Employee v Contractor – correction to legal interpretation

Are your ‘contractors’ really employees?

This is a common question we confront our clients with. After years of fumbling with the common law definition inherited from court cases, recent new cases have significantly impacted how to determine this going forward.

Why does it matter?

Having an employee rather than a contractor could expose you to:

  • Single Touch Payroll Reporting
  • Withholding Tax
  • Superannuation Guarantee Contributions
  • Payroll Tax
  • Fringe Benefits Tax
  • Leave, minimum wage, termination limitations and other entitlements under the Fair Work Act 2009
  • Workers’ Compensation Insurance

Failure to have recognised these obligations could be very costly.

How do I know what my worker classifies as?

Whether a worker is an employee or a contractor has always been a tricky question, as it depends on the format of your agreement, not what label you or your worker apply to it. To determine this, the Courts had come up with a multifactorial test:

  1. Basis of payment – mode of remuneration
  2. Delegation – delegation of work, right to exercise direction
  3. Authority to accept or decline work – obligation to work
  4. Tools – provision and maintenance of equipment
  5. Responsibility – responsibility for the outcome of a job
  6. Control – existence of control
  7. Hours of work – the hours of work and provision for holidays

Until now, it was thought this test was to be applied to evaluate the relationship of a business with its workers, regardless of what the contract said. A time-consuming and costly exercise to evaluate each year the status of each worker.

What has changed?

Two recent High Court cases have provided further clarity when determining the status of a worker:

  • Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1
  • ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2

While the multifactorial test remains, the High Court declared the contract to be the establishing element of the relationship. As such, you only need to look at the contract to determine whether a worker is an employee or a contractor. What matters are the legal rights and obligations as outlined in the contract of the engagement, instead how the business and the worker interact in practice.

However, the Courts warned against sham contracts, or where conduct has effectively waived or stopped the contract: in these circumstances, you might still need to examine the conduct rather than the contract.

Does iron-clad contract = no exposure?

Do note that some employer obligations still extend to contractors. For instance:

  • Superannuation for contractors paid wholly or principally for labour
  • Payroll Tax, unless exemptions apply

To ensure the contracts are clearly and properly drafted to achieve the intended outcome, please ensure a professional has reviewed the agreements. Accru Felsers works closely with legal firms and can assist you with reviewing your exposure to employer obligations. Please contact us if you need any assistance.

About the Author
Will Merdy Principal | Accru Felsers
Will sees himself as a driver of innovation and progress. He challenges the status-quo and helps his clients in planning for the best business solutions and taxation strategies.