Two landmark cases before the High Court highlight the problem of identifying whether a worker is an independent contractor or employee for tax and superannuation purposes.

Many business owners assume that if they hire independent contractors they will not be responsible for PAYG withholding, superannuation guarantee, payroll tax and workers compensation obligations. In some cases genuine contractors can be treated as if they were employees. To correctly classify the employment relationship can be difficult and there are significant penalties faced by businesses that get it wrong.

Two cases handed down by the High Court late last month clarify the way the courts determine whether a worker is an employee or an independent contractor. The High Court confirmed that it is necessary to look at the totality of the relationship and use a ‘multifactorial approach’ in determining whether a worker is an employee. If a contractor is treated like an employee and allocated work as such then they can be classified that way even if on paper they are allocated the term contractor.

In the case of In CFMMEU v Personnel Contracting and ZG Operations Australia v Jamse, the court determined a labour hire contractor to be an employee despite the contract stating he was an independent contractor.

This was because Personnel Contracting offered the labourer a role with the labour hire company. The labourer, a backpacker with some but limited experience on construction sites, signed an Administrative Services Agreement (ASA) which described him as a “self-employed contractor.” The labourer was offered work the next day on a construction site run by a client of Personnel Contracting, performing labouring tasks at the direction of a supervisor employed by the client. The labourer worked on the site for several months before leaving the state. Some months later, he returned and started work at another site of the Personnel Contracting’s same client. The question before the court was whether the labourer was an employee.

The court determined that the labourer was required to work as directed by the company and its client. So this became a 'contract or service' rather than a 'contract of services'.

A second case, ZG Operations Australia v Jamse produced a different result.

In this case, two truck drivers were employed by ZG Operations for nearly 40 years. In the mid-1980’s, the company insisted that it would no longer employ the drivers, and would continue to use their services only if they purchased their trucks and entered into contracts to carry goods for the company. The respondents agreed to the new arrangement and Mr Jamsek and Mr Whitby each set up a partnership with their wife. Each partnership executed a written contract with the company for the provision of delivery services, purchased trucks from the company, paid the maintenance and operational costs of those trucks, invoiced the company for its delivery services, and was paid by the company for those services. The income from the work was declared as partnership income for tax purposes and split between each individual and their wife.

This relationship was not an employment relationship. In this case the fact that the workers owned and maintained significant assets that were used in carrying out the work carried a significant amount of weight.

For employers struggling to work out if they have correctly classified their contractors as employees, it will be important to review the agreements to ensure that the “rights and obligations of the parties under that contract” are consistent with an independent contracting arrangement. Merely labelling a worker as an independent contractor is not enough if the rights and obligations under the agreement are not consistent with the label.

A genuine independent contractor who is providing personal services will typically be:

· Autonomous rather than subservient in their decision-making;

· Financially self-reliant rather than economically dependent upon the business of another; and,

· Chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided.

Each business that employs contractors should ensure they have a process in place to correctly classify the employment arrangements and review those arrangements regularly. Even when a worker is a genuine independent contractor this doesn’t necessarily mean that the business won’t have at least some employment-like obligations to meet.

Consider all your options and if you have any questions seek advice.