High Court decisions regarding classification of employees and contractors could affect employee benefit provisions

Under National Employment Standards, Australian employees are entitled to various employee benefits including annual leave, parental leave, personal/carer’s leave, community service leave, long service leave, public holiday leave and termination/redundancy pay. However, contractors have no such entitlement.

The distinction between whether a person is an employee or a contractor is therefore extremely important for ensuring your business is providing the appropriate leave benefits to staff and recognising these in your financial statements. In particular, IAS 19 Employee Benefits contains recognition and measurement requirements for different types of employee benefits, including how much to recognise, and when.

The issue of providing appropriate benefits to employees has been prevalent in the media over the past two years, for example:

  • ‘Double dipping’ of employee entitlements by casual employees receiving a loading on their pay rate and then also claiming leave entitlements – WorkPac Pty Ltd v Rossato (Rossato decision) and subsequent overturning of the Rossato decision by the High Court, followed by changes to the Fair Work Act 2009
  • ‘Wage theft’ cases where some entities have been underpaying employees for a sustained period of time due to using incorrect awards, not paying overtime, etc.

Two recent High Court decisions in ZG Operations v Jamsek and CFMMEU v Personnel Contracting also shine light on the employment practices of businesses and have a flow-on effect to the quantum of employee benefits recognised in the balance sheet.

Classification of workers as an employee or contractor needs to be revisited

In a nutshell, the decisions of the High Court in these two cases means that the relationship between a business and its workers is dependent on the rights and obligations set out in a written legal agreement (contract) between the parties, rather than the day-to-day workings of the relationship which could span several decades. If the terms of a written agreement are not being disputed, there is no need to further consider the ‘substance and reality’ of the relationship.

In the ZG Operations v Jamsek case the legal agreement was considered an independent contractor agreement, and therefore two truck drivers failed in their bid for more than $1 million in unpaid overtime because under the written agreement, they were not employees.

Conversely, in the CFMMEU v Personnel Contracting case, Mr McCourt who was represented by the CFMMEU was considered an employee, even though he was labelled as an independent contractor in the legal agreement. This is because the terms of the legal agreement were that of an employer-employee relationship.

Businesses need to revisit all their employment agreements and ensure workers are correctly classified as employees or contractors, and ensure that employee benefit provisions recognised under IAS 19 reflect this.