Contractor versus employee – what has changed and what does it mean for your business

There have been some significant changes to the approach for determining whether a sole trader contractor engaged by your business is an employee or a contractor at common law.

Overview of the changes

Over the last two decades a steady stream of case law and legislation around the engagement of contractors, and the applicable tax considerations, led to the evolvement of the traditional ‘multifactorial analysis' for determining whether a worker should be considered an employee or a contractor at common law.

The multifactorial analysis involved looking beyond the scope of any contract in place and focused on the relationship between the two parties over the life of the engagement.

Two recent High Court decisions have fundamentally altered this approach. Specifically, the Court has stated that contractual terms and not the performance, where those terms can be ascertained and where the contract is not a sham, will determine the true nature of the relationship.

For completeness, if the contract is oral, or partly oral, or the terms of the contract have been varied, or the terms of the contract are being challenged, or there has been a challenge to the enforceability/applicability of the contract, then a multifactorial analysis and a consideration as to the manner in which the relationship is worked in practice may be appropriate.

Given the significance of this shift, it is worth visiting what happened in the High Court cases.

Recent High Court cases

Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel)

In Personnel, an individual was engaged by Personnel Contracting Pty Ltd under an Administrative Services Agreement, as a self-employed contractor, to supply labour to a builder.

Whilst the Federal Court of Australia (FCA) held that the individual was a contractor (relying upon an earlier decision of Personnel Contracting Pty Ltd (t/as Tricord Personnel) v Construction, Forestry, Mining and Energy Union of Workers [2004] WASCA 312), the High Court overturned the decision.

Noting that under the specific terms of the agreement between the parties, Personnel had the right to fix the remuneration of the individual, would be responsible for paying the individual, and could terminate the agreement if the individual failed to comply with the directions of Personnel or the builder. The individual had no discretion as to how to complete the works and ultimately little control over the arrangement.

The Court held that: 

"While there may be cases where the rights and duties of the parties are not found exclusively within a written contract, this was not such a case. In cases such as the present, where the terms of the parties’ relationship are comprehensively committed to a written contract, the validity of which is not challenged as a sham nor the terms of which otherwise varied, waived, or the subject of estoppel, there is no reason why the legal rights and obligations so established should not be decisive of the character of the relationship”.

ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek)

In Jamsek, two truck drivers had been engaged to provide transport services for a company, ZG Operations Pty Ltd. The truck drivers formed partnerships with their spouses who acquired trucks to provide the relevant transport services to the company as independent contractors.

In Jamsek, the FCA held that the truck drivers were employees and had consideration of the long association between the parties. Similarly to Personnel above, the High Court overturned the view of the FCA as too much emphasis had been placed on the conduct of the parties.

In reviewing the contracts between the parties, the High Court viewed, for different reasons, that the truck drivers were independent contractors, and that since the creation of the partnership agreement they had clearly entered into a principal/contractor relationship.

Important notes from these cases

• Firstly, these cases do not change the need to consider superannuation guarantee obligations even where the sole trader is considered a contractor at common law. This is a major focus of the ATO and one of the areas we are seeing significant audit activity, driven primarily by ATO complaints.
• The ATO has released a decision impact statement on the matter. In this, it highlights that the multifactorial analysis is still relevant however it arises primarily in examining the terms of the written contract between the parties to establish the character of the relationship, where that contract is an accurate and accepted record of the agreement struck between the parties. Further, greater emphasis should be placed on the traditional business integration test. 
• The ATO has noted that the implications of the High Court cases may have an impact on other rulings and guidance and are currently reviewing a number of items including:
• Superannuation Guarantee Ruling SGR 2005/2 Superannuation guarantee: work arranged by intermediaries
• Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees

What does it mean for your business?

In short, previously formed positions on contractors may no longer be accurate. Just recently the Full Bench of the Fair Work Commission overturned an earlier decision that a Deliveroo rider was an employee, and determined that the rider was an independent contractor. Specifically, the following comment was made:

These matters, taken together, would tip the balance in favour of a conclusion that Mr. Franco was an employee of Deliveroo. However, as a result of Personnel Contracting, we must close our eyes to these matters.

We recommend

Given the significance of these changes, along with the ATO’s current focus on these arrangements for superannuation guarantee purposes, we recommend businesses conduct an assessment of their current sole trader population to ensure they are comfortable with the current positions adopted.

RSM has developed technology to allow employers to get a quick high-level view of their sole trader contractor exposure across superannuation guarantee, payroll tax, and PAYG Withholding.

Please contact your local  RSM office to discuss the above matters in further detail.