It is essential that organisations have clear and consistent processes in place to correctly determine whether an individual should be treated as an employee or a contractor in order to identify and comply with their statutory obligations.
Contracting remains a popular alternative to traditional employment arrangements and comes with many benefits to both parties including access to flexible and mobile skills for the principal, and increased earnings potential, flexibility and choice for the contractor.
However, it is essential that organisations have clear and consistent processes in place to correctly determine whether an individual should be treated as an employee or a contractor in order to identify and comply with their statutory obligations.
The changing landscape around contractor assessment
Organisations that engage with workers under contract face an often challenging evaluation of whether the worker may be considered an employee or a contractor. This distinction is of particular importance as it will influence an organisation’s obligations for matters such as superannuation, payroll tax, WorkCover insurance and pay compliance.
The ATO and relevant state revenue authorities continue to review and audit contracting arrangements closely. Where they determine that a ‘contractor’ is actually an employee, they will expect the corresponding employment tax obligations to be satisfied.
Where these obligations are not being met, organisations can expect interest and penalties to apply, and will most likely be subjected to additional ongoing scrutiny.
It is important to note, even where a worker may be considered a contractor, this does not necessarily mean employment tax obligations will not arise due to the extended definition of an employee for superannuation purposes and, further, contractor provisions contained within applicable payroll tax and WorkCover legislation.
When it comes to evaluating the nature of the relationship with the worker, it is not as straightforward as simply labelling them a contractor or ensuring they have a registered Australian Business Number (ABN).
In fact, as of 9 February 2022, the accepted methodology used to make such a determination has shifted, following a decision handed down by the High Court in the matter of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd  HCA 1 (Personnel Contracting). This decision was closely followed by a separate decision handed down on the same day by the High Court, in ZG Operations Australia Pty Ltd v Jamsek  HCA 2 (Jamsek), which confirmed this position.
Prior to these decisions, the various Courts had employed a multifaceted approach in deciding whether a worker may be considered an employee under common law. This approach considered the relationship between the worker and the organisation examined in its totality, with due consideration being paid to both the written agreement between the parties and the ‘reality of the arrangement’ between them.
The recent decisions in Personnel Contracting and Jamsek have refined this process, placing greater emphasis on the rights and obligations of the parties under written contract. The previous approach of reviewing the ‘reality of the relationship’ is currently considered to be unnecessary unless the contract is completely/partly oral, the written contract terms have been varied or the written contract is challenged as being invalid.
This approach has since been applied in subsequent decisions such as Deliveroo Australia Pty Ltd v Franco  FWCFB 156 (Deliveroo). In this case, the Full Bench of the Fair Work Commission found, on appeal, that Mr Franco was not an employee, aligning with the decision to limit analysis of the employment relationship to what was contained in the written contract between the parties.
On appeal, it was acknowledged that looking outside the contract could lead to a different outcome, as had been done by the Fair Work Commission at first instance. While this decision adds greater certainty in this space, we make particular note of the anticipated legislative changes.
The new Federal Government has made promises to provide the Fair Work Commission with powers to address pay and conditions for ‘employee-like’ workers, particularly in respect of the gig-economy.
This commitment was acknowledged during the Jobs and Skills Summit held in September, suggesting that some sort of change is inevitable.
Determining whether a worker is an employee or a contractor
In the wake of the High Court’s decisions earlier this year, the determination of whether workers are employees or contractors has been difficult to navigate. There is a lack of guidance on how the new approach of the Courts is to be applied, with the ATO’s decision impact statement making it clear that their previous public advice is being reviewed and updated to align with the principles set by the High Court.
Though we are in a period of uncertainty, there is some reassurance in the fact that the well-established practice of considering the ‘totality of the relationship’ has not been completely disturbed by the High Court.
In practice, this means that no single factor will be taken as determinative of the whole relationship between two parties. However, while the totality of the relationship is still to be considered, it is the legal rights and obligations of the relationship, as presented in the contract, that is the overriding factor in answering the question of employee or contractor. Based on the decision handed down in Personnel Contracting, the following elements are relevant to this process, but they must be considered in light of the rights and duties established under the contract:
- Legal nature of the parties involved – For instance, is the contracting party a partnership, company or individual?
- The method of remuneration – Is the worker salaried or do they invoice for their work?
- Work equipment – Is one of the parties responsible for providing and maintaining equipment?
- Control – Is the worker directed as to how work should be undertaken, the hours of work and where said work should be completed?
- Delegation – Can the worker delegate or subcontract their work?
A number of these elements have previously been explored by the ATO in Taxation Ruling TR 2005/16, however, the ATO has indicated this ruling is being reviewed in light of the Personnel Contracting and Jamsek decisions.
As we await updated guidance from the ATO and potentially from other regulators and possible legislative changes, it is recommended that employers ensure contracts are prepared to reflect the actual nature of the engagement with a worker and that oral contracts are not relied upon.
In our current climate, the contract will be the primary reference for any court decision and the distinction of employee vs contractor.
Contracting and the gig economy
One industry in which we expect to see several cases reviewed based on the High Court’s recent decisions is the gig economy. Rising to prominence in recent years, the term gig or sharing economy refers to the economic activity in which people share services or assets for a fee via a digital platform.
Workers operating in this space are freelance, enjoying the benefits of enhanced flexibility, diversity in employment and the ability to work outside the traditional nine to five weekly routine. This task-by-task basis of working, sometimes across multiple employers, is more accessible than ever before thanks to the digital marketplace allowing individuals to obtain work at the touch of a button.
The rapid growth of this business model has seen it scrutinised several times already by Fair Work, the Board of Taxation and the Courts. It is this attention that necessitates caution for businesses that engage workers on this basis, and the examination of the factors to differentiate between employees and contractors is arguably now more important than ever.
Well-known companies such as Uber, Deliveroo and Foodora have all come before the courts in recent years, involved in cases that were seeking to answer the question of whether workers were employees or contractors. In light of the High Court’s decisions, a case concerning Deliveroo’s unfair dismissal of a worker has already been revisited and the prior decision overturned.
In the Deliveroo case discussed earlier, it was confirmed that the worker in question would not be considered an employee of Deliveroo based on an analysis of the written contract between the parties.
The fact that the multifaceted analysis which looked beyond the contract had previously found the worker to be an employee highlights the impacts of the High Court’s decisions. Deliveroo’s case is currently the most senior ruling involving workers in the gig economy and helps to provide greater certainty to organisations operating in this space.
How BDO can help
Contracting remains a significant area of interest for the ATO and other regulatory bodies, with errors proving both costly and time-consuming to resolve for employers.
Should you have any queries with regards to determining employee vs contractor status, improving process efficiency or satisfying ATO compliance activities, please contact BDO’s Employment Taxes team, who can assist you with navigating the complexity of this area.