Employee or contractor? Recent shifts in the law10 March 2021 Authored by: Fletch Heinemann | Topics: Professional advisers, Tax and revenue, Tax disputes, Workplace relations and safety
Whether an individual is an employee or contractor continues to cause disputes.
For many businesses, getting the classification wrong can have significant PAYG withholding, superannuation and payroll tax consequences, in addition to the costs associated with employee entitlements.
The courts and tribunals have been busy – and we have seen recent shifts in the law as a result of their decisions. Businesses should make sure their decisions are based on the law as it stands in 2021.
So how has the law shifted?
Shift 1 – whether the individual is carrying on their own business is not the test for employment
There were a number of cases, dating back to 2011, that concluded that the test for employment could be determined by firstly considering whether the individual was operating their own business.
That position was not accepted as current in the recent Full Federal Court decision in Jamsek v ZG Operations Australia  FCAFC 119. Perram J stated:
[A]lighting upon the question of whether someone is working in their own business may have a tendency to cause confusion in an area which is already replete with traps for the unwary. This Court has, therefore, affirmed that the question which is to be asked and answered is whether the person is an employee and not whether the person is conducting their own business
Practically, if the individual is carrying on their own business, this may be relevant to establishing that they are providing services as a contractor. However, the effect of the Full Federal Court’s comments is that the reverse is not correct: if the individual is not carrying on a business, it does not follow that they must be an employee.
The High Court will consider the inconsistency in those decisions in ZG Operations Australia’s appeal.
Shift 2 – the checklist approach is not correct
Different factors need to be considered to determine whether an individual is a contractor or employee.
We often see advisers and auditors incorrectly weigh up those factors in competing lists, and then conclude that ‘on balance’, the weight of factors points to a particular conclusion.
The courts have often described the test for determining whether someone is an employee as requiring a ‘multifactorial approach’. However, that label has caused problems. Recently, the courts have made it clear that the ‘multifactorial approach’:
- does not involve a ‘mechanical exercise of running through items on a checklist’, and
- does not involve ‘mechanically disaggregating and deconstructing different parts of the relationship by tests drawn from other cases’.
The courts have emphasised the need to consider the ‘totality of the relationship’, and then attribute weight to the most relevant factors based on the particular circumstances.
For example, the fact that an individual provides their own truck as part of their services may often point to a contractor relationship. However, if the individual was previously an employee, and purchased the truck from the former employer, providing their own truck may be outweighed by other factors.
Shift 3 – the intention of the parties should be given appropriate weight
The courts and tribunals are now often dealing with cases where parties agreed that their relationship was a contract for services, and acted on that basis, only for the individual to claim they were always an employee – after the agreement terminated.
The parties cannot determine their relationship simply by how they label it. However, the label that the parties give is relevant to their intentions for how the services will be provided.
On this issue, the courts have noted that the parties’ stated intention should be given more weight where the agreement has been negotiated – rather than a company preparing a standard contract and presenting it to the individual on a ‘take it or leave it’ basis. In CFMEU v Personnel Contracting Pty Ltd  FCAFC 122, Allsop CJ stated:
In some circumstances it would be perfectly legitimate to give significant weight to [the contract’s] negotiated terms. By way of example only, such circumstances may include where the working man or woman wanted to work as an independent contractor, perhaps with a family trust arrangement, and made that clear in negotiations. There may be countless other circumstances of a relationship intended and expected by both parties in creation and operation to exhibit the distinguishing features of independent contracting…
So where are we now on the test for employment?
The fundamental question remains whether there is a relationship of master and servant.
In MWWD v Commissioner of Taxation  AATA 4169, Deputy President McCabe emphasised that the fundamental question is ‘whether the worker has been engaged to serve, or to provide services’. This emphasis on serve helps direct the focus to the correct test.
To determine whether an individual is serving the employer, the courts have recently identified the following factors as relevant – bearing in mind these must not be applied in a checklist fashion:
- the terms of the contract
- the intention of the parties
- whether tax is deducted
- whether sub-contracting is permitted
- whether uniforms are worn
- whether tools are supplied
- whether holidays permitted
- the extent of control of, or the right to control, the putative employee whether actual or de jure
- whether wages are paid or instead whether there exists a commission structure
- what is disclosed in the tax returns
- whether one party “represents” the other
- for the benefit of whom does the goodwill in the business inure
- how “business-like” is the alleged business of the putative employee — are there systems, manuals and invoices
What about compulsory superannuation and payroll tax?
Individuals who are genuine contractors may still be entitled to compulsory superannuation. Businesses may also be liable to payroll tax for payments made to genuine contractors – regardless of whether they are individuals or companies, partnerships or trusts.
In Dental Corporation Pty Ltd v Moffet  FCAFC 118, Dr Moffet sold his business to Dental Corporation, and then agreed to provide services as a dentist for the next five years in the business he had just sold.
The Court concluded that Dr Moffet was not an employee at common law, but that the services agreement was a contract ‘wholly or principally’ for Dr Moffet’s labour. The fact he had to provide the services personally – and was not entitled to delegate – was central to that conclusion.
I have contractors who are individuals – what should I do?
The first step is to review the current agreements. If there are currently no written agreements setting out the terms for how a contractor is providing services, the business needs to put these written agreements in place.
The parties should consider making it clear:
- whether payment is conditional on the contractor achieving a particular result – and if so, the nature of that result
- whether the contractor is entitled to delegate
- whether the price has been calculated on the basis that the contractor will look after their own tax and superannuation liabilities – and if so, an indemnity to prevent the contractor from double dipping by making a claim for superannuation after the agreement has been completed or terminated.
The second step is to review whether the written agreements, over time, continue to reflect what happens in reality. Circumstances often change – it is critical to make sure those changes do not result in unexpected exposures for either party.
Please contact a member of our team if you would like to discuss.