Employee or Contractor: Are YOU Sham Contracting?

This from Phill, who runs a crew agency:

Over the past couple of years, the Fair Work Ombudsman (FWO) has increasingly been investigating instances of sham contracting under the Fair Work Act 2009. In a nut shell, sham contracting is where a worker is engaged as a contractor but is doing the same work, or substantially the same work, as an employee; as a contractor they are missing out on employee entitlements such as annual leave, personal/carer’s leave and superannuation and are not covered by an Award or Agreement.

In the live performance industry, this is a particularly topical issue because many workers such as performers and musicians request to be engaged as a contractor (ie. as a sole trader) under their ABN rather than as an employee. If the worker is doing the same work as other people that are engaged as employees and amongst other issues, is subject to direction by the employer, the odds are that they should be engaged as an employee. The only exception may be where the employer engages the services of the worker through the worker’s Pty Ltd company.

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Why?
•    Because it is illegal under the Fair Work Act 2009 to do any of the following, with a civil remedy of $10,200:

(1)    misrepresent a person’s employment as an independent contracting arrangement when it is an employment relationship

(2)    dismiss an employee and engage them as an independent contractor to perform the same, or substantially the same, work

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(3)    make a misrepresentation to a worker to persuade the individual to become an independent contractor

•    Because you will have to make superannuation contributions on their behalf (provided that they meet the eligibility requirements) anyway as they are deemed to be an “employee” for superannuation purposes under the relevant legislation

•    Although the workers’ compensation legislation varies from state to state, in most States and Territories individuals engaged under an ABN must be covered by workers’ compensation insurance by the person or organisation that is engaging them

• A signed contracting stating that the worker is an independent contractor is not enough; it depends on the totality of the factors such as whether the worker is subject to control or direction – can they choose when they work and how to do it? Do they have to follow any policies or procedures in performing the work? Can they delegate the work to someone else?

•    A person or organisation that is found to have sham contracted a worker will have to back-pay unpaid accrued entitlements such as annual and long service leave and may also have penalties imposed

Employers may be putting themselves at risk of investigation for sham contracting even though they are providing the workers with many of the same benefits as an employee. Whether a worker is an employee or contractor depends on how the relationship actually works in practice. This is the case even if they’ve signed a written independent contracting agreement.

Should a performer or musician request to be engaged as a contractor, you should tell them that you can only do so if they have their own Pty Ltd company. Effectively, you would be sub-contracting to the company to provide the services of the performer or musician. That company is their employer; it is responsible for paying wages, annual leave, superannuation and workers’ compensation. As a result, the fee negotiated for such companies includes compensation for annual leave, superannuation, overtime, workers’ compensation etc. As a general guide, an additional amount of between 18% – 25% over the usual rate of pay is negotiated.

In 95% of cases a performer, musician or backstage employee will be an employee. There are a number of factors which are used to determine whether a worker is an employee or contractor, one of which is that of control of the work being performed. This test will usually mean that the majority of workers in the live performance industry will be employees.

Exceptions will be (a) employees with their own Pty Ltd companies (as discussed above) and (b) artists engaged in festivals or similar performances where the employer or organisation has no control over what the artists do/play at the event and (c) some artistic personnel.

Artistic personnel have much more freedom in performing their work, but whether they are an employee or not will depend on the type of artistic personnel and the work they are doing. Directors, choreographers and musical directors do work in their own time, but are also required to attend rehearsals and performances at set times. However, designers such as set and costume designers tend to have more freedom in deciding when and how they will perform their work, and will use their own tools to do so. The totality of the parties’ relationship must be considered. There is a strong argument that artistic personnel who do not have their own company may well be employees.

The case law cited below gives an insight into how the courts look at the question of whether a person is an employee or a contractor.

The Case Law
ACE Insurance Limited v Trifunovski (2013): An insurance company was ordered to pay $490,000 in unpaid entitlements and $10,000 in penalties after it was found that five former insurance sales agents were engaged as independent contractors but were actually employees. This was on the grounds that:

•    The Company exercised some control over how the agents performed their work

•    In practice the agents could not carry on other businesses due to the hours worked for the Company

•    The agents were not conducting their own business but were instead enhancing the goodwill of the Company

•    The Company exercised a high degree of organisational control over the agents (they were subject to training and development programs, organised into teams, provided incentives for advancement)

Even though the insurance agents considered themselves to be contractors, were paid a commission and not a salary, used their own vehicles, employed their own administrative staff, were permitted to carry on other business and had some of them had incorporated themselves, based on factors listed above the court found that the agents were employees.

Donovan v Sullivan t/a Blaze on Stage Pty Ltd (2006): A club entertainer was offered work doing in-house by an agent at a club. Training was provided, and the entertainer was required to issue invoices under his ABN including GST for the work carried out. After 18 months, the agent terminated the entertainer’s services at the club and the entertainer lodged a claim for unfair dismissal against the agent. Initially it was found that the entertainer was an independent contractor on the basis of the Entertainment Industry Act 1999 (NSW) which governs the relationship between agents and performers in New South Wales, but this was overturned on the appeal. The Full Bench of the NSW Industrial Relations Commission stated that the Entertainment Industry Act 1999 (NSW) was not determinative of their employment relationship – the totality of the parties’ relationship had to be considered. The Full Bench found that the entertainer was an employee of the venue based on the following findings of fact:

•    The entertainer’s engagement was on a regular basis for an 18-month period to perform promotional work for the club

•    The entertainer was paid weekly from a fee paid by the club to the agent

•    The club trained the entertainer on an existing system which had to be adhered to

•    The entertainer worked as part of a team

•    Promotions were run at the direction of the club and the entertainer did not exercise artistic control over the promotions

•    The club provided all tools of the trade

•    The club was responsible for any workers’ compensation obligations

•    The club directed the agent to cut back the entertainer’s work and later to terminate it, and the agent was obliged to follow those directions

Stern v C Restaurant (2006):
A performer (singer/pianist) was issued with a Memorandum of Understanding to perform at a restaurant at specific times, provided a meal, paid weekly, and was provided with a car park. Two weeks’ notice was required by either party to terminate the agreement. The Western Australian Industrial Relations Commission found on balance that the performer’s working relationship with the restaurant was as an employee based on the following factors:

•    The Memorandum of Understanding did not indicate the performer’s employment status but confirmed an ongoing permanent part-time relationship which could be terminated with two weeks’ notice by either party

•    The performer was paid on a weekly basis for hours worked (like an employee) after an invoice was submitted

•    The performer worked regular and fixed hours that he could not vary

•    There was no provision in the agreement for annual, sick or long service leave

•    The performer was responsible for paying his own tax under the ATO scheme but did not have an ABN so could not do so
•    The performer was not under the restaurant’s direct control when performing, but this is not unusual in this industry

•    The performer was part of the restaurant’s operational structure, as he assisted them to update its sound system, provided his database for promotional use and was provided with a staff meal and car parking

•    The restaurant did not make superannuation contributions on the performer’s behalf

•    The restaurant provided and maintained the piano and sound equipment used by the performer

•    There was no evidence that the performer was running his own business; he did not have an ABN

•    The performer was required to work at a set time and day, and there was no evidence that he could unilaterally vary the times

Increases to Superannuation begin on 1 July 2013
The Federal Government announced three years ago that it will be gradually increasing the superannuation guarantee rate that employers are required to make on behalf of their employees (and in some circumstances, independent contractors engaged under an ABN) from 9% to 12%. The superannuation guarantee rate will increase gradually from 1 July 2013 until it reaches 12% on 1 July 2019.

For 2013-2014 the rate will be 9.25%

The superannuation guarantee rate is the minimum contribution that should be made by an employer on behalf of eligible employees. If an employer has employees that are covered by an Enterprise Agreement such as the Performers’ Collective Agreement (PCA) that requires superannuation contributions higher than 9%, employers should continue to pay the higher rate until the superannuation guarantee rate exceeds it. The increases are not on top of superannuation contributions that exceed the superannuation guarantee rate and can be absorbed into the higher superannuation contribution.

Employers may take these increases into account when negotiating future wage increases in enterprise agreement negotiations.