A New Year heralds in a challenging year for business with growing economic uncertainty and troubled markets and while surviving these uncertainties is an important part of running a business; this job can be made easier by considering the known variables within the business. An employer’s legal obligation in respect to employment is one such known variable that business owners can control and cannot afford to ignore. Employment requirements will vary depending on the ‘type or status’ of the worker’s employment however, getting this status right can easily be overlooked, especially when the business is expanding rapidly, with the need for workers becoming a paramount concern. This article will focus on the employment question of, ‘whether a worker is an employee or independent contractor’ a question that if not answered correctly could prove disastrous for the business.
Prior to becoming a lawyer I was a shipwright for just on eighteen years. I commenced my time as an apprentice and soon became aware of the economic uncertainty that followed this trade in Australia. This was a period of deregulation and tariff reduction that resulted ship construction moving offshore leaving a domestic industry focussed on pleasure craft, a luxury that was first to go in troubled times. This shift in industry foreshadowed a change in employment practices from traditional employer/employee relationships to the flexibility of the independent contractor, a flexible benefit that assisted business in managing their workforce, especially in difficult economic times. However, being a relatively small industry, the potential for workers to be forced into independent contractor status when it was clear they were employees was real. Workers often felt powerless due to their reliance on their job and would often not speak up against an unscrupulous employer. The practice of employing workers as independent contractors means that employers can reduce running costs and not have to pay their tax obligations of PAYG tax and super. And while the marine industry may have matured, knowing who is an employee and who is an independent contractor still remains a difficult and important distinction to make.
The purpose of the Fair Work Act 2009 (FWA) was to simplify the two tiered employment system, which encompassed state and commonwealth jurisdictions, with a single commonwealth system incorporating incorporated and unincorporated businesses. While the focus of this legislation is on employee/employer relationships it also provides legal guidance in respect to the creation of sham independent contractors. In November 2011 the Fair Work ombudsman, Nicholas Wilson, looked at the question of sham contracting in the cleaning services, hair and beauty and call centre industries. The audit revealed some examples of when employers had attempted to disguise an employment relationship as an independent contracting relationship, thereby avoiding obligatory rates of pay and other entitlements such as superannuation. The audit highlighted a number of trading enterprises who engaged contractors that should have more accurately been classified as employees.
While Fair Work inspectors found that most of these arrangements were not deliberate, they did identify a number of employers whom they believe knowingly or recklessly misrepresented the employment relationship to their workers as one of independent contracting. The Ombudsman said, Legal action was being considered in some instances and he did not believe the problem was confined to these industries alone. Misclassification can lead to a contravention of the FWA’s National Employment Standards (NES), minimum wage orders and terms of a Modern Award or Enterprise Agreement. It can also result in contraventions of employer obligations to provide employee records and pay slips and may expose employers to back-payment of outstanding entitlements and superannuation payments with consequential taxation implications.
The Ombudsman stated further, that a number of employers had received advice from accountants on how to structure their operations. Since workplace law is different to taxation law and financial accounting practices, the Ombudsman said it appeared the legality or appropriateness of the arrangements under relevant workplace laws was often not considered. The employment issues not addressed by the accountant here should have been asked of a competent lawyer.
The Independent Contractors Act 2006 (ICA) assists in determining who is an independent contractor that is whether the type of employment can be defined as a contract ‘of service’ or a contract ‘for services’, the latter being the independent contractor. However, to get to this point the distinction between an independent contractor and employee is usually made by reference to a ‘multi-factor’ test, looking at the relationship between the worker and business. The following points summarise the legal test for employee and independent contractor and should go some way to clarifying the issue.
Circumstances that may suggest an employer/employee relationship:
- the employer usually controls the manner of work;
- the employer prescribes the times and locations for the performance of the work;
- the employer has the discretion in relation to task allocation and termination;
- the employee has no inherent right to delegate tasks to others, although some duties may be delegated to other employees.
- the employer provides the equipment and materials for the work;
- the commercial risk is borne by the employer;
- the employee receives benefits such as annual, sick and long service leave;
- the employee receives a salary or wages;
- the employee is compensated for the use of own equipment or materials;
Circumstances that may suggest an independent contractor relationship:
- the contractor completes a defined contract that may be terminated with penalty when conditions are not fulfilled;
- the contractor maintains a high level of discretion and flexibility how the work is performed;
- the contractor bears the risk of the commercial loss or profit,
- the contractor sets their own hours of work;
- the contractor provides their own equipment and assets;
- the contract does not include leave provisions;
- payment to a contractor is based upon performance of the contract;
- the contractor incurs their own expenses;
- the contractor is free to advertise their services to the public; and
- the contractor has an unlimited power of delegation.
In addition to this scratch and smell test, the employer must consider the relationship between their business and the worker. Is there an existing contract or is there an established employment history? In essence, to answer the question of employee or contractor it boils down to how much control the business has over the worker. The more flexible the work arrangements are with the worker, the more likely it is that they are an independent contractor. Ultimately, the failure of a business to incorrectly employ a worker as an independent contractor could be a very costly exercise; an expense easily avoided.
The failure to withhold and remit PAYG tax carries serious consequences. If PAYG should have been withheld and was not remitted, then the ATO has very wide-ranging powers to recover these funds. If the business is unable to provide the relevant information the Commissioner of Taxation can estimate an employer’s liability plus interest and after notification to the employer, commence recovery proceedings including winding up the company. Further, the directors of a company may be personally liable for the company’s liability, irrespective of whether the failure is as a result of a genuine mistake on the part of one or both parties. If superannuation or payroll tax has not been paid due to the confusion around correct employment status significant financial penalties can also apply along with the payment of any outstanding money owed with interest.
The last thing a business needs to be burdened with is the financial and administrative pressures created by not determining their workers employment status correctly. Often a worker’s employment starts as an independent contractor and due to needs such as a growing business or change in business structure the contractor finds themselves looking more like an employee. This change can be so subtle that the employer and employee can fail to notice it. Given the ability of business to control the known variable of employment status, if your business is employing independent contractors, make sure you consider the scratch and smell test, as this could save your business significant pain and money in the future.