Employee or independent contractor? Know the rules and classify workers correctly

4 April 2024
Employee or independent contractor? Know the rules and classify workers correctly

Ensuring providers correctly engage their workforce as either employees or independent contractors, and comply with all applicable workplace and taxation laws, is a key focus for the Labour Hire Authority (LHA).

Some businesses may be motivated to incorrectly engage a worker as an independent contractor because they believe it will lower their costs.

But in reality, the business’s legal obligations to workers are often similar or identical, regardless of whether they are engaged as employees or as independent contractors.

LHA undertakes a range of compliance and licensing activities to ensure providers correctly classify their workers, particularly in industries where sham contracting is a high risk.

This risk increases in industries with relatively high labour input, relatively low wages and limited training, such as horticulture, commercial cleaning and security.

Labour hire workers may be misclassified if they are:

  • engaged under an Australian Business Number (ABN)
  • working as part of the labour hire provider or host’s business, rather than genuinely conducting their own business
  • subject to control about how their work is performed, as an employee would be.

As well as being unfair to workers, employee misclassification and related non-compliance can disadvantage legitimate businesses, by making it harder for them to compete and win contracts against companies with artificially low cost structures.

Tackling the risk of misclassification

When reviewing a licence application, LHA pays close attention to businesses who intend to supply workers as independent contractors.

If workers have been misclassified, LHA can take a variety of actions, including imposing conditions or refusing to grant a labour hire licence.

Where businesses engage genuine independent contractors, LHA considers whether they will comply with applicable legal obligations such as superannuation, PAYG withholding tax, workers’ compensation and payroll tax.

LHA has published guidance for labour hire providers around engaging workers as independent contractors to help ensure providers:

  • comply with legal obligations
  • correctly classify workers
  • avoid the risk of licensing action.

Compliance and licensing action to address the issue

LHA is running a targeted compliance campaign to tackle employee misclassification, sham contracting and independent contractor non-compliance.

Identified businesses are provided with educational material about correctly classifying their workers and are given the opportunity to voluntarily address non-compliance.

Providers who remain unwilling or unable to comply may face serious consequences, including licence cancellation or prosecution.

LHA has cancelled several labour hire licences as part of this campaign, in industries including security, horticulture and hospitality.

In some circumstances where a risk of employee misclassification is identified in a licence application, LHA may still opt to grant a licence, while imposing strict conditions.

Last year, a horticulture provider was granted a licence with a condition that specified that the company must only engage workers as employees, to mitigate the risk of sham contracting.

A commercial cleaning provider was also granted a labour hire licence with conditions after LHA identified risks around their use of a large number of independent contractors.

Under these licence conditions, the company must supply LHA with regular payroll summary reports, profit and loss reports, and information around their workers.

This reporting enables LHA to monitor the company and ensure its workers are correctly engaged, and the company remains compliant with all applicable legal obligations.

Anyone with evidence of a provider involved in sham contracting is encouraged to provide this to LHA through the Report a Problem form or by calling 1300 545 200.

Important changes to the Fair Work Act

As part of the ongoing ‘Closing the Loopholes’ changes, two significant changes relating to employee misclassification and sham contracting have been made to the Fair Work Act.

From 26 August 2024, the Fair Work Act will contain a new definition of ‘employee’ and ‘employer’. When considering whether or not a worker is an ‘employee’, regard must be had to “the real substance, practical reality and true nature of the relationship”.

The purpose of this change is to facilitate a return to the ‘multi-factorial test’ that was applied by courts and tribunals for many years prior to High Court of Australia’s recent decisions in CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.

On 27 February 2024, an important change was also made to the defence available to employers for sham contracting contraventions. The current test that an employer didn’t know and wasn’t ‘reckless’ when entering into sham contracting arrangements will change to a test that examines whether they ‘reasonably believed’ they had entered into a genuine independent contracting arrangement.

These changes will make it easier for LHA to take action against businesses who intentionally break the law and exploit their workers.

Find out more about these and other recent and upcoming changes to the Fair Work Act in our related LHA News article.

More information