Where an employee is engaged as an independent contractor, there exists exposure to a number of potential claims against business owners , particularly with respect to the Fair Work Act 2009 (Cth), but also under:
- the Income Tax Assessment Act 1997 (Cth);
- the Superannuation Guarantee (Administration) Act 1992 (Cth);
- Workers Compensation and Work Health and Safety Legislation; and
other employment related legislation such as those applying to long service leave.
There is no statutory definition of an "independent contractor".
There are simply guidelines and factors that assist to inform the nature of the arrangement.
Problems can arise when an organisation (or "engaging entity") seeks to employ a specific individual as a contractor on a regular basis. Even where a corporate structure is in place, this can still be a grey area .
WHEN IS YOUR "CONTRACTOR" REALLY AN EMPLOYEE?
The absence of a clear and simple definition is problematic.
Even the courts have acknowledged that "workers and those who employ or engage them require more clarity from this law. That is particularly so when important legislation such as the Fair Work Act… have steadfastly avoided defining what is an employee, yet demand (on paid of civil penalty) that there be no misrepresentation as to the nature of the work relationship." 1
We have seen employers assume that, just because they have called a worker a "contractor" and have required that worker to obtain an Australian Business Number ("ABN") and invoice the employer, then the employer can avoid the industrial law obligations ordinarily applied to employees.
However, this is often not the case.
There are a number of factors which go to the question as to whether a worker is properly classified as an employee or an independent contractor. The courts will always look at the "totality of the relationship between the parties" when determining the true standing of a person's employment.
THE "MULTI-FACTOR" TEST
The "multi-factor" test is of much assistance in considering the totality of the relationship between the worker and the engaging entity. Some of the factors to consider will be of more relevance than others given the diversity of modern working arrangements. They include:
- Does the engaging entity control and direct, or have the capacity to control and direct, the manner in which the work is performed by the worker?
- Is the worker performing work which is a key part of the engaging entity's business?
- Does the worker generate any goodwill for themselves?
- Is the worker being engaged to perform a specific task and achieve a specific result, or is that person paid for the hours worked?
- Does the contract between the engaging entity and the worker require the work to be performed personally or can the worker delegate the task to someone else? That is, does the worker have the right to pay another person to do the work instead?
- Which party bears the liability for any losses resulting from substandard work and is the worker liable for the cost of rectifying any defect in the work performed?
- Does the worker supply his or her own tools and equipment?
- Is the worker also free to work for others at the same time as working for the engaging entity?
- Which party determines the working hours and any leave requirements?
Ultimately, it is the substance and reality of the relationship between the parties that is paramount.
To use a colloquial expression, if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
- What are the leave arrangements in place for the worker?
- What is the basis for the amount agreed to be paid to the worker? Does the payment represent a quoted price for an agreed/predetermined result, a set amount per period, or a price per item/activity?
- On what basis are payments made? In particular, are attendance records and/or timesheets kept or does the worker invoice the engaging entity?
- How is the work arrangement set up and what are the terms of any agreement between the parties?
- Does the worker have his or her own ABN?
- What are the income tax and GST arrangements in place?
THE "ULTIMATE QUESTION"
In a recent decision, Justice Bromberg of the Federal Court described the "focal point" around which the relevant factors can be examined as follows:
- Is the person performing the work as an entrepreneur who owns and operates a business; and
In performing the work, is that person working in and for that person's business as a representative of that business and not of the business receiving the work?
- If the answer to that question is yes, in the performance of that particular work, the person is likely to be an independent contractor. If no, then the person is likely to be an employee."
Independent contractor: contracts out his or her labour in furtherance of his or her own business. They build their own good will and work to make their own business profitable and successful.
Employee: works for an employer in furtherance of the employer's business. The employee works to build their employer's good will and make the employer's business more profitable and successful.
For further information please contact:
1 On call Interpreters and Translators Agency Pty Ltd (ACN 006 272 760) v Commissioner of Taxation (No. 3)  279 ALR 341 per Bromberg J at 380.
2 On call Interpreters and Translators Agency Pty Ltd (ACN 006 272 760) v Commissioner of Taxation (No. 3)  279 ALR 341 at 381.
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Disclaimer: The information contained in this e-alert/update is not advice and should not be relied upon as legal advice. Hunt & Hunt recommends that if you have a matter that is legal, or has legal implications, you consult with your legal adviser.