This is Part 2 of our series on how the law treats the distinction between employees and contractors. To read Part 1 which covers recent High Court decisions in this area, click here.
The relationship between an employer and an independent contractor can be complex and multifaceted. In recent years, there have been a number of high-profile legal cases that have tested the boundaries of this relationship, particularly in regard to when an independent contractor should be treated as an employee under the law. Two such cases are the CFMMEU v Personnel Contracting case and the ZG Operations v Jamsek case (discussed in detail in Part 1).
These cases have raised important questions about the definition of an employee under Australian law. Traditionally, an employee has been defined as someone who is engaged under a contract of employment, while an independent contractor is engaged under a contract for services. However, the distinction between these two types of workers is not always clear-cut, and there are a number of factors that need to be taken into account when making a determination.
The ATO’s response
In response to these cases, the Australian Taxation Office (ATO) has taken steps to clarify its position on the matter. The ATO has emphasised that the key factor in determining whether someone is an employee or an independent contractor is the degree of control that the employer exerts over the worker. If the employer has a high level of control over the work that is being done, including how and when it is done, then the worker is more likely to be considered an employee. On the other hand, if the worker has a high degree of autonomy and is able to determine how and when the work is done, then they are more likely to be considered an independent contractor.
Other factors that may be taken into account include the level of risk involved in the work, the level of skill required, and the degree of integration with the employer’s business. For example, if a worker is required to use their own tools and equipment, bears the risk of any loss or damage, has a high degree of skill and expertise, is permitted to delegate work, and has a contract based on outcomes rather than hours, then they may be considered an independent contractor. On the other hand, if the worker is closely integrated with the employer’s business, uses the employer’s tools and equipment, and is subject to the employer’s directions and supervision, then they may be considered an employee. Just because a contractor has an ABN and performs their work via their company or trust, this does not mean they won’t be considered an employee.
It is worth noting that the ATO’s guidance is not legally binding and does not have the force of law. However, it is likely to be taken into account by courts and tribunals when making determinations about employment status.
How far back can the ATO go in regard to enforcement in this area?
There is no defined time limit on how far back the ATO can go in regard to enforcing Super Guarantee obligations. This means that theoretically, the ATO could retroactively enforce the payment of superannuation for past contractors. Obviously this is alarming for employers who may suddenly find they’ve been hit with a large superannuation bill.
The good news is that typically it will be difficult for the ATO to enforce superannuation obligations from five or more years prior, because employers are only required to keep employment records for five years. However, if the employee can provide decent records to support a claim for superannuation to be paid, then the ATO may still be able to enforce this, even if the worker was engaged over five years prior.
What does this mean for employers?
Ultimately, employers must realise that engaging independent contractors is not a useful way to avoid superannuation and other entitlements. Even if a clause in the contract suggests that superannuation is not required to be paid, this won’t be sufficient if the ATO considers the contractor to fit the definition of an employee.
Directors of a company, sole traders or partners in a partnership that have not met their Superannuation Guarantee obligations can become personally liable for the amount owing. The ATO can seek to recover the debt through garnisheeing bank accounts, offsetting the amount against refunds owing to the individual or through legal action.
In order to be compliant, employers should always put in place a contract which clearly classifies the worker as an independent contractor, should ensure that the nature of the work fits what has been set out in the contract, and should avoid any actions which could be argued to resemble coercion of an employee into a contractor role. Furthermore, ensuring the contractor has control over their work and time, and bills on an outcomes basis rather than a time basis, will add a further layer of protection.
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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.