violates the rights that a contractor should enjoy as an independent business entity. Those rights include, among others:
● The right to delegate work to subcontractors
● The right to simultaneously work for other companies
● The right to decide how the work will be done
● The right to accept or refuse additional work
The specifics of how these rights are to be respected isn’t always clear-cut. For example, an employee can be required to drive a company vehicle and wear a uniform, while a contractor cannot. As their own business, the contractor might prefer to use their own vehicle or uniform, and may want to perform work for multiple client businesses without changing their vehicle or clothing. However, a contractor who voluntarily uses a company vehicle, or wears a uniform, isn’t necessarily an employee.
The government is developing better tools for businesses
There are ongoing discussions between the FWO, ASBFEO, ATO, and the Attorney General’s Department to provide clearer information to businesses. According to Deputy ASBFEO Dr. Craig Latham, they are working to develop a single consistent decision tool for businesses to rely on when classifying employees. In the meantime, though, businesses need other ways to gain clarity.
Clear up confusion by working with the FWO
In her recent statement, Fair Work Ombudsman Parker reiterated that businesses that need help in determining whether they’re dealing with an employee or a contractor relationship should contact the FWO. Besides the FWO, businesses can also get in touch with the ASBFEO or the ATO regarding this issue. As the FWO launches its crackdown, it’s important for businesses to examine their relationships to their workers, and to ensure that they don’t face any penalties. Specific feedback from relevant government agencies can be an invaluable tool for this, and can help businesses to preemptively resolve any problems.
Currently, businesses are forced to muddle through a relatively vague set of guidelines. By developing a tool for businesses to use to definitively classify employees, the government is taking an important step to protect both businesses and workers. Ideally, this will eventually serve to better protect the rights of workers, while ensuring that all businesses are held to the same rules. This will, in turn, keep competition among businesses fair, while eliminating unnecessary uncertainty.