In the past we have reported on Fair Work Australia’s crackdown on sham contracting, and their investigation into certain types of businesses that attempt to avoid employer obligations by disguising their staff as independent contractors. You can read about that here. This time we’ll discuss a recent case[i] that shows how the Federal Court approaches this issue and how costly it can potentially be if you get it wrong.
As a recap, just because you call someone working for you a “contractor” doesn’t mean they will necessarily be treated as a true contractor. This can have implications on your obligations for workers compensation insurance, superannuation payments and your potential liability to have to back pay other employee entitlements such as annual and long service leave.
The case of On Call demonstrates some of the risks for businesses. It also serves as a reminder that the courts don’t necessarily care what you or your “contractor” call the relationship, they are going to look at the reality of the relationship, and it might surprise you the things they take into account, and even more so the things that won’t have any weight at all.
The facts might be all too familiar. On Call operated an interpreting and translating business. They engaged interpreters and translators as independent contractors, and even got a ruling from the ATO that their staff were independent contractors. On this basis, On Call didn’t make any superannuation contributions, as required to be paid under the relevant laws to employees.
Several years later, the Tax Commissioner considered that the interpreters were actually employees within the meaning of the superannuation legislation, and assessed that On Call had to pay for over 2,500 employee’s super contributions for a 5 year period. On Call challenged the finding, and the matter ended up before the Federal Court.
What did the Federal Court find?
Justice Bromberg didn’t care that the interpreters were called independent contractors on paper. He looked at the real substance, the nitty gritty, of their working relationship, and whether it “smelled” like an employee. His honour quoted Justice Gray’s famous approach: “the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck”.[ii]
Some of the areas that may be reviewed is deciding whether the worker/business is an entrepreneur who owns and operates a business? ie
- is risk taking involved in making profit?
- is it engaged in repetitive and continuous activities with its clients?
- does it have its own employees? Can the work be sub-contracted? Or is there just swapping of assignments?
- is goodwill created by the economic activities of the business? Or is the goodwill more that of a valuable employee?
- is it involved in self-promotion to the public?
- does it have its own tangible assets such as equipment or property to support its business activities?
- does it have its own personal indemnity insurance?
- does it hold a separate business bank account?
In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?
- who controls and directs the business and according to whose standards and practices? Note that in this case, it didn’t matter that On Call didn’t control the working hours or location that the work was to be done, as this is also found in casual employment.
- which business is actually being represented?
- to what extent is payment dependent on the person achieving a satisfactory result?
- does the person have to personally perform the work? The court considered that the right to delegate, and evidence of actual delegation, is a strong indicator of an independent contractor.
Bear in mind, that in this case, the fact that even the interpreters treated themselves as contractors, liased with the ATO as if they were contractors, and had their own ABNs, didn’t make much difference for Justice Bromberg and on the basis of all the evidence he found that the interpreters weren’t independent contractors. On Call was liable to pay the superannuation guarantee charge.
It’s important that employers get this right. The consequences can be costly, including a maximum penalty of $33,000 for each breach, and being ordered to back pay employee entitlements under the Fair Work Act. The courts have clearly shown that the label won’t have much bearing, so don’t worry so much about what you are calling it, but do make sure that it actually is what you’ve labelled it. The consequences of getting the label wrong can be big.
If you would like advice about your contractors, or any other employment issues you may be having, send an email enquiry to [email protected] or phone us on 02 8006 0830 and we will organise a time for a confidential discussion.
[i] On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No. 3)  FCA 366 (13 April 2011)
[ii] Re Porter and Transport Workers Union of Australia (1989) 34 IR 179
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