Independent contractors are often engaged as a convenient way to cater for the changing needs of a business. However, the legal definition of a contractor can be complex and getting it wrong leaves businesses at risk to claims of "sham contracting".

We recently featured a case study on the EI blog which highlights the consequences of blurring the distinctions:

"In a Federal Court decision delivered on 18 November 2011, the Federal Court found that sales agents of an insurance company, who had been engaged for periods ranging from four to twenty four years as “contractors” were actually employees.

The Court acknowledged that there were factors that indicated the agents were employees as well as a number of factors that indicated they could be contractors – but decided overall that the true nature of the relationship was one of employment.

The indicators of a contractual relationship were:

1. The agents were paid commissions on the premiums collected from their sales;
2. The agents used their own motor vehicles;
3. No income tax was deducted from their payments;
4. The agents issued tax invoices.

The indicators of an employment relationship were:

1. The agents were under the employer’s effective control;
2. The tax invoices were generated by the employer;
3. The sales agents had no goodwill in their own businesses;
4. They did not work for anyone else;
5. They did not sell insurance for anyone else;
6. They followed the employer’s business systems.

As a result of the finding, substantial back payment of employee entitlements must be made. The extent of this and of penalties against the employer will be determined in a later decision.

The case highlights the care that needs to be taken when setting up contractor arrangements and it is recommended that legal advice be sought at the outset."