Employees, independent contractors and ‘shams’ in the construction industry

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It is common for builders and operators in the construction industry to utilise contractors to carry out specific trade skills such as concreting, plastering, bricklaying and plumbing.

Business operators however, need to be cautious when ‘hiring’ skilled or other labour to ensure that they are not in breach of provisions of the Fair Work Act 2009 (Cth) (the ‘Act’). The Act prohibits a person from misrepresenting ‘employment’ as ‘independent contracting’, otherwise known as ‘sham arrangements’.

These sham arrangements have been predominant in the construction industry and are illegal.

It is important for business operators to understand the difference between an independent contractor and employee.

Example of a sham arrangement

Sham contracting came back to haunt Royans Wagga Pty Ltd in the 2017 case, Putland v Royans Wagga [2017] FCA 910. Royans Wagga was a business primarily running truck repairs. Linda and Shane Putland performed work for Royans Wagga over many years in a call centre, obtaining and passing on information about vehicle accidents to Royans Wagga sales representatives so that repair work could be secured.

If the Putlands could prove that they were employees and not independent contractors, they stood to gain significant back pay and payment in lieu of reasonable notice of termination. Meanwhile Royans Wagga stood down the barrel of a long list of contraventions of the Act and pecuniary penalties. It therefore denied the employer-employee relationship, arguing that the Putlands were independent contractors.

As is often the case, a number of factors pointed towards either relationship. Bromwich J had to balance these factors against each other and arrive at a conclusion.

Is someone an employee or an independent contractor?

The distinction between an employee and independent contractor is not always easy to determine. Generally, the Fair Work Commission or a Court will look behind the label given to the arrangement by the parties to identify the factual substance of the relationship. How one party or both parties view the relationship is not determinative of the issue.

Primarily, an employment relationship is an exchange of labour (time, skill and effort) for remuneration – the employee serves the employer as opposed to carrying on a business in his or her own right.

If the worker is acting as an entrepreneur who owns and operates an enterprise and as a representative of its own business, then it is more likely that the worker is an independent contractor.

The entirety of the relationship is analysed which might consider the following factors:

  • the degree of control that a business operator can exercise over a worker engaged to perform work (whether the control is actually exercised or whether just the potential exists);
  • whether the worker works exclusively for the business operator;
  • the provision of a uniform, business cards, tools etc. from the business operator;
  • whether the worker undertakes work personally or is free to delegate to others;
  • the location of the work;
  • the method of payment for the work performed – whether at an hourly rate or on completion of a specific project, whether wages are paid or there is a commission;
  • the responsibility for acquisition and maintenance of equipment;
  • the creation of goodwill of saleable assets through the work performed;
  • the allocation of risk and profit associated with the work;
  • the degree of integration the worker has with the entity for which it works;
  • the existence of leave, taxation, superannuation payments, etc;
  • how ‘business-like’ is the business of the business operator – are there systems, manuals, invoices etc;
  • the right of the business operator to dictate the place of work, hours of work etc. of the worker

This list is not exhaustive.

In the case above, Royans Wagga required the Putlands to obtain ANBs, it issued tax invoices in lump-sum amounts, it did not deduct income tax, it did not require uniforms to be worn, and it paid others to do work.

On the other side of the scales, the Putlands only worked for Royans Wigans, their telephone and internet accounts were paid by Royans Wigan, they had their office equipment supplied, they did not advertise any business run by themselves, their work led to Royans Wigans accruing goodwill, and they lacked ‘true autonomy’ in their work. Evidence also indicated the managing director of Royans Wigans had authority to control and issued directions and approvals to the Putlands.

Bromwich J decided it was an employee-employer relationship, to Royans Wagga’s significant detriment.

Misrepresenting employment as independent contracting

A business operator is prohibited from offering a person a role as an independent contractor when the relationship between the parties is really one of employer-employee.

Section 357 of the Act states: ‘A person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.’

To take advantage of a sham arrangement, the employer would insist that the ‘contractor’ obtain an Australian Business Number (ABN) and create his or her own business before commencing work. The worker is generally responsible for paying his or her own taxes and insurances.

The worker is treated as an independent contractor and the employer circumvents the obligations that would normally arise from an employer-employee relationship. Consequently, by signing up as an independent contractor, the worker foregoes access to employment entitlements such as payment for annual and sick leave, long service leave, compulsory superannuation contributions and protection from unfair dismissal or termination of employment.

For contractors who are genuinely running a business as a profit-making enterprise this is not problematic. However, in the case of a sham arrangement, the workers may earn a higher hourly rate, but perhaps not conducive to a profit-making enterprise, from which they must pay their own tax, insurance and superannuation. In such circumstances, the sham arrangement results in the employer ‘getting its cake and eating it too’.

Sham arrangements are illegal

It is illegal to inform a someone that he or she is an independent contractor if they are actually an employee. It is also illegal to dismiss an employee or threaten to dismiss an employee for the purpose of ‘re-engaging’ them in predominantly the same work as they performed whilst they were employed.

Similarly, a person must not induce a former employee to carry out the same type of work as when they were employed under the guise of an independent contractor arrangement. Where an employer employs or has at any time employed an individual to perform particular work, the Act also makes it illegal for the employer to make a statement that they know is false in order to persuade the individual to perform substantially the same work as an independent contractor.

Businesses entering sham arrangements risk significant civil penalties and potential claims for back-pay of employee entitlements such as annual leave payments, sick leave and superannuation contributions.

Why do businesses use sham arrangements?

A sham arrangement may result from simple ignorance on the part of the business owner or a desire to minimise costs. A worker may even indicate that he or she is ‘happy’ with the arrangement.

Sham arrangements may be prevalent during the start-up phase of a new business where cashflow is limited and the future success of the enterprise unknown. Conversely, businesses may have been running sham arrangements for some time.

The temptation to use ‘contractors’ instead of employing staff usually flows from a desire to circumvent the financial and other responsibilities that arise from an employment relationship. If the business takes on workers as independent contractors rather than as employees, the business need not comply with nationally-recognised employment conditions, annual leave, sick leave, workers’ compensation or termination processes.

Conclusion

If you are considering engaging workers for your building projects, you should think carefully about the arrangements to determine whether your workers are truly independent contractors or employees. If you are unsure, obtain legal advice.

Failing to do so could lead to significant costs down the line.

Please contact us should you require any further information, on +612 9248 3450 or email [email protected]

Deal or no deal: electronic signatures and contract law

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Of the many changes brought by the digital age to the commercial landscape, one that is overlooked is the act of executing a contract. The days of wet-ink signing ceremonies in boardrooms are on the way out, while clicking a computer mouse a few times is fast becoming the norm. This can lead to situations that will make any company director uneasy.

Williams Group Australia v Crocker

A software system HelloFax enables users to upload their digital signatures to a document if the correct password and username are entered. Director A of a building company sets up usernames and passwords for Directors B and C. The passwords are not changed. Down the track, Director A uses these passwords to execute an application for credit not only in their name but also in the names of Directors B and C. Director A also executes personal guarantees bearing the digital signatures of all the directors. A lending company approves this credit application, and over time a $889,534.35 debt is accrued.

Eventually, the lending company claims the debt from the building company, and from the directors personally. Director C learns that they are being personally sued for hundreds of thousands of dollars.

Of course this was a real case: Williams Group Australia v Crocker [2016] NSWCA 265. One of the parties was going to be left up the proverbial creek without a paddle. If the contract was void then Williams Group Australia’s debts were lost. If the contract was valid, then the innocent director Mr Crocker was going to foot the substantial bill for a contract he didn’t sign.

Digital signatures made basic questions difficult. As Crocker said in evidence: “Well it’s difficult when you’re presented with … your signature that’s electronic to know whether you did or didn’t [sign it]”.

Ultimately Crocker won, as he had not represented that his co-director had authority to sign on his own behalf. Had it been he who set up the signature software, however, it might have been different. And the substantial legal bills undoubtedly soured the victory. A warning shot was fired for all users of digital signatures.

Digital signatures and electronic signatures: some basics

Some quick definitions:

  • Electronic signatures are essentially like traditional handwritten signatures but in electronic form: typing a name into an email, or pasting an image of a signature.
  • Digital signatures use a code attached to an electronic document that identifies and authenticates the signatory. Adobe Sign for PDF files is one example. One party has a ‘private key’, which enables them (and only them) to sign a document. The other another party has a ‘public key’ enabling them to see the signature, but which does not let them edit the signature.

In both types of signature, if a witness is required, they must be present to witness the authentication.

What risks do electronic executions open a company up to?

Of course, there are enormous benefits brought by the rise of digital and electronic signatures. The software keeps a record of who signs and when. They are efficient: signatories don’t need to leave their office, and can almost instantaneously do business with parties on the other side of the globe. However, this rise also brings added complexities.

Two of these must be considered by businesspeople:

  1. Unauthorised use of the signature, or forgery, is now quite easy. Directors must beware of colleagues or fraudulent third parties taking their signature or the digital key. Even though forgery is illegal and renders a contract void, it creates huge problems, especially if the fraudulent party has disappeared with the money. Also, it won’t be forgery where a superior has given a subordinate authority to use the digital signature software; working out whether this has happened is not always easy.
  2. On the other side of the coin, a person may intend to sign a contract, but if the electronic execution is not done according to law, a contract may be deemed unenforceable and the other party can escape its obligations.

The law tries to find a line between a desire for commercial convenience and the desire to prevent forgery. It pays, sometimes in the hundreds of thousands, for signatories to be aware of the law around electronic execution.

A contract is void if the signature is forged, so that it is as if the contract never existed. However, this is no consolation if the forger has disappeared.

So how do I digitally execute my contract properly?

Very generally, the law’s position is not totally different for digital execution as for physical wet-ink execution. Contract law remains the same at its core: there must be an intention shown to make an offer and to accept that offer.

Having said this, there is no short answer to this question. Certain types of contracts, such as for sale of land or for giving someone else your right to sue, have particular requirements and electronic execution might not suffice. Statutes will have different definitions of signature.

Australian governments foresaw the issue of electronic execution at the turn of the century. They enacted the Electronic Transactions Act 1999 (Cth) and the Electronic Transactions Act 2000 (NSW).

These Acts make it clear a transaction, including a contract, is not invalid just because a signature was made electronically. Additionally, if an Act requires someone to give information in writing, this is satisfied by electronic communication so long as this communication is readily accessible and the other person consents to electronic communication.

To meet the requirements of signature by electronic means:

(1) A method must be used to identify the signing party and to indicate the person’s intention;

(2) This method must be as reliable as appropriate for the purpose for which the electronic communication was generated; and

(3) The other party must consent to the use of electronic means to sign a document.

Where the signatory is someone acting on behalf of someone else, e.g. an employee for a corporation:

(4) The signing person must have authority to bind the principal.

The cases confirm this story. Generally, a person must put their name or mark to a document, and the important part is that they must do this “for the purpose of adopting or authenticating the document”. In some contexts, a typed first name at the end of an email suffices to create legal relations between the receiver and the sender.

Businesspeople should be very cautious in relation to witnesses to signatures, as attestation is not apparently protected under these Acts. It is assumed electronic attestation is permitted under law, but this has not been demonstrated yet.

The fourth element: binding a principal

As (4) indicates above, the situation is further complicated for companies or other principals and their agents. The person signing a document must have some form of authority to do sign on the principal’s behalf.

This authority must come from the company. Always the safest form of authority is express actual authority: the company should inform the other party in writing that the agent has the authority to use the electronic signature.

A company may also give the person ostensible authority, such as by providing them a certain title, status and facilities. Common practice is for businesses to put in place an organisational structure that gives the appearance to outsiders that an officer has the authority to bind the principal. For example:

  • Giving an officer the title ‘Manager’ and providing letterheads and business cards gives ostensible authority to the officer.
  • Significant prior dealings in which a person acted on behalf of the company, to its apparent acceptance

Conclusion

In Williams Group Australia v Crocker, if the director Crocker had made some representation that his co-director had authority to sign on his behalf, then he could well have been bound. This ostensible authority might have arisen if Crocker had set up the electronic signature system himself. He was saved by the fact that his co-director had set up the system.

Crocker was also saved by the fact that email notifications that came with use of his digital signature were not detailed enough to inform him of the full circumstances of his signature being used by his co-director. Had they fully informed him of the circumstances and had he done nothing, he may have ‘ratified’ the signature and beared the costs.

The court did not resolve the question of whether a ‘genuine’ electronic signature made without authority is forgery, but hinted that it might be.

The story is not happy for any of the parties. Crocker was still put through the ordeal of expensive legal proceedings. Williams Group Australia faced huge losses.

The case shows that in the digital age, training and rigorous checks and balances are more important than ever in ensuring that employees understand how their signatures are used and who has authority to use them.

And there is no substitute for open communication between the two parties about who has authority and how they will exercise it.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected]

New laws in relation to multi-storey residential strata schemes

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On 27 September 2018, the NSW government enacted amendments in relation to residential strata schemes. In introducing the bill, Minister for Innovation and Better Regulation Matt Kean MP said: “Currently more than two million New South Wales residents are working as strata industry professionals or strata owners, or are living in strata-titled townhouses or units.”

The amendments are aimed at reducing defects arising from defective construction of residential strata schemes. The Amending Act is called the Strata Schemes Management Amendment (Building Defects Scheme) Act 2018. It makes changes to Part 11 of the Strata Schemes Management Act 2015 (the Act) and will take effect when the government announces so in the NSW Government Gazette. The Legislation Review Committee indicates this will happen ‘once the regulations are operational’.

Who is affected by this amendment?

Firstly, Part 11 only applies to contracts entered into on or after 1 January 2018.

Secondly, Part 11 only applies to ‘residential building work’ carried out on any part of a multi-unit dwelling strata scheme of at least four storeys.

Thirdly, Developers cannot contract out of these provisions.

The Act

At its core, Part 11 was intended to ‘streamline the identification and rectification of defects for the benefit of strata residents, builders and developers’. The Act contains the following provisions:

  • A developer must arrange for an inspection report. This means they must appoint a qualified, impartial and independent person as a building inspector, generally within 12 months of completion of the building works;
  • This building inspector must carry out an inspection of the building work and provide an interim report between 15 months and 18 months after the completion of the building work. This interim report must identify any defective building work and attempt to identify the causes of the defective work;
  • Within 18 months of the completion of the building, the developer must then arrange for the same building inspector to provide a final report on the building work;
  • The building inspector must carry out a final inspection and provide the final report to all parties between 21 months and 2 years after the completion of the building work. This report is to identify both defects not rectified, and defects arising from attempts to rectify defects. The report also must specify how defects should be rectified;
  • All costs of inspection and reporting are borne by the developer;
  • Before commencing a development, a developer must also lodge a building bond which is worth 2 percent of the total development contract price, it is to be given to the Secretary of the Department of Finance, Services and Innovation (the Secretary);
  • The 2 percent bond will be used by the owners corporation of a building as security for funding to rectify any defects in the building that arise. It can be claimed up to 2 years after the date of completion of the building work, or within 60 days after the building inspector’s final report – whichever is later; and
  • The Secretary,  owners corporation or the developer can apply to the NSW Civil and Administrative Tribunal to have the contract price determined by the Tribunal..

Some of the decisions made by the Secretary are reviewable, but such an application for review must be made within 14 days after notice of the decision is given.

The amendments

Developers of strata schemes need to be aware that there are now new requirements in relation to lodging a bond and providing information to authorities in relation to the contract price. Additionally, the Secretary has been given increased investigative powers in relation to the contract price, building bonds and building defects.

The amendments are as follows:

  • The Amending Act now makes it mandatory, before an application can even be made for an occupation certificate, for the developer to give the 2 percent building bond to the Secretary. Failing to do this will attract a significantly increased penalty: originally $22,000, the maximum penalty is now $1.1 million and an additional $22,000 for each day the offence continues;
  • There is also a new penalty where a developer provides the Secretary with false or misleading information about the contract price or amount required to be secured by the bond (maximum penalty: $1.1 million for corporations, $22,000 for any other case);
  • A requirement that the developer and owners corporation agree on the amount required to rectify any building defects identified by the inspector. They may use a wide range of methods to determine the cost. If they cannot agree, the Secretary may appoint a quantity surveyor to determine this amount;
  • The deadline for an owners corporation to claim the secured amount to rectify defects has been extended, from 60 days after the building inspector’s final report is issued to 90 days;
  • The Secretary may consider it appropriate to release the developer from the bond, if the interim report does not identify any defects, or if some of the amount has been claimed and both the owners corporation and developers agree to cancel the remaining amount;
  • Where the building bond given by a developer is insufficient to cover the amount required to be secured, the Secretary may recover the required amount in court as a debt from a developer. The owners corporation may then claim from the Secretary;
  • The Amending Act grants new powers of investigation and enforcement of Part 11 to any officer authorised by the Secretary. These powers are for the purposes of investigation, monitoring and enforcing compliance with Part 11, and/or for obtaining information and records to be used in administering Part 11. For these purposes:
    1. An authorised officer may by notice in writing to a person require them to provide information or records;
    2. An authorised officer may require a person or the director of a corporation to answer their questions, if they suspect this person has knowledge about Part 11 matters;
    3. An authorised officer may enter premises at any reasonable time, with or without a search warrant, and do certain activities: make examinations and inquiries, direct a person to produce records, examine and inspect records, copy records, and seize anything suspected of being connected with an offence. Where the premises are predominantly residential, a warrant or the consent of the occupier is required for entry;
    4. An authorised officer may obtain a warrant to enter and search premises for evidence of contravention of Part 11;
    5. Penalties for refusing to comply with these requirements, or obstructing an authorised officer, gives rise to penalties up to $4400 for a corporation, or $2200 for any other case. This is unless reasonable excuse can be shown, such as client legal privilege or a privilege against self-incrimination; and
  • A building inspector is protected from action, liability or claim where they act in good faith and for the purposes of their Part 11 functions. Professional associations will however have powers to impose conditions on the functions of building inspectors. A person authorised by the Secretary is also protected from liability, however the Crown may be sued.

Conclusion

The NSW government is taking a keen interest in the processes of identification and rectification of defective building works in strata schemes. It is also clamping down on attempts to circumvent the Act.

In this changing legal environment, it is essential that parties involved in constructing residential strata developments, including developers and owners corporations, understand these changes to their rights and obligations. For developers affected by these provisions, the first deadline to be met could be as soon as 1 January 2019 for the appointment of a building inspector.

Please contact us, should you require any further information, on +612 9248 3450 or email [email protected].

Security of Payment – More Changes

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On 21 November 2018, the NSW government passed the Building and Construction Industry Security of Payment Amendment Act 2018.

This will make changes to the security of payment regime, and will take effect when the government announces so in the NSW Government Gazette.

So what are the main changes that builders and developers need to be aware of?

  • A payment claim must once again state that it is made under the Building and Construction Industry Security of Payment Act 1999 (“endorsement”);
  • Progress payments to a subcontractor are now due and payable 20 business days after a payment claim is issued (previously: 30 business days);
  • The ‘reference date’ system for payment claims is abolished. Now, where the contract is silent on dates for serving payment claims, a payment claim may be served on the last day of the month that construction work was first carried out under the contract, and then for the last day of each month of work afterwards;
  • Where a contract is terminated, a payment claim may be made from the date of termination;
  • If a head contractor company issues a payment claim to a principal and provides a supporting statement that is known to be false or misleading, then any company director who knows about this false or misleading statement can be convicted of an offence;
  • The Minister for Innovation and Better Regulation may make codes of practice to be observed by adjudicating organisations, and may cancel an adjudicating organisation’s authority for non-compliance with these;
  • Once a corporation is in liquidation, it cannot serve payment claims or enforce them;
  • Authorised officers from the Department of Finance, Services and Innovation now have extensive powers for the purposes of investigating, monitoring and enforcing compliance with the Act; and
  • Maximum penalties for various provisions have been increased.

The amendments also confirm what the High Court has already decided: that there are very limited grounds for appealing the decision of an adjudicator once it is made.

Other changes have also been made. These changes do not apply to any contract entered into before the amendments take effect. If you’d like to know more, please contact us on +612 9248 3450 or email [email protected].