Employees vs Independent Contractors: The consequences of misclassification
As the new year truly gets underway, the Fair Work Ombudsman (FWO) has declared that 2020 will be a year during which it focusses and cracks down on businesses which misclassify its employees as contractors.
As a clear indication of this focus, the FWO has launched an underpayment case against Queensland transport company, Boske Road Transport. The FWO alleges that Boske wrongly treated a number of delivery drivers as independent contractors when they were in fact employees. The FWO goes on to allege the drivers were covered by the Road Transport and Distribution Award, and because of this misclassification, Boske underpaid the drivers Award entitlements by some $63,800 between 2016 and 2018.
- drove Boske-owned vehicles;
- wore Boske uniforms;
- had to work on days and at times set by the company; and
- were paid according to the hours worked.
In the claim the FWO asked the Court:
- to order Boske to backpay the drivers;
- to impose civil penalties (fines) against Boske;
- to declare that Boske breached the Fair Work Act by failing to pay overtime, penalty rates, leave entitlements, superannuation and work-related costs; and
- for an order that the business display a notice on site about workers’ rights and a notice that identifies the difference between contractors and employees.
The Fair Work Ombudsman, Sandra Parker, issued a statement that, “if employers misclassify employees as independent contractors and pay flat rates that undercut entitlements, they face serious consequences such as court action, hefty back-payment bills and penalties.”
For its part, Boske denies the claims.
Given the FWO’s stated intention to campaign on misclassified contractors for 2020, it is important for businesses to take the time to review and consider any independent contractors they engage, particularly if:
- the business pays an hourly rate for work;
- the business sets work hours;
- pay is calculated according to the time spent working, rather than on achieving a particular task;
- the contractors are portrayed as being a part of the business and working for the business (for example, by wearing uniforms or having business cards that identify the most part of the business); and
- the contractor cannot be said to be genuinely operating their own business, but instead are working for the business (especially if they are indistinguishable from others who are employees).
While some businesses (and their workers) believe there are advantages to engaging people as independent contractors, the consequences of any court action and orders to back-pay wages and annual leave entitlements or to have civil penalties imposed may quickly make those advantages evaporate. As well, certain contractors must be covered by a business’s WorkCover policy in any event.
It is an essential for the business’s legal risk management to take time to review and assess whether your independent contractors are in fact employees, and if they are, to recognise that fact and pay sufficiently to meet Award entitlements.
What to do
If you have workers whom you treat as contractors, and their engagement is consistent with any of the points 1 to 5 above, then you need to take some steps to assess your exposure to a risk of the FWO investigating you and making adverse findings about your engagement practices. You also need to consider the likelihood that a supposed contractor may claim against you, or even worse, complain to the FWO, that you have misclassified them. There may be significant adverse financial consequences from such a claim. If one contractor succeeds (or even claims they have been misclassified), you could face claims by a number of others. Multiple claims are common – don’t become another sufferer.
If, for any of your contractor workers, you cannot say for sure that they are operating their own business, then you need to take steps to assess your exposure of an FWO investigation.
If you are unsure, contact Cornwalls for advice and to review your contractors’ terms of engagement and operation to ensure your arrangements with the contractors are lawful and do not expose you to the unnecessary risk of claims for underpayment of wages or civil penalties. You also need to remember that directors or other persons in control of the business (for example HR Managers) who knowingly participate in a breach of these contractor arrangements can be subject to personal liability.
There may be ways to structure the contract arrangement that meet your business requirements but minimise the risk of misclassifying employees as contractors. Don’t leave this to chance or good luck. Review your contractor arrangements as soon as you can.
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.