This firm acts for a lot of clients in industries where the difference between an employee and contractor can be difficult to assess, including:
- Building and Construction;
- Mining and Resources;
- Transport and Logistics.
Risks and Penalties
This issue – employee or contractor – particularly for the industries above, is frequently targeted by the ATO, Unions, the Fair Work Ombudsman and other agencies with regulatory powers, and there can be severe consequences for getting it wrong, including exposure to large back-pay obligations and personal liability for directors and human resources managers.
- In May 2012, a steel fixing company, Inner Strength Steel Fixing Pty Ltd received penalties of $41,250.00 for contraventions of the Fair Work Act 2009 (and the preceding legislation) relating to engaging workers as contractors in circumstances where they should have been treated as employees. In addition, the director was personally penalized $6,750.00, and the business was further liable to its workers for accumulated under-payments and leave and other entitlements;
- In April 2011, the ATO won a landmark case against a business, On Call Interpreters that put interpreters into short-term placements. The court refined the previous test defining “employee” to include an examination about entrepreneurship and the role of a worker within a business that builds good will. And, a little surprisingly, found against the business in circumstances where, some years earlier, the business had truthfully and accurately completed an ATO questionnaire and received written ATO feedback accepting that the interpreters were contractors. The contrary finding that the interpreters were employees had back-pay and superannuation implications costing many tens of thousands of dollars.
- In April 2011, the director and a manager of a financial services company, Centennial Financial Services Pty Ltd each personally received penalties of several thousand dollars for their involvement in “sham” contracting, where sales personnel were terminated from employment and re-engaged as ABN holding contractors. These personal penalties were in addition to penalties against the corporate employer, and orders were made requiring payment of penalties direct to the employees affected;
- In December 2011, this firm successfully represented a participant in the taxi industry in a claim by a cab rank supervisor (following termination of his services) that he was an employee entitled to unfair dismissal remedies. There was no written contract between the parties, and the claimant predominantly provided his labour, but he rendered invoices. The history of the relationship was significant to the finding by FWA that he was not an employee.
Business owners frequently assume that a worker with an ABN, rendering invoices for hours worked, must be a contractor. This is frequently wrong.
There is a commonly held assumption that a written contract with a worker, acknowledging and agreeing that he or she is a contractor (and not an employee), removes doubt about the status of the relationship. It can help, but a contract alone will not be enough.
Another commonly held assumption is that a worker who is a contractor for one purpose, e.g. Commonwealth taxation obligations, must be a contractor for all purposes. Again, this is frequently wrong. Regrettably, there are different tests to determine the issue in different statutory contexts, for example:
- Fair Work Act 2009 – This is the predominant employment legislation in Australia and relies on the ‘common law’ test. There is commentary on the common law test below, which is based on court decisions, which means (note:) the test can change whenever there is a new case dealing with the issue;
- PAYG and Superannuation (ATO) – This legislation expands the ‘common law’ test in limited ways, e.g. by including persons who work “under a contract that is wholly or principally for the labour of the person”. However, the ATO has a useful ‘decision tool’ freely available to assist: www.ato.gov.au;
- WH&S and Workers’ Compensation legislation – These laws each have different defined meanings for “worker”, which create obligations to, for example, pay WorkCover premiums or ensure safe systems of work, for a much broader category of persons. Statutory responsibilities for safety are so broad that it is nearly always better to assume you are responsible. The WorkCover Queensland website contains some specific guidelines: www.workcoverqld.com.au;
- State payroll tax – This perhaps ‘casts the widest net’, not so much by changing the definition of ‘employee’ but instead, by including a payroll tax obligation in circumstances where there is a “relevant contract” (defined to include contracts for services where labour is the most significant component of supply), even where there is an “interposed entity” (e.g. company) providing the services. Again, for more payroll specific guidance: www.osr.qld.gov.au.
Common Law Test
The ‘common law’ test to determine whether or not a person is an “employee” is deliberately vague and flexible, and can change over time, to catch situations that would otherwise result in (perceived) injustices.
The test achieves this flexibility by having a broad range of ‘indicia’ that must be examined in the circumstances of each case, and the court will look at the “totality of the relationship”. We set out below a checklist of the indicia that most frequently determine the outcome. The list is not exhaustive and, although we have listed the indicia roughly in the order that tend to weigh most heavily, :
|An Employee||A Contractor|
|The contract is with an individual||Contract with a trust, corporation or partnership|
|The supply is predominantly labour (remuneration is based on rates for time or for small tasks)||The supply is predominantly for goods, equipment or a defined outcome (remuneration based on defined scope)|
|A particular individual is required to do the work||Anyone may be delegated to do the work|
The person benefiting from the work controls, or can control, how the work is done (e.g. method, timing, location)
The supplier of the work determines when, where and how best to achieve the outcome with a view to making a profit
|The worker is a fixed or regular part of, and contributor to, the business of the person receiving the benefit of the work||The supplier of the work has their own independent business identity and promotes that identity distinct from the client|
|The person benefiting from the work supplies most or all the tools and materials||The supplier of the work provides most or all of the tools and materials|
|The person benefiting from the work bears the risk of not achieving outcomes and the worker has no commercial risk||The supplier bears the financial risk and expense to achieve outcomes and must make-good their expense|
|The worker receives wages, NES entitlements (e.g. paid leave) and the employer looks after PAYG, worker compensation insurance and superannuation||The supplier has its own ABN, renders tax invoices, accounts for GST and manages its own tax and insurances (public liability and income protection)|
|The parties have agreed that the relationship is as employer and employee||The parties have agreed that the relationship is as client and contractor|
We recommend business owners and senior managers not tolerate circumstances that leave in doubt the status of worker engagement. It is better to have certainty than to leave the engagement status in doubt and find yourself exposed to large back-pay liabilities and statutory penalties.
There are steps that can be taken to provide more certainty and this firm regularly advises how best to manage the situation. We also represent clients in audits or disputes where the issue is in contention.