The Black Economy: Should your contractors actually be employees?

Contracting is not a new concept in the Australian workplace. Once this was about a skilled labour shortfall and limited to a few highly specialised roles or industries. Now it is more commonplace with demands for flexible work practices and increasing commercial pressures.

However, when the relationship is tested in courts and tribunals, employers may find themselves having to defend a genuine contracting arrangement to avoid being found to be engaged in sham contracting.

The Morrison Government is set to further empower the Fair Work Ombudsman to address the growing practice of ‘sham contracting’ and its contribution to Australia’s Black Economy.

The budget spending promise will enable FWO to establish a dedicated sham contracting unit to uncover employers engaging in the behaviour, particularly those who “knowingly or recklessly misrepresent employment relationships as independent contractors to avoid statutory obligations and employment entitlements”. No doubt this will turbo charge the sham contracting discoveries currently scrutinized by FWO and ATO.

Understand your labour hire relationship

A contracting relationship is determined by FWO where:

  • The contract principally involves payment for labour and skills.
  • Performs the work personally.
  • Is not paid to achieve a result.

In this relationship, the contractor is obligated to look after their own tax, GST, superannuation and WorkCover requirements. It needs to be noted that while for tax purposes an employee may be determined as a contractor, the employer may still have superannuation and WorkCover obligations.

The ATO does provide an online tool to help businesses decide if a worker is an employee or contractor for tax and super purposes.

An employee relationship is determined as:

  • Performs work, under the direction and control of their employer, on an ongoing basis.
  • Generally works standard or set.
  • Usually has an ongoing expectation of work.
  • Bears no financial risk.
  • Tools and equipment are generally provided by the employer, or a tool allowance is provided.
  • Paid regularly.
  • Entitled to receive paid leave or receive a loading in lieu of leave entitlements in the case of casual employees.
  • Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer.
  • Has income tax deducted by their employer.

A sham contracting relationship is defined under the provisions of the Fair Work Act where an employer:

  • misrepresents an employment relationship or a proposed employment arrangement as an independent contracting arrangement.
  • dismisses or threaten to dismiss an employee for the purpose of engaging them as an independent contractor.
  • makes a knowingly false statement to persuade or influence an employee to become an independent contractor.

It is essential for your business to seek legal advice about hiring contractors and make a proper assessment of your risk, particularly when contractors perform the same roles as current or past employees and if your contractors have been engaged for a significant amount of time.

Hall Chadwick Melbourne is ready to assist you in getting on contact with specialists practicing in these areas. Please contact our office 03 9820 6400 or email Peter Pryn at