A question common in the construction, property, engineering and architecture industry (among many others) is the vexed complex question of is a certain worker an employee or an independent contractor and so running their own business.
Of course, generally speaking the answer is clear and the issue does not need to be examined. However in the age we are in of an increasingly flexible workplace and the increasing casualisation of the ’employee workforce’ the correct categorisation of a worker can become complex. The worker could be an employee, be a casual rather than full or part time employee or not even be a part of the business per se and so be an independent contractor.
This article won’t focus on casual employees, that is best left for another day but will focus on the employee/contractor distinction. The issue has gone all the way to the High Court on more than occasion and many others have written on the issue.
The issue then becomes, what is the result of the correct categorisation being one or the other? That will be dealt with in this article, albeit a little briefer than the main question, which category does a worker fit into?
To say that there is often no clear answer hinders rather than assists the argument, nevertheless it is true. The courts look to a number of factors and look at the relationship in its totality to answer the question. The most common and stronger measure though is the right to control the hours, method and manner of doing the work. The actual right to control is looked upon favorably than actual control, in view of the fact that that many workers are highly skilled in what they do (e.g. surgeons) and that is in fact why they are ’employed’ and so the employer in reality cannot control many aspects of the way the worker works but that lack does not by itself mean a worker is definitively a contractor.
Further factors the courts consider are whether the worker wears a company supplied uniform, whether the business pays superannuation (which almost never occurs in relation to a contractor) and whether the business deducts taxation out of the money paid to a worker. The question the courts essentially ask is, is the worker engaging in their own business on their own account and so they are not an integral part of the business engaging them?
In that respect then, it is relevant to consider whether the engaging entity pays only upon the provision of an invoice or not (obviously an employee having to provide an invoice in order to get paid would be unusual) and also whether the worker has an ABN or not and if they do, they provide the ABN details to hirer.
Further questions to be considered are who provides the tools and equipment (if the hirer does then it is more likely, but not definitive, that the worker is an employee). Further things to consider are hours of work and who sets them, whether the worker is hired to do a specified task for a certain period of time (where they may then be either a contractor or a fixed term employee), and whether the worker is allowed annual leave and sick leave and also how often they are paid and what triggers the payment. If the worker is paid very regularly say on a fortnightly cycle regardless of the result of a task being done or not then are more likely to be an employee.
The correct categorisation then becomes, in line ball cases, a matter of throwing all these factors into the mix and seeing what on balance as a result looks like the correct result.
It is interesting to note the ATO has on its website an ‘Employee/contractor decision tool’ which upon the user answering a series of questions, a ‘report’ is made which outlines which side of the line a particular worker falls into. It is a very useful to give good guidance on the question however it is unfortunately not definitive and cannot be relied conclusively for all purposes of categorisation as the tool is for tax and super purposes only. It is useful as well though to giving proof that a business has seriously considered the correct categorisation of the worker and spent some time trying to work it out. It is also a good prompt for the issues that need to be considered in a categorisation question.
One important thing to keep in mind is that despite the difficulty as outlined above, of reaching a decision as to the correct categorisation, if you do get it wrong, in certain instances a business may fall foul of the sham contracting laws. Those laws apply where a business misrepresents a worker as being a contractor when in fact and in reality should have been categorised as an employee. A business can be liable for penalties under the Fair Work Act in such cases and such penalties can be pretty steep. It is more likely to happen that a penalty is imposed in more clear cut cases, where it is quite obvious the incorrect categorisation was applied, merely to avoid obligations to pay annual leave, superannuation and workcover premiums and the like.
A business, it is recommended, should review their contractual and worker documentation and as always, particularly in light of the sham contracting provisions of the Fair Work Act, advice should be sought in cases of doubt. Save and except for the cases where a business (and thankfully such cases are rare but they happen, human nature being what it is) is deliberately or recklessly evading the obligations it has to an employee, generally speaking an employer wont be in too much trouble if it makes the correct categorisation after an incorrect categorisation was or has been made, and acts quickly when it realises that there may be an issue.
Paul Cott is Managing Director of legal firm Law on Lydiard