Contractor or Employee?

Thursday, 17 November 2011


The Australian Taxation Office ("ATO") continues its focus on identifying “sham contracting arrangements” (arrangements where individuals operate as contractors instead of employees of a business) as part of its 2011-12 Compliance Program.  The ATO’s focus is to identify employers who are not complying with their superannuation and PAYG obligations as they have incorrectly characterised persons as contractors where they are employees.  PAYG obligations only arise for employers where a person is a common law employee.
 
Failure to comply with superannuation and PAYG obligations can result in significant issues for an employer including payment of superannuation guarantee charge (“SGC”), penalties and administrative costs to your business to comply with past obligations and ensure the correct systems are in place for the future.  An employer cannot claim a deduction for the payment of SGC. 

ON CALL INTERPRETERS & TRANSLATORS AGENCY

The case of On Call Interpreters & Translators Agency Pty Ltd v Commissioner of Taxation (No. 3) [2011] FCA 366, recently heard by the Federal Court, reiterated the interpretation taken by Australian courts regarding the contractor versus employee issue. 

On Call has since been put into voluntary administration to rectify the issues arising from this case. 

Background Facts

On Call Interpreters & Translators provided translation services mainly to large institutional clients and also to government departments, courts and private businesses.  It maintained a ‘panel’ (i.e. list) of interpreters it could call upon to take jobs as they arose. 

These interpreters were identified as independent contractors and accordingly no superannuation contributions had been made for them. 

The Commissioner of Taxation (“Commissioner”) argued the translators were employees under the common law definition as well as the extended definition for superannuation and imposed SGC on On Call for unpaid superannuation contributions. 

The Decision

The interpreters were considered to be employees under the ordinary meaning (as determined by Australian courts), failing that Bromberg J considered they came within the extended definition of employee set out in the Superannuation Guarantee Administration Act (“SGAA”). 

To establish its panel of interpreters were contractors, On Call provided as evidence a ‘sample’ of seven interpreters who it claimed were representative of its 2,500 strong panel.  Bromberg J concluded the ‘sample’ provided was not representative of On Call’s panel of interpreters, and as such could not be relied on to determine whether all persons on the panel were contractors. 

Even if the sample was considered representative of the panel of interpreters, Bromberg J concluded he would only reach a conclusion by inference to the sample provided if he was satisfied all interpreters called were contractors. The question of whether a person is a contractor is a complex and personal question that is determined according to a wide range of indicators.  Making a decision on those indicators requires consideration of evidence that is personal to the individual.  Due to the personal nature of the test, a conclusion could not be reached on a less than 100% basis.   

1. Common law definition

Following earlier decisions, Bromberg J noted the question of whether a person is an employee or contractor is determined according to the reality / real substance of the relationship between the so-called contractor and party engaging them.  To determine the reality of a relationship, it is necessary to look beyond any contract or agreement in place and determine the substance of the relationship. 

The two questions to consider when determining whether a person is a contractor are:

  • Is the person performing the work as an entrepreneur who owns and operates a business; and
  • In performing the work, is that person working in and for the person’s business as a representative of that business and not of the business receiving the work?
     

If the answer is yes to both questions, the person is a contractor. 

The following factors were listed as those relevant to determine whether a person was operating a business:

  • Whether the economic activities of the business involve taking risks in pursuit of profits;
  • Whether the business engages in a repetitive and continuous manner with purchasers of its services; 
  • Whether the business employs persons other than the other owner or operators to carry out economic activities; and
  • Whether they create goodwill in their business by carrying on its economic activities.
     

These factors were raised for consideration to determine whether the person carried on the activities for their business:

  • Does the person control and direct, or have the capacity to control and direct the manner in which the economic activity is carried out;
  • To what extent is the agreed payment contingent on the person providing a satisfactory result;
  • Is the activity represented or portrayed as the activity of the person’s business (or the other party’s business); and
  • Is the person free to employ their own means to produce the activity (or must they personally perform the work). 
     

2. Extended definition

Bromberg J agreed with the Commissioner’s argument that even if the translators were not common law employees, On Call was still required to make superannuation contributions for them in accordance with the extended definition of employee in section 12(3) of the SGAA.  That section considers a person to be an employee for superannuation purposes where they work “under a contract that is wholly or principally for the labour of the person”.  

Bromberg J concluded it is not appropriate to interpret s12(3) on the basis that a contract for a given result or outcome is outside the scope of the paragraph.  The subsection should be interpreted in the context of s12 of the SGAA and the purpose of the SGAA. 

Bromberg J noted the provision of labour is not confined to there being physical toll - it involves the combination of time, skill and physical or mental effort.  The question of whether a person was an employee under the extended definition could best be answered by asking “Whether, in all circumstances, the labour component of the contract in question could have been provided by the recipient of the labour employing an employee?”   

WHAT SHOULD EMPLOYERS DO?

As a result of the On Call decision, employers should address the following issues:

  • Review current contractor arrangements – A person is not necessarily a contractor just because the documentation / contract includes ‘contractor’ terminology.  However, a contract that clearly sets out the actual engagement (including rights and responsibilities of each party) will provide support for a contention that a person is a contractor. 
  • Do not assume that just because a person is engaged as a provider of services they are a contractor – you need to determine whether they actually own and operate their own business. Remember, significant costs arise if a contractor is incorrectly identified!  It is better to review current contracts and implement processes to ensure current and future engagements are characterised correctly.
     

HWL Ebsworth’s Workplace Relations & Safety Group provide comprehensive, pro-active and practical solutions to your business’ employment law and industrial relations needs - click here to see details of our Beyond Compliance package. 
 

If you would like to discuss this case further or have questions regarding your obligations for contractors you engage, please contact any of the following people:

Taxation Group



For information on our Taxation Group click here.


Workplace Relations & Safety Group







For information on our Workplace Relations & Safety Group click here.