The differences between an independent contractor and an employee are complex to determine.
Historically, courts have looked at a range of factors (known as the multi-factor test) to determine whether a worker is an employee, or an independent contractor.
Some of the prominent factors taken into account include:
- degree of control over how a worker performs work
- terms of the contract
- ability to delegate or subcontract
- whether the worker is held out to be a representative of the employer’s business
- deduction of income tax from the worker’s remuneration
- ability to perform work for others
- degree of risk taken on by the worker.
Even where an agreed independent contractor contract is in place, courts have found this did not automatically result in a finding that a worker was an independent contractor.
In February 2022, there were two High Court decisions which considered the approach to determine whether a worker is an independent contractor or an employee:
- Construction, Forestry, Maritime, Mining & Energy Union vs Personnel Contracting Pty Ltd (PDF 209KB) (Personnel Contracting)
- ZG Operations Australia Pty Ltd vs Jamsek (PDF 217KB) (ZG Operations)
A summary of the cases are below.
The High Court decisions emphasised the importance of the nature of the written contract when determining whether the workers were independent contractors or employees.
A key element of the High Court’s reasoning in both judgments was that where the rights and duties of the parties are comprehensively set out in a written contract, and the contract is not a sham and has not otherwise been varied, the legal rights and obligations existing under the contract are decisive in determining the worker’s status. This approach was consistent with the High Court’s reasoning in Workpac Pty Limited vs Rossato (PDF 214KB) (Rossato), in relation to casual employment.
While the High Court noted that, in certain cases, it may be appropriate to consider multiple indicia of employment and the totality or substance of the relationship, this is not the case where the contractual terms are exclusively in writing.
If a contract is exclusively in writing, and is not otherwise a sham or subsequently varied, then the proper assessment of whether a worker is an employee or contractor at common law will only involve a consideration of that contract, and not the circumstances between the parties during their relationship. As such, businesses must take great care over their wording of agreements and contracts with workers.
We recommend the following steps:
1. Review independent contractor agreements
Review existing independent contractor agreements, including any existing template contracts. Ensure these arrangements are up to date and are consistent with the terms of an independent contractor arrangement.
Seek legal advice on contractual arrangements where there is uncertainty.
2. Where independent contractor agreements are unclear, review working arrangements
Where there is ambiguity in the contracts used to engage independent contractors, organisations should review whether the workers are more likely to be characterised as independent contractors or employees. Organisations should seek advice before proceeding to make any changes to their engagement model.
3. Ensure employment tax obligations are appropriately considered
It should be recognised that superannuation and payroll tax obligations can still apply in respect of engagements with genuine independent contractors.
The Superannuation Guarantee (Administration) Act 1992 Act has an expanded definition of ‘employee’ which captures contracts ‘wholly or principally for labour’1 as well as other prescribed kinds of service providers2. The application of this definition was not dealt with in the decisions on the basis the Commissioner was not a party to the proceedings. However, the existing ATO public guidance continues to apply.
Payroll tax is payable in respect of payments to contractors unless specific exemptions apply. Analysis should be undertaken and records maintained to ensure compliance with payroll tax obligations.
- Section 12(3) of the SGAA
- For example, a person who is paid to participate in the performance or presentation of music, play, dance, entertainment, sport, display or promotional activities, pursuant to section 12(8) of the SGAA.