The distinction between an independent contractor and an employee is less black and white than it may seem. Even if a worker is employed on a contract basis, legally they may still be considered an employee for tax or superannuation purposes.
While this is designed to deter employers from using contracts as a loophole to avoid paying superannuation or other entitlements, the issue is that it does create a great deal of confusion for employers and contractors alike. It isn’t always clear who counts as an employee and how superannuation, entitlements like long service leave, or tax will need to be handled for the worker in question. Moreover, how employees are defined can vary depending on the area of the tax system. For example, when it comes to the Superannuation Guarantee, there is a stronger likelihood that the contractor will be defined as an employee.
The problem that arises is that when an employer does get this distinction wrong, they can be hit with penalties and other adverse consequences. This is why it’s so important that employers are clear about their responsibilities upfront, so there isn’t room for a contractor to claim down the track that they should have been treated as an employee.
Two recent High Court decisions (CFMMEU v Personnel Contracting, ZG Operations v Jamsek) have created more clarity around how employers should define contractors versus employees.
CFMMEU v Personnel Contracting: The facts
In this case, 22 year old British backpacker, Mr McCourt, was on a working holiday visa and obtained a “white card” enabling him to work in construction. He was offered a role by labour hire company, Personnel Contracting, as a “self-employed contractor” and signed an Administrative Services Agreement (ASA) with the company. Mr McCourt purchased some of his own work materials including a hard hat, steelcapped boots and high vis clothing.
He worked on a building site under the supervision and direction of the building company, Hanssen, between July and November 2016. Mr McCourt returned in March 2017 and commenced work for Hanssen on a different site in a similar role. On 20 June 2017, he was advised that his services were no longer required.
There was no contract between Mr McCourt and Hanssen, only between Personnel Contracting and Hanssen, and Mr McCourt and Personnel Contracting. He and other workers from Personnel Contracting were referred to Hanssen on a “daily hire basis” based on an hourly rate and invoiced weekly.
Mr McCourt and the CFMMEU sought for Mr McCourt to be recognised as an employee of Personnel Contracting and commenced legal proceedings in the Federal Court.
CFMMEU v Personnel Contracting: The findings
The High Court held that Mr McCourt was in fact an employee of Personnel Contracting. The ruling followed a Federal Court finding which found Mr McCourt to not be an employee, overruling the finding and setting an important precedent going forward.
The High Court found that the terms under the ASA resembled an employment contract, in that Personnel Contracting had control over who Mr McCourt would work for and when. That degree of control more closely resembles an employer and employee relationship rather than an employer and independent contractor relationship. Because Mr McCourt didn’t have control over who he worked for, the ASA resembled a contract of service rather than a contract for services.
ZG Operations v Jamsek: The facts
Mr Jamsek and Mr Whitby worked for ZG Operations as truck drivers from 1977. For the first eight years they were engaged as employees. In 1985, with the threat of redundancy, the company requested Mr Jamsek and Mr Whitby purchase the company’s truck and transition to independent contractors. They agreed and established partnerships with their wives. They would go on to work with the company on this basis for another 30+ years. Mr Jamsek and Mr Whitby worked full-time hours in this time and would invoice ZG Operations for their services. The contract was terminated by ZG Operations on 20 January 2017.
Seeking entitlements such as superannuation and long service leave, Mr Jamsek and Mr Whitby commenced proceedings in the Federal Court of Australia to prove that they were employees and not contractors for ZG Operations.
ZG Operations v Jamsek: The findings
The primary judge in the Federal Court initially held that they were independent contractors, but the Full Federal Court overturned the decision and held that they were employees.
On appeal, the High Court unanimously agreed that Mr Jamsek and Mr Whitby were not in fact employees of the company because of the nature of their contracts, as well as the fact that they owned and paid the maintenance and operational costs of the truck.
How do these High Court rulings impact the definition of an employee versus a contractor?
The ATO has released updated guidance in this area. We delve into the intricacies of the ATO response in Part 2 of our series on how the law treats the distinction between employees and contractors.
Need some clarity around your contractors and their entitlements under the law? Contact us today to find out more.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice, and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
Ryan Miller is the founder of Keeping Company, May 2011 – Present. A tie-loathing, people person with an entrepreneurial spirit. Ryan’s drive to modernize the accounting industry coupled with his desire to help people succeed saw the birth of Keeping Company. Focusing on the SME space, KeepingCo. empowers business owners by providing high-quality end-to-end accounting and business advisory services.
Ryan took his first Accounting role working at KPMG. He went onto further refine his skills as a Chartered Accountant taking the role of Director of a Chartered Accounting firm in Erskineville.
Ryan is a fully qualified Chartered Accountant and a member of the Institute for Chartered Accountants Australia and New Zealand. He is also a Registered Tax Agent and holds a Bachelor of Commerce from the University of South Australia.