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.

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.

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, or the old multifactorial 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.

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; 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.

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, it's important to get good legal advice and to have proper contractor agreements in place.

Given the update to the law, the court will primarily review and interpret the contractor agreement. Therefore, the contractor agreement needs to, on its face, have compelling terms which support that the arrangement is a contractor agreement. MKI Legal can help you prepare these documents.

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 more difficult for contractors who have entered into an engagement with their own company (as opposed to in their personal capacity) to assert that they are employees.
  • 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.
  • It is better if the contractor does not wear company uniform, if possible.
  • 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.

Contact us for a no-obligation discussion if you wish to discuss this further.