Hiring a new employee is a crucial decision in any business. However, deciding on the most appropriate employment relationship for a growing business can be a daunting prospect. With so many types of employment arrangements now available such as full-time and part-time permanent employment, casual employment, temporary employment, internships and fixed term employment to name a few, each with their own respective advantages and disadvantages, it can be difficult to know which is the most appropriate arrangement to use for your business. It is crucial for employers to understand the differences between the respective ways in which an employee can be engaged, so as to enable the business to make an appropriate decision regarding the make-up of its workforce. In addition, incorrectly classifying an employment relationship can have serious detrimental consequences. In this article, we provide a summary of some of the most popular employment arrangements and how they can be used.
Full-time or part-time permanent employment
The Fair Work Act 2009 (Cth) (“FWA”) provides the definition for full-time and part-time employment. Employment status is classified based on the ordinary hours of work per week of the employee. A full-time employee usually works an average of 38 hours per week under an ongoing employment contract, while a part-time employee usually works less than that. The actual hours of work for an employee in a particular job or industry are agreed between the employer and the employee and/or set by a modern award or other industrial instrument.
Both full-time and part-time employees must receive the benefits of the minimum standards as set out in the National Employment Standards (“NES”) in the FWA. This includes:
- Maximum weekly hours;
- Requests for flexible working arrangements;
- Parental leave and related entitlements;
- Annual leave;
- Personal carers leave and compassionate leave;
- Community service leave;
- Long service leave;
- Public holidays;
- Notice of termination and redundancy pay;
- The Fair Work Information Statement.
Full-time and part-time employees will also be entitled to superannuation payments in accordance with legislation.
The key difference between full-time and part-time employees, other than the fact that part-time employees work less than 38 hours per week, is that a part-time employee will accrue their minimum lawful entitlements on a pro-rata basis based for the hours of work they perform.
If employers do not require an employee to work at least 38 hours a week, it would be advisable that the employee is engaged as a part-time employee and this is made clear to the employee when they commence. It is also important for both the employer and employee to make clear the part-time hours and whether these are set or flexible, to some extend if flexible part-time hours are preferred, this often can replace a casual employment arrangement.
A casual employee is usually understood to mean an employee who works only on demand by an employer, and there is no ongoing expectation of work. A casual employee works on an ad hoc needs basis and does not have regular and systematic working hours. Casual employees do not receive all the entitlements available to permanent staff such as paid leave. However, all modern awards provide for the payment of a casual loading (usually 25% of the minimum award wage) as compensation for not receiving the usual employment entitlements provided under the NES and in recognition that casual employment is, by its very nature, a precarious type of employment.
Although under the FWA casual employees do not have access to paid leave entitlements under the NES, they are entitled to two days unpaid carer’s leave, two days unpaid compassionate leave per occasion and unpaid community service leave.
Notably, the Fair Work Commission recently handed down a decision to insert a clause in many modern awards to allow casuals who have worked regular and systematic hours over a 12-month period, to request their employer to convert them to a permanent position. Employers are able to refuse the request but only in reasonable circumstances.
Employers tend to favour casual employment in circumstances where they cannot predict the amount of work that will be available or in the mistaken belief that casual employment provides them protection from unfair dismissal laws. This is not in fact the case. Casual employees who have worked regular and systematic hours and have a reasonable expectation of ongoing work will have access to the unfair dismissal regime. It may therefore be far more cost effective, not to mention increase employee engagement and morale if regular casual employees are engaged as permanent part-time employees, or fixed term employees.
Fixed term contract
Fixed term employees are individuals who have an employment contract where both parties agree employment will be for a specified period of time or for the completion of a specific task.
A fixed term contract may be appropriate when the business needs an employee only during a seasonal period or if the company requires a specialist for a given project. Companies may also consider offering a fixed term contract to cover maternity leave or extended sick leave, or to fill other temporary absences.
Contrary to opinion, a full-time or part-time employee under a fixed term employment contract have similar entitlements to that of a permanent employee including the minimum conditions set by the NES, except for notice of termination and access to the unfair dismissal regime. It is important to remember that a fixed term contract should specify when the employment ends. It is also generally understood that where a fixed term contract gives either party an unqualified right to terminate the contract on notice rather than at the end of the term, or with payment in lieu of notice, it may not be considered a fixed term contract for the purposes of the exemption to the unfair dismissal regime. As such, the employee may be entitled to make an application under the unfair dismissal provisions of the FWA. To prevent this, the contract needs to be carefully drafted.
Employers should also be cautious when engaging employees under a series of fixed term contracts. If it becomes the practice that the fixed term employment is being continuously renewed, it may be open for a Court to conclude that a continuing employment relationship exists and there is an expectation of ongoing employment. In all circumstances of re-engagement, the employer must ensure that there is a relevant and appropriate contract of employment in place. The failure to do so may mean that the employee is able to argue that they are entitled to reasonable notice on termination, and not subject to any previous expired contracts, including any restrictive covenants contained in them.
Independent contractor arrangement
A person who enters into a contract of service is an employee, however where there is as an arrangement that provides for a contract for services by an individual or entity, this may be an independent contractor arrangement. The difference between a contract of services and a contract of service (or in other words an employment relationship versus an independent contractor relationship) are complex and beyond the scope of this article. Unlike employees, independent contractors are not subject to the provisions of the NES and not entitled to the benefits of employment including the operation of Modern Awards, leave, superannuation and the like.
However, despite the obvious attraction of engaging workers as independent contractors, doing so inappropriately when in fact the worker is an employee can mean significant liability and cost for the employer. The FWA has specific penalty provisions for sham contracting designed for the very purpose of preventing and discouraging the misuse of independent contractor arrangements. This issue of contractor arrangements has been prevalent in the headlines, with many cases of contractor arrangements being deemed as sham contracting by the Federal Court. It is extremely important that if your business intends to engage a contractor, that the relationship is in fact one of a genuine independence. The consequences of having a relationship deemed as a sham contract may include significant costs including back pay of entitlements owed to the employee (including back pay, leave entitlements, overtime and allowances and superannuation), penalties against the company and its directors, and tax liability and penalties for breach of the relevant tax legislation.
It should be remembered proper independent contractor arrangements do have some protections including pursuant to the Independent Contractors Act 2006 (Cth) and the FWA. The Independent Contractors Act 2006 allows independent contractors to sue the principal where the contract is unfair, harsh or unconscionable and goes some way to protects the rights and entitlements of independent contractors.
The failure to properly address the working relationship and ensure employees are engaged correctly can have significant adverse consequences as is illustrated by the decision in Balemian v Mobilia Manufacturing Pty Ltd & Anor  FCCA 743. In this case, Judge Hartnett ruled that Mobilia, its predecessor company Austcraft Contructions and its sole director misrepresented the working relationship of a worker. The employer had underpaid the worker by more than $230,000 through recklessly disguising the true legal nature of a 20 year plus employment relationship by classifying the worker as an independent contractor.
The worker had begun at Austcraft in 1994, but never entered into a written contractual arrangement with the business. The worker asserted the arrangement was “one of word of mouth and trust” but he considered himself an employee. The worker said he never discussed his working arrangements in greater detail because he was “very naïve” and was “embarrassed” to ask about his pay and entitlements. Hartnett J accepted there was simply an absence of agreement or discussion about the employment relationship other than the agreement that the worker would be paid hourly and could use the company car.
Her Honour held that the company had the power to direct the worker to perform work of its choice and controlled important aspects of his working arrangements and day-today activities. He was also not free to use his own discretion in relation to how he performed the work and this was clearly demonstrative of a contract of employment.
Judge Hartnett found the worker had missed out on 425 days of annual leave and more than 18 weeks long service leave. Her Honour calculated that the worker suffered a financial loss of $231,326.95, because of the employer failing to pay him at the correct rate (a shortfall of more than $26,000), or to pay for annual leave (more than $102,000), public holidays (more than $51,000), long service leave (more than $22,000) and superannuation (more than $29,000).
Lessons for employers
Prior to hiring, a business should consider the most appropriate type of employment it requires. To do this, the business should assess their current and future needs and clearly identify and define the role needing to be filled. If the role is short term, and required to fill an immediate unpredictable need, then casual employment may be appropriate. If however, the role is short-term but the hours are fixed and certain, a fixed term contract may be advisable. If the role is ongoing but requires the person to work less than 38 hours a week, a part time permanent contract would be recommended. On the rare occasion that a specific assignment or service is required for a very specific or identifiable purpose, an independent contractor arrangement may be suitable. In all circumstances, once the correct relationship has been identified, it is essential that an appropriate and carefully considered and drafted contract is provided to the individual concerned.
If you wish to discuss any aspect of this article or require specialist advice or assistance in relation to your employment relations framework, please do not hesitate to contact us.
This alert is not intended to constitute, and should not be treated as, legal advice.