Employee or Independent Contractor

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The Fair Work Act 2009 (the “Act”) prohibits employers entering into agreements which are sham arrangements. Sham arrangements or sham contracting is where an employer tries to disguise an employment relationship as an independent contracting relationship. Such arrangements are often entered into for a variety of reasons including flexibility for the employer and the employee and for the employer avoiding having to pay employee entitlements.


The Act provides that the employer cannot:

  • disguise an employment relationship or proposed employment relationship as an independent contracting arrangement;
  • dismiss or threaten to dismiss an employee to reengage them as an independent contractor; and
  • knowingly make a false statement to persuade or influence an employee to become an independent contractor.

Importantly, the Fair Work Act provides that the onus of proof in relation to sham contracting is on employers. This means that employers will need to prove that they have not breached the Act rather than the prosecution proving the employer did breach the Act.

There is no contravention of the Act if the employer proves on the balance of probabilities that at the time the person made the representations regarding the contract agreement, the employer did not know and was not reckless as to whether the contract was a contract of employment rather than a contract for services.


The name of an agreement between the parties is not relevant when determining the actual relationship. A court will look at the entirety of the relationship to determine whether an arrangement is a contract for services or a contract of employment.

A contract of employment traditionally is a relationship between an employer and an employee typically a relation between the bearer of power and one who is not the bearer of power. A contract of employment is also known as a contract of service.

This is distinguished from a contract for services which is a contract between one person and another for the provision of services on one or more occasions.


In determining whether there is a contract of employment or a contract for services, a court will look at various matters including:

  • The hours of work performed;
  • Whether the party was told when to start and finish the work;
  • The duration of work performed;
  • Whether the tools were provided by the employer;
  • Whether the worker has special qualifications or skills;
  • Whether the work can be sub-contracted;
  • Whether the worker performs work for other parties;
  • Whether the worker is restrained from performing work for other parties.

The above is not an exhaustive list but rather a list of the more common factors looked at in sham arrangements.


If a court finds that an arrangement is a contract of employment rather than a contract for services, the court can make varying orders, including:

  • the payment of a minimum wage;
  • the payment of employee entitlements such as annual leave and overtime; and
  • the payment of superannuation.

Pursuant to the Act, Fair Work Inspectors may take an employer to court if they believe the employer is involved in sham contracting. The courts are entitled to penalise the employer up to $33,000.00 per contravention. This means that if the employer is involved in more than one sham contracting arrangement, they may be liable to pay a penalty for each arrangement.


It is important that business owners and employers closely look at their arrangements that may fall within the definition of sham arrangements pursuant to the Act. Not only can the contractor/employee bring a claim, as Fair Work Australia now have the power to instigate their own investigations and court proceedings even where no complaint has been lodged. If you have any doubts about any of your arrangements, please contact Tony Pattinson, Director, from our office for expert legal advice.

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Category: Contract Law, Employment Law, Fact Finders, General

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