Whether someone providing services to a business is classed as an employee or independent contractor can be difficult to assess, but the distinction is important, and failing to establish it correctly can prove costly.

In a recent case, an interpreting and translating business which classified its interpreters as independent contractors found itself facing penalties.

The business engaged skilled people who could not renegotiate the rate at which they were remunerated but who were free to reject jobs and undertake work from rival companies.

Having recognised most of the interpreters as independent contractors, the company had not made employee minimum superannuation contributions for them.

The Tax Office, however, assessed the company as liable for super contributions for over 2,500 interpreters on its books over a five-year period and the case went to court.

In considering the matter, the judge said he looked beyond the mere contractual description to the real substance of the parties' roles, functions and work practices which establish the "totality of the relationship" – an approach involving what he described as a "smell test", or a level of intuition.

There were two aspects to the test: Is the person performing the work an entrepreneur who owns and operates a business? And do they represent that business rather than the business receiving the work? "If the answer to that question is yes, in the performance of that particular work, the person is likely to be an independent contractor. If no, then the person is likely to be an employee," the court held.

The company presented evidence of seven interpreters which the judge did not consider was a representative sample. He found only two of the seven owned and operated their own business and that the company had failed to establish the majority of its 2,500 translators and interpreters were independent contractors.

As a result it was liable to pay the superannuation guarantee charge. Employers need to be wary of sham contracting – if they fail to provide required employee entitlements they face a maximum penalty of $33,000 for each breach.