Written Contracts Reign: the Employee vs Contractor question is now settled, isn’t it?

In April this year, we published an article called “Written Contracts Reign” about two earth-shattering (for the legal world, anyway) decisions of the High Court which have changed the way we look at the question of who is an employee and who is a contractor. ZG Operations v Jamsek and CFMMEU v Personnel Contracting confirmed the primacy of the written agreement in deciding. This does not mean that the issue is determined by simply calling a worker a contractor, but where the characteristics of an independent contractor are reflected in a written agreement, that is likely to be determinative (absent things like sham contracting).

This sounds like a cause for celebration: Whether you think the decision is right or wrong, surely there is now at least some certainty about the issue of who is a contractor and who is an employee. Well, unfortunately that is not entirely the case.

The decisions of the High Court earlier this year decided this question for the limited purposes of employment entitlements under the Fair Work Act, such as notice of termination and paid leave. The Court in Jamsek did not decide on the question of whether the contractor would be deemed an employee for the purposes of superannuation contributions. This question was sent back to the lower court to decide. We have not yet heard the outcome.

So, the certainty provided by the High Court rulings is limited. Principals engaging contractors must navigate a range of different tests in order to determine whether or not a worker is an employee or a contractor for different purposes. Different tests are applied for superannuation, workers’ compensation and payroll tax, for example. As a result, a principal may well have the same contractor deemed an employee for some purposes, and a contractor for others.

Workers’ compensation depends on the legislation (which differs from state to state), however, generally the legislation sets out its own test or definition to determine who is an employee for the purposes of compensating workplace injuries. Sometimes, the legislation lists certain occupations which are deemed to be employees. In some cases, the legislation may refer to definitions contained in other legislation (such as tax legislation) to determine who is an employee.

For the purposes of superannuation, the statutory definition of an employee starts out by referring to its “ordinary meaning”. This would indicate that the High Court decisions from earlier this year could cover this ground. However, the legislation goes on to significantly broaden this definition by providing that an employee is also “a person working under a contract that is wholly or principally for the labour of the person”.  Just what is a contract that is principally for the labour of a person? Well, that is not easy to answer, but one thing is certain: that is that this definition captures a whole range of workers that many principals might reasonably expect to be independent contractors, and not employees, for the purposes of superannuation.

These two paragraphs contain a very simplified overview of the different approaches taken to determining this question of employee vs contractor.  But it serves to highlight the serious and complex problem which is still faced by principals.  Not only are these tests different for different purposes, but they may be different depending on different State or Territory legislation that applies, and the results may be different depending on the particular circumstances in each case.

The concern that we raise with our clients is that this employee vs contractor question is a sleeper issue that can fester into an uncomfortably large liability if not caught early. Just think about unpaid superannuation contributions over a period of 10 or 15 years.   And resolving this issue for one purpose does not mean you have resolved it for all purposes.


Lessons for Principals:

Principals should:

  • Review their arrangements with contractors generally
  • Ensure that they take advantage of the relative certainty provided by the High Court cases in relation to employees vs contractors for the purposes of the application of the Fair Work Act
  • Conduct an audit to understand their obligations and liabilities to contractors in relation to employment entitlements, workers’ compensation, superannuation and payroll tax.

If you would like to discuss these or other workplace issues please contact Andrew Bland or call 02 9412 3077.

Previous Post
We could all go on strike
Next Post
High Income Employees: Does the Award still apply?