The contracting quandary

The perennial issue of whether a person is or should be engaged as a contractor or employee continues to baffle (and really, really annoy) business owners, HR managers and contractors alike.

On top of that, when contractors have been engaged, how do business owners ensure productivity and “engagement” without blurring the lines between a contractor and employee at law?

The question is often asked “Why should the law intervene when two sufficiently savvy parties wish to enter into an independent contracting arrangement?” Whilst there are valid arguments on either side of this question, the fact remains that many businesses are aware of and ignore the very real risks of engaging as contractors those who the law would otherwise view as employees.

So what are these risks? Obviously there are the legal risks. To name a few, there is the risk of a Fair Work prosecution for sham contracting, or that the ATO will hunt the employer down for failing to withhold PAYG tax or remit superannuation, or that the relevant state workers’ compensation authority will impose penalties for failing to effect a policy when required.

However, what about the risks to the firm’s reputation should a prosecution or penalty result? For example, there is a strong risk that the business will be publicly judged and viewed as trying to circumvent workers’ rights. And then there is the financial risk of loss of business resulting from reputational damage, not to mention the costs of defending actions and paying fines. What about the risk to employee morale because of the perception that contractors get paid more for doing the same job? The list goes on.

For many businesses, the decision to hire contractors often revolves around the need for flexibility as to the termination of the arrangement (without fear of an unfair dismissal claim). For contractors, there is often a desire to be ‘masters of their own destinies’ (although the employee’s reasons for wanting to work as a contractor should never be the primary reason for engaging them as such).

For employers worrying about termination and unfair dismissal, provided that the process is handled properly, the risks are, in reality, quite low. So why not give employment a go?

Here are some flexible ways in which the employment option can be used:

 casual employment allows for flexibility both as to hours worked and terminating thearrangement without fear of unfair dismissal (provided the casual employment is not on aregular and systematic basis, without an expectation of ongoing work);

 fixed term employment contracts allow for a specified period of employment without fear of an unfair dismissal claim on termination at the end of the fixed term;

 use of the minimum employment period (of 12 months for small business employers or 6 months otherwise) allows the employee’s performance to be assessed and the employer’s ongoing need for the employee considered and, if necessary, terminated without fear of an unfair dismissal claim.

Of course, there are reasons other than the need for flexibility why businesses are not keen on engaging employees. However, where the law sees a contractor as an employee, it’s not worth ignoring the risks. Employment may be a case of better the devil you know than the one you don’t want to know (such as the Fair Work Commission or the ATO!).

So what about when a contractor has been engaged? Managing the relationship frequently requires treading the fine line between ensuring that contractors are productive and allowing contractors to retain their independence.

For businesses that rely heavily upon contractors, ensuring that contractors are productive whilst maintaining the relationship on an arms’ length basis is especially difficult as relationships between the business and the contractors often develop in the same way as does an employer/employee relationship. This can be by accident, but often it is unwittingly by design. 

For example, consider a small business which engages many contractors to provide a personal service to the business’ clients. The business has a well-drafted contractor agreement in place which clearly defines the relationship as that of a principal and contractor.

However, in an effort to “engage” contractors and to ensure productive outcomes, the business puts in place a rewards system for the contractors. Additionally, the business holds “staff meetings” which the contractors are required to attend, provides uniforms bearing the business’ logo and pays contractors by the hourly service they provide.

Often, the situation propels from there. Businesses obviously want to ensure that their brand is represented in the way they want and expect. They want to ensure that the contractor works with the business’ organisational values and that the business’ culture remains intact. To achieve this, and to ensure productivity, businesses often engage contractors through a ‘recruitment process’ and motivate and engage them in the same way as they would employees.

Whilst these practices might help the business achieve business goals, they also substantially blur the line between a contractor and an employee at law and set the business up for a showdown with, potentially, the ATO, the workers compensation insurer and the Fair Work Commission. 

So how then do businesses ensure the productivity of their contractors without blurring the line? There are various ways but ensuring that tightly drafted clauses requiring measurable key outcomes is a must. So too is ensuring that there are not practices in place which tend to reward contractors in much the same way as an employer would reward its employees.

Remember that facing the consequences of getting this wrong will easily outstrip any gains those practices were designed to make.

Melissa Fitzpatrick LLB (Hons); B.Int.Bus is the Industrial & Employment Relations Specialist for HR business direction, a team of mlti-disciplinary HR specialists providing a powerful holistic approach of commercial & practical advice to clients to assist them in exceeding their business goals through their people.

Fitzpatrick is an Employment and Industrial Relations specialists with a law degree,international business degree and many years of experience in Employment Law. She also has experience in commercial law and therefore is able to bring much more value to the advice and information to our clients. Melissa is a member of the Queensland Industrial Relations Society.



To keep up to date with Australian Mining, subscribe to our free email newsletters delivered straight to your inbox. Click here.