Business owners are increasingly opting to hire contractors over regular employees. Not only is it often more simple and cost effective to hire a contractor, the growing skills shortage combined with the rise of the gig economy and flexible work has also made it faster and more convenient to do so. However, failing to fully understand the differences between these kinds of workers is landing a growing number of businesses in hot water with the Fair Work Ombudsman.

gig 300x192 - As the gig economy grows, businesses face allegations of sham contracting

The practice of classifying a worker who is actually an employee as a contractor is called “sham contracting”, and comes with steep penalties. Businesses who try to take advantage of employees by reclassifying them as independent contractors, or who simply don’t understand the legal limits of a contract relationship, can face hefty fines and the requirement to retroactively pay employment benefits. Because of this, it’s important to understand exactly what differentiates an employee from a contractor, and what steps businesses should take to avoid potential difficulties with the FWO and ATO.

Employers often simply don’t know how to work with contractors

Many employers opt to hire contractors without first educating themselves about the topic, because contractors are relatively easy to work with, and often cost less than regular employees. They can be hired or laid off at any time, are only paid for the specific work they do, and aren’t entitled to paid leave, insurances, or superannuation. It sounds like something that could give their business an advantage, so they go for it, even if the type of role involved actually calls for a traditional employee.

Businesses who are working with contractors for the first time can easily get themselves into trouble—particularly smaller businesses who may forego the use of legal counsel in designating requirements and responsibilities for these kinds of workers. That’s because they often fail to consider the other differences between contractors and employees.

Understanding what a contractor is and isn’t

At first glance, a contractor might just seem like a less expensive, and much more flexible kind of employee. This is not the case, though. A contractor is their own employer, not someone else’s. This means they ultimately have control over the work they do, and whether they will accept any given task. The client generally can’t set the contractor’s hours or determine how work is done. Also, the contractor generally enjoys the same rights as the business they work for, meaning that they can also terminate a relationship without notice unless indicated otherwise in their contracting agreement.

Most importantly, contractors are not exclusive to the business they work for. They can take on other clients, outsource work to subcontractors of their own, and generally manage their responsibilities as they see fit.

How the Fair Work Ombudsman spots sham contractors

The rules that determine who is an employee and who is a contractor aren’t entirely clear cut. Depending on the particular contractual agreement or the nature of the job, contractors might be reasonably expected to engage in some employee-like behavior. Because of this, the FWO looks at the entire relationship to determine whether an employee-relationship actually exists. In general, that means ensuring that the business isn’t making unreasonable demands of the contractor that should be exclusive to employees. Besides this, a few specific behaviours can be viewed as clear indicators of sham contracting:

●     Forcing an employee to quit, and rehiring them as an independent contractor to fill the same role, minus insurance, superannuation, and paid leave

●     Dictating set hours for a fixed wage, and requiring the use of uniforms

●     Unilaterally setting the worker’s workload and responsibilities.

Few businesses, of course, are out to take advantage of their workers. The reason that allegations and convictions of sham contracting are on the rise is rather because the line between a contractor and an employee can become very blurry. To help businesses avoid mistakes in classifying their workers, the ATO provides more in-depth information on its website at

Used properly, contractors can help businesses to get work done more efficiently while also driving down costs. Additionally, they can make businesses more flexible, by giving them the ability to quickly adjust the size (and cost) of their labour force to adapt to changing conditions, such as seasonal shifts in demand. This portion of the business’ workforce, however, need to be treated differently than regular employees. Because of this, it’s a good idea for businesses who fear any kind of ambiguity with regard to their contractor relationships, to work with a lawyer to avoid any potential difficulties with the Fair Work Ombudsman or the ATO.

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