Who’s That Working For You?

Posted on by Mark Fernandez

Who’s that working for you?

Why the ATO and other authorities are looking closely at your sub-contractor arrangements

Distinguishing between employees and subcontractors, and different classes of employees, is not just an academic pursuit.  Different classes of staff will face different treatment in differing contexts by legal and government authorities.  Errors can be costly and there are many shades of grey.

The challenge

The area of law concerning the divide between independent contractor and employee is not clear cut.  The courts will consider an array of indicia and will be influenced by the context of the relationship.

In 1996, the Commissioner of Taxation sued a courier company regarding the company’s obligation to pay superannuation benefits to its couriers whom the Commissioner viewed as employees.  The trial judge found that the company was liable.  However, at appeal, the New South Wales Court of Appeal ruled that the company’s car and bicycle careers were independent contractors rather than employees.  The company was not obligated to pay superannuation because it was not an employer.

In contrast, five years later in a separate set of proceedings, following the trial, appeal and yet further appeal to the High Court of Australia ( HCA), the HCA found that the same courier company was an employer of its bicycle couriers and that they were not independent contractors.  As a result, the courier company was vicariously liable for the injuries caused by the negligence of one of its bicycles couriers.  The HCA did not criticise the judges in the earlier proceedings or the judges below in the same proceedings for reaching the opposite view.

Many statutes now contain hybrid definitions extending the obligations of a principal beyond its employees and to cover some sub-contractors.  This hybrid definition is a “worker”.

Issues at stake

For many reasons, it is important for businesses to consider the legal character or personality of the staff they engage to carry out work for them. 

For instance, a principal will be liable for superannuation and workers’ compensation for all employees but only some independent contractors (who are classified as workers). 

A principal is vicariously liable for the actions of its employees but typically not independent contractors (as always, sometimes they are). 

An employer must comply with obligations arising under the National Employment Standards and Modern Awards (to name but two employment obligations for federal system employers) but has no such obligation towards independent contractors.  Only employees have a right to claim unfair dismissal or other general employment protections. 

Casual employees are entitled typically to a casual loading under many awards but have no right to annual, sick and long service leave.  However, if you engage part-time staff on regular hours/days and/or times, for an on-going basis, those employees may become permanent part-time thereby entitling them to pro rata paid leave.

It is generally known that employers must arrange workers’ compensation insurance cover for their employees and that they must also pay superannuation.  Generally not know however is that both obligations extend to those sub-contractors who are paid in “substance for his [or her] personal manual labour or services”.

Describing your employees as contractors does not necessarily mean that that is how they will be viewed by a court in the event of a dispute between the parties or an audit by a government authority. 

Consequences

Various government authorities have extensive powers to conduct audits and prosecutions for breaches of obligations towards employees and workers.  The Australian Taxation Office is aggressively prosecuting late BAS lodgement and payment and non-compliance with superannuation obligations.  The ATO will also act to require back payment of superannuation for all workers plus penalties.  Equally, the Fair Work Ombudsman conducts audits to ensure all federal entitlements are paid.  WorkCover conducts random audits to ensure that all workers are covered by workers’ compensation and the maximum fine is $5,000 per worker per week of no insurance.

Guidance

In all but the clearest cases, it will be necessary to review in intricate detail the relationship between the parties to determine its true nature.  We recommend that you seek legal guidance if you are in doubt about the legal status of the relationship of the parties with whom you contract and the legal implications of the relationship.

David Markovich|  PRINCIPAL |  LITIGATION & INSOLVENCY

7 Tully Road, East Perth, Western Australia 6004 | PO Box 6314, East Perth, Western Australia 6892
T: +61 8 9388 3100 | F: +61 8 9388 3105 | W: www.murfett.com.au | E: david@murfett.com.au

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