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    What’s in a name? Independent Contractor or Employee?

    There are few that would argue the distinction between an independent contractor and an employee is always clear cut. However, it has been generally accepted that when an individual’s services are provided through a corporate entity, the relationship is one of ‘principal’ and ‘independent contractor’.

     

    For example, Company A enters into a contract with, and makes payments to, Company B for Ben’s services. Company A views Ben as an ‘independent contractor’ and considers that Company B is responsible for Ben’s remuneration, insurance, tax and all other entitlements.

     

    Recent decisions, in a number of different jurisdictions, would suggest that this may no longer be the case. In circumstances akin to the example above, it has been held that the diversion of funds to Company B does not mean that Ben is not an employee of Company A.

     

    In short the Court has said that ‘parties cannot create something which has every feature of a rooster, but call it a duck and insist that everyone else recognise it as a duck’.[1]

     

    Whether or not there is a Company B involved as above, or, as is more commonly the case, the ‘independent contractor’ simply has their own ABN, the consequences for a business of an independent contractor being re-characterised as an employee can be significant.

     

    When ‘independent contractors’ successfully claim employee status, the ‘employee’ has access to unfair dismissal protections, the right to redundancy payments as well as additional payments in respect to annual leave and long service leave.

     

    Even when an individual and a business agree that their relationship is one of ‘principal’ and ‘independent contractor’ the ATO may audit a business and all the factors will be considered to see whether this is so.

     

    On top of this, the extended definition of an ‘employee’ in the superannuation guarantee legislation can result in a liability where there is a properly characterised principal/independent contractor relationship.

     

    It is not an uncommon occurrence for individuals to be retained as independent contractors. However, in light of recent decisions, it would be prudent to review whether or not, in all the circumstances, your independent contractor ‘crows’ or ‘quacks’! Measures should be then put in place to mitigate any risks should the relationship later be characterised as one of employer and employee.

     

    For help with classifying your relationships, please call Kerry Sarten.



    [1] [2011] FCA 366 at 192