Employee versus contractor relationships in real estate

It is not uncommon for principals of real estate agencies to be approached by senior sales agents seeking to negotiate an appointment to perform their services as independent contractors rather than direct employees of a real estate agency.

The appeal for agents is twofold: that is, an agent who works as a contractor often has the potential to earn more money than they might as an employee, and contracting affords the agent increased flexibility in terms of how, when and for whom business services are performed.

Similarly, principals of agencies may see benefit in appointing contractors given that contractors are not entitled to annual leave or sick leave entitlements, or minimum wage entitlements. Independent contractors are also responsible for paying their own income tax and, in most (but not all) instances, their own superannuation contributions.

Nevertheless, there remains some risk to the principal of a real estate agency if the terms of the contracting relationship are not properly defined from the outset. That is, a failure to properly characterise the relationship by a written agreement such as to give certainty as to the terms under which the services are to be performed may expose principals to prosecution for sham contracting arrangements. 

Sham contracting

Principals who engage an agent as a contractor in circumstances where the terms of the retainer are akin to that of an employment relationship will be exposed to prosecution for engaging in a sham contracting arrangement.

The purpose of the sham contracting provisions under the Fair Work Act 2009 (Cth) [1] are designed to ensure that principals do not actively seek to avoid their obligation to pay workers those entitlements ordinarily due to them under the National Employment Standards.

A finding of sham contracting currently attracts maximum penalties of $93,900 for a corporate entity in respect of each contravention and $18,780 for any individual who is complicit in the contravention.

Employee -v- contractor: Distinguishing the nature of the relationship

The distinction between an employee and a contractor is that an employee works within the agency as a representative of the agency’s business under a contract of service, whereas a contractor operates their own business and may provide services to the agency’s business under a contract for services.

Determination of the nature of the relationship is not, however, always straightforward. 

In the past, a multi-factorial test was applied to determine whether an individual was an employee or a contractor, having regard to various indicia such as workplace control, mode of remuneration, provision of tools and equipment, responsibility for insurances and business expenses, the entitlement to perform services for multiple businesses, the vesting of goodwill, and the ability to sub-contract or delegate the performance of the services etc. 

However, in 2022, the High Court departed from that position by finding that the terms of the written agreement in place between the parties provide the mechanism by which the nature of the relationship is to be determined.

The decisions in Construction, Forestry, Maritime, Mining and Energy Union & Anor -v- Personnel Contracting Pty Ltd [2] and ZG Operations & Anor -v- Jamsek & Ors [3] served to afford contracting parties greater certainty as to the nature of their legal relationship by reference to the rights and obligations attaching to each of them under the written agreement.

Nevertheless, examination of the legal relationship by reference to the former multi-factorial test will still be warranted where the agreement is wholly or partly oral, or where the contractual terms have been varied by the parties, or where the terms are subject to challenge by either party as to their validity and enforceability.

Minimum requirements for contractor appointment

Of course, prior to negotiating the formation of an independent contracting agreement, it is necessary to ensure that an individual who seeks to carry out services as an individual contractor can demonstrate their qualification to do so.  

Noting the penalties which may apply for sham contracting, principals of real estate agencies ought to satisfy themselves that the contractor:

1. has a registered company and an Australian Business Number (ABN);
2. is neither an apprentice nor a trainee; and
3. holds a full real estate licence.

Principals should ensure that the written agreement is expressly conditional upon the contractor’s qualification of these factors.

Further, the terms of an independent contracting agreement must also provide that the contractor will:

1. be directly responsible for the cost of their own business equipment, training, licensing and applicable insurance policies;
2. be able to produce evidence of current and appropriate industry qualifications, and demonstrate the currency of all licenses and policies of insurance necessary to perform the services to which the agreement relates;
3. be entitled to determine how, where and when the services will be performed, subject to reasonable direction by the principal of the real estate agency having regard to the project(s) for which the contractor is appointed;
4. be at liberty to sub-contract or delegate the services to be performed under the agreement to another worker engaged by the contractor as the contractor deems appropriate;
5. enjoy the freedom to perform services for other businesses should they wish to do so; and
6. render invoices to the principal of the real estate agency in respect of all services performed under the agreement.

Principals ought to also be aware that certain contracting arrangements may still attract an obligation to pay the contractor superannuation on their ordinary time earnings. It is, therefore, important to seek legal advice as to the terms of the proposed retainer prior to entry into a binding agreement. 

Key takeaways

There is little doubt that independent contracting agreements may afford benefits to both the contractor and the real estate agency when the relationship is formed for genuine reasons of independence. However, the decision to enter into an independent contracting agreement is one which needs to be carefully considered.

Such an arrangement must not be put in place merely for the purpose of avoiding the agency’s obligation to pay employee entitlements such as annual leave, sick leave, payroll tax and/or superannuation.

Moreover, where a principal requires the individual to work exclusively for the agency, and otherwise wishes to maintain ultimate control over the performance of the individual’s workplace activities, a contracting agreement will generally not be appropriate.

Principals are urged to seek qualified legal advice prior to appointing an independent contractor to ensure that the terms of the retainer are drafted in a manner which is consistent with the intended relationship such as to avoid disputes as between the parties and/or exposure to prosecution for sham contracting.

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