This question has plagued business for many years. Recent High Court decisions now provide clarification for business.
If an individual has been incorrectly classified as an independent contractor instead of an employee, there may be consequences for the business. For example:
- payment of employee leave entitlements
- the employer may be vicariously liable for the employee’s actions
- payment of employer superannuation guarantee contribution
- payroll tax
- pay as you go withholding & Tax deductibility of payments
The High Court’s decision
In both recent cases:
- Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMEU); and
- ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek)
The High Court, in determining whether an individual is an employee, involved a fundamental shift from the previous test of considering the ‘totality’ of the relationship (multifactorial test).
Before the High Court’s ruling in CFMEU and Jamsek, both the Federal Court and the Full Federal Court held that the multifactorial test, used to identify and weigh up the factors in characterising an individual as an employee, was the appropriate test.
The test
The multifactorial test included (but not limited to):
- Delegation - whether the person could subcontract/delegate work
- Control - the extent of which the business owner had control as to the way in which the work must be performed
- Equipment - who supplied the tools required to perform the work?
- Independence – the way the work was performed. Does the worker operate independently or is the worker considered as part of the business?
- Contract – the written terms of the agreement
Under this test, the contract agreement was only one of the factors that was considered in making a determination as to whether an individual was an employee or an independent contractor.
In both the CFMEU and Jamsek, the High Court held that the multifactorial test should no longer be used if there is:
- comprehensive written contract agreed between the parties; and
- the contract is not a sham; and
- the parties have not varied the contract through their conduct.
A written comprehensive contract is now critical
This new approach relies on a comprehensive written contract to determine whether the other party to the agreement is an employee or, an independent contractor. This means that while the totality of the relationship between the parties still needs to be considered, it is the terms and conditions evidenced by a written contract that are relevant.
Importantly, business now needs to review their independent contractor arrangements to make sure the terms and conditions of engagement are clearly set out in a comprehensive written contract (agreement for services). This will ensure that an agreement made with an individual, deemed to be a ‘contractor’, is a ‘genuine contractor’ and not an ‘actual’ employee.
Ulton can assist you with drafting comprehensive written contracts for both independent contractors and your employees. For further details on these services and more please see our Human Resources Consulting page.
Payroll Tax – Shift in determining excluded contractors for Medicos
It is common practice in the health care industry for a medical practice to enter into a tenancy and agency model with the medical practitioner. Under this type of arrangement the practice provides facilities and administration services. The administration entity collects the fees from the patient on behalf of the practitioner and in exchange for these services the administration entity retains a service fee and then pays the balance to the medical practitioner.
However, after the recent payroll tax cases of Commissioner of State Revenue v The Optical Superstore Pty Ltd [2019] VSCA 197 (Optical Superstore) and Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2021] NSWCATAD 259 (Naaz), these arrangements may need to be restructured as the administration service entity may be subject to payroll tax for payments made to the practitioner engaged under a “relevant contract”.
It was generally understood that payments made to the practitioner by the administration service entity would not be caught by payroll tax, as the amounts were beneficially owned by the practitioner and are only held by the service entity on trust for the practitioner and therefore the payment to the practitioner are not taxable wages. The court however held that the practitioner was not only providing their services to the patients but also to the service entity for a payment (being the remaining balance of the fees less the service fee) which were essential for the service entity to conduct its business, thereby deeming the service agreements as “relevant contracts”.
In order to remain outside the scope of payroll tax, service entities will be required to relinquish some of the control in their contracts with the practitioner, including:
- the collection of fees;
- rostering arrangements;
- how the administration fees are set;
- the use of consulting fees to pay the clinic’s operating expenses;
- restraints of trade; and
- ownership of patient records.
Essentially, this means service entities will need to review their contracts with the practitioners.
If you wish to discuss any concerns you have about whether an individual is an employee or an independent contractor, please contact your trusted Ulton advisor or Ulton's HR consultant, Christine Guy.
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