Contractors

We can assist you in setting up your contractor documents and arrangements lawfully. If the contracts are improperly drafted or the arrangements not properly followed, the business can be sued for misclassifying a person as a contractor when they should have been classified as an employee. This exposes the business to penalties and also requires the business to repay entitlements up to six years.

Getting Contractor Arrangements Right

There can be risks in relation to classifying staff as contractors. A person can be deemed an employee even though they are classified as a contractor.

If that occurs, there could be liabilities in respect of paying taxation obligations, civil penalties being imposed, payment of superannuation and payment of employee entitlements.

This primarily discusses rights under the Fair Work Act, e.g. those businesses covered by the National employment system (not the WA system).

Just a warning, as of 26 August 2024 classifying a contractor has changed significantly and these are the things we discuss:

The new definition, which the Fair Work Ombudsman calls the “whole of relationship test” under s 15AA of the Fair Work Act (which applies to incorporated entities).

The High Court decisions in 2022 of Personnel Contracting and Jamsek which fundamentally changed the law in relation to classifying contractors, which the changes to s 15AA of the Fair Work Act intended to change (but it has not been removed completely).

The opt out notice that high contractors who earn above the high income threshold can send to make it easier for business to classify them.

Legal Summary

Until relatively recently, the courts used to use the multifactorial test to determine if a person was a contractor or employee. The old multifactorial test involved considering various factors such as invoicing, control, who provides the tools, if the employee services other businesses and various other factors to determine if a person is a contractor or an employee.

In January 2022, the High Court handed down two important decisions that changed the way the law approaches classifying someone as a contractor or employee. These cases were Personnel Contracting Pty Ltd [2022] HCA 1 and the Jamsek [2022] HCA 2.

Below is a summary of the key legal points businesses should understand, given these new decisions.

However, where there is a dispute between the parties, this does not prevent a court from examining the circumstances of the engagement, including the contract where it may be relevant to:

To the rights and duties established by the contract between the parties, including where a contract is partly written and partly oral, or where there is no written contract.

To ascertain the existence of variations to any contractual terms.

Where there are allegations of sham arrangements

In circumstances where a party is relying on another legal remedy such as rectification, estoppel or a statutory right or remedy.

Sham arrangements are dealt with in Part 3-1 Division 6 of the Fair Work Act, and include circumstances where;

An employer knows and makes reckless representations to an employee that they are an independent contractor when they aren’t.

An employer dismisses, threatens to dismiss an employee to re-engage them to perform the same or substantially the same work as an independent contractor.

An employer makes false statements in order to persuade or influence an individual to enter into an independent contracting arrangement for the same or substantially the same work which the individual performed as an employee.

Therefore, a business needs to be cautious when determining if the worker in question is eligible to be a contractor.

If you hire a worker as a contractor where they should be an employee, this can be considered sham contracting.

Whether a work relationship will be one of an employer/employee or principal/contractor will depend on the following matters;

The extent of control that the putative employer can be seen to have over how, where and when the putative employee does the work.

The extent to which the putative employee can be seen to work in his or her own business as distinct from the business of the putative employer.

The extent to which the putative employee could be said to be integrated into the business of the putative employer.

The more control that a worker has, the more likely their work relationship will be that of an independent contractor.

Whether a worker will be conducting their own business will depend on a number of factors, including but not limited to, the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work and provision for holidays, the deduction of income tax and the delegation of work by the putative employee.

It is preferable that the services of a contractor are provided through an incorporated entity as courts or tribunals are reluctant to ‘lift the corporate veil’ (in other words see who is behind the company) in order to examine the true character of the relationship. This however does not exclude the possibility of an employment relationship where such an entity is a payment vehicle only (it needs to be a genuine trading entity).

Independent contractors can generally perform tasks themselves or engage others to perform the work, whilst an employee must perform the work personally.

Some contractors can be considered to be employees for superannuation purposes where the contractor is under a contract for their labour, the contractor is performing work personally for their labour and skills and that work cannot be delegated to someone else. The ATO provides guidance on when a contractor may be considered an “employee” for superannuation purposes which can be accessed at here.

Tips to Minimise Claims

In order to minimise a claim, its important to get good legal advice as its now easier for workers to establish they are contractors under the whole of relationship test have proper contractor agreements in place, and if the contractor earns above the income threshold, consider voluntarily obtaining an opt-out notice.

We`ve seen contractor agreements which are deficiently prepared and are read more like an employment contract. You should avoid these situations as they can prove fatal. Here are some other practical tips a business can take to reduce the risks:

It is better for contractors to enter into an engagement with their own company (as opposed to in their personal capacity.

Make sure the contractor regularly invoices the Company. The contractor must have the contractor’s company details on such invoices.

Make sure the contractor controls the hours they work. It is best that the hours worked are not regular.

Make sure the contractor controls how they perform the work. Reduce the level of supervision.

Let the contractor perform work for other entities provided there is no conflict of interest.

Give the contractor the freedom to reject or say no to a job.

The contractor has the ability to hire staff to do the work.

Contractors do not get annual leave or sick leave.

Try to keep reimbursement of expenses to a minimum.

Remember the contractor is supposed to be running their own business, so make sure that actually occurs in practice.

As much as possible, have the contractor provide their own tools and materials.

Wearing a company uniform is a factor that points towards employment, but it`s not decisive. If a uniform is required, consider if they can have their own branding alongside company branding.

If there is a change of circumstances, this should be reflected by way of a written variation to the contractor agreement.

What happens if the person is an employee?

If a business misclassifies a worker as a contractor, the business and any individuals within the business who were involved could be held liable for breaching the Fair Work Act. This could result in the imposition of penalties and potentially cause reputational damage to the business.

The worker is also entitled to be back paid their entitlements for the last six years which include long service leave, annual leave, superannuation, payment for days when they were sick, and any award entitlements. This can end up being quite costly.

What happens if the person is an employee?

Whole of relationship test

From 26 August 2024, the Fair Work Act introduces a new definition of employment under section 15AA. This section applies to constitutionally-covered businesses when determining if a worker is an employee or contractor. Constitutionally-covered businesses are generally incorporated entities (eg Pty Ltd or Ltd) that engage in trade or financial activities.

From 26 August 2024, under s 15AA, a constitutionally-covered business must use the whole of relationship test to determine if a worker is a contractor or employee. The whole of relationship test considers:

The real substance of the relationship

The practical reality of how work is performed

The true nature of the relationship and not solely the terms of the contractor agreement.

This test looks beyond just what`s written in the contract. It examines how the relationship actually works in practice. For example, if a contract states the worker can refuse work, but in reality they never do and are expected to always accept work, this practical aspect would be considered.

S 15AA states that it was enacted in response to the Jamsek & Personnel Contracting decisions. Another important point is this new test is limited to the Fair work Act. So the start of relationship test mentioned below is still relevant for example:

Pay as you go withholding under the Taxation Administration Act 1953 (Cth)

superannuation (noting superannuation laws have an expanded definition of employee); and

for payroll tax.

Start of Relationship Test (eg Jamsek & Personnel Contracting)

The start of relationship test definition has been created by the Fair Work Ombudsman to make it easier for everyone to understand, so we will adopt it. The start of relationship test will continue to be used by state-referred businesses under the Fair Work Act. These are typically sole traders, partnerships, and unincorporated entities in states like NSW, SA, QLD, VIC, and TAS.

Note, this excludes WA because sole traders, partnerships, and unincorporated entities in WA are not covered by the National Fair Work Act (but instead by WA laws which are bound to follow the Jamsek & Personnel Contracting cases anyway).

The start of relationship test focuses primarily on the terms agreed to at the beginning of the relationship, usually as set out in the contract. This is basically the law that was made by the High Court in 2022 by the Jamsek & Personnel Contracting cases (we expand on this below).

Constitutionally-covered businesses will still use this start of relationship test for work performed before 26 August 2024. This means there could be a situation where a business uses different tests for the same worker, depending on when the work was performed.

Opting Out Provision

Workers earning above the contractor high income threshold can choose to opt out of the whole of relationship test. As of 1 July 2024, this threshold is $175,000 (but it changes on 1 July each year). Workers must provide written notice to opt out (s.15AB(5)). Businesses can notify eligible workers of their right to opt out, but the choice ultimately lies with the worker. (s.15AB(2-3)).

Opting out means the start of relationship test applies instead, e.g. the test set out by Jamsek & Personnel Contracting discussed below (s.15AC). In other words, opting out gives businesses more confidence that the terms of the contractor agreement will be used to determine whether the person is a contractor or employee (instead of the entire relationship). So if a business can do this, they should do so to minimise the risks (without using pressure or unfair tactics of course).

This opt out notice can disadvantage a worker because this could potentially result in the worker being classified as a contractor under the start of relationship test, even if they might have been considered an employee under the whole of relationship test

Jamsek & Personnel Contracting

This provides further information on what we mean by the start of relationship test. In January 2022, the High Court handed down two important decisions that changed the way the law approaches classifying someone as a contractor or employee. These cases were Personnel Contracting Pty Ltd [2022] HCA 1 and the Jamsek [2022] HCA 2. Below is a summary of the key legal points businesses should understand, given these 2022 decisions.

Where there is a comprehensive written contract and the validity of the contract is not in dispute, the rights and obligations of the parties under the contract will determine whether the relationship is one of employment or independent contractor. There is no need to consider a wide-ranging review of the entire history of the parties dealings (e.g. unlike under the whole of relationship test). However, where there is a dispute between the parties, this does not prevent a court from examining the circumstances of the engagement, including the contract where it may be relevant to:

To the rights and duties established by the contract between the parties, including where a contract is partly written and partly oral, or where there is no written contract

To ascertain the existence of variations to any contractual terms

Where there are allegations of sham arrangements

In circumstances where a party is relying on another legal remedy such as rectification, estoppel or a statutory right or remedy.

The name, label or characterisation of a position as employee or independent contractor used in a contract is not determinative of that relationship. Rather the relationship is to be determined by its legal character and by the rights and obligations established in the contract and at law. Therefore, a business needs to be cautious when determining if the worker in question is eligible to be a contractor. If you hire a worker as a contractor when they should be an employee, this could be considered sham contracting.

Whether a work relationship will be one of an employer/employee or principal/contractor will depend on the following matters. Note, if there is a contractor agreement, these matters mentioned below need to be examined by reference to solely the terms of the contract.

The extent of control that the putative employer can be seen to have over how, where and when the putative employee does the work

The extent to which the putative employee can be seen to work in his or her own business as distinct from the business of the putative employer; and

The extent to which the putative employee could be said to be integrated into the business of the putative employer.

The more control that a worker has, the more likely their work relationship will be that of an independent contractor (as referred to by the terms). Independent contractors can generally perform tasks themselves or engage others to perform the work, whilst an employee must perform the work personally.

It is preferable that the services of a contractor are provided through an incorporated entity as courts or tribunals are reluctant to lift the corporate veil (in other words see who is behind the company) in order to examine the true character of the relationship, under this test.

Engaging a contractor through an incorporated entity makes it harder to establish a contractor relationship because a company cannot be an employee (only an individual can). However, care needs to be taken that this is not a sham arrangement. It`s also possible for an employment relationship to be established if the incorporated entity is only a payment vehicle and not a genuine trading entity

Sham Arrangements

The Fair Work Act has provisions for sham arrangements as well. Sham contracting arrangements are addressed in Part 3-1, Division 6 of the Fair Work Act 2009. These provisions aim to prevent employers from misrepresenting employment relationships as independent contracting arrangements. The key sections are:

1. Misrepresenting Employment as Independent Contracting (Section 357)

An employer must not represent to an individual that their employment contract is actually a contract for services as an independent contractor.

Exception: If the employer can prove they reasonably believed it was a contract for services, considering factors such as the size and nature of the employer`s enterprise.

2. Dismissal to Engage as Independent Contractor (Section 358)

An employer must not dismiss or threaten to dismiss an employee in order to re-engage them as an independent contractor to perform the same or substantially similar work.

3. Misrepresentation to Engage as Independent Contractor (Section 359)

An employer must not knowingly make false statements to persuade or influence an individual to enter into a contract for services as an independent contractor for work that is the same or substantially similar to work they performed as an employee.

These provisions are civil remedy provisions, meaning that contravention can result in penalties under Part 4-1 of the Fair Work Act.

Superannuation Laws

Some contractors can be considered to be employees for superannuation purposes where the contractor is under a contract for their labour, the contractor is performing work personally for their labour and skills and that work cannot be delegated to someone else. The ATO provides guidance on when a contractor may be considered an employee for superannuation purposes which can be accessed at here.