EMPLOYEE V CONTRACTOR CHARACTERISATION – MORE IMPORTANT THAN EVER

By Herbert Fischbacher, Principal

Introduction

Employers continue to struggle with the notion of when, and in what circumstances, an individual can be properly regarded as a contractor, and not an employee, to their business.

Getting it right is critical to avoiding significant legal risk and cost (as well as disruption); particularly relevant in changing business needs being faced by employers in the ‘post’ COVID-19 business environment, weighed against how individuals wish to be employed (or engaged), moving forward, including the ever increasing flexibilities being sought/demanded.

Why employers need to get it right

Most employers are generally aware that getting it wrong can mean significant legal risk and cost to it.  Employers are far less aware of the prosecutory risks that exist.

Examples of the types of risks that exist (when incorrectly treating an individual as a contractor) include:

  1. backpayment of modern award based entitlements such as minimum wages, overtime, penalty rates & shift allowances/loadings;
  2. backpayment of National Employment Standards (NES) based entitlements such as paid leave, redundancy & termination benefits;
  3. backpayment of mandatory superannuation contributions;
  4. protection under statutory based protections including unfair dismissal & discrimination based claims;
  5. breach of the Fair Work Act 2009 sham contracting provisions; and
  6. breach of taxation and workers compensation mandatory schemes.

What is changing

Employers are increasingly looking to modern working arrangements such as labour hire, casual employment and use of gig economy based labour. Whilst the government is looking to address these new arrangements (an example being the recent changes made to the Fair Work Act 2009 dealing with the engagement/use of casual labour – see our article at https://www.mst.com.au/federal-industrial-relations-bill-passed-by-parliament/, its response to date has been sadly lacking.

How does an employer determine whether an individual can be properly regarded as a contractor?

The simple answer is it is not simple!  Differing tests apply depending on the context in which it is being applied.  Even more confusing is the fact that no one test is determinative.

Quite broad ‘deeming’ tests exist in a statutory context (workers’ compensation, taxation & superannuation) whereas common law (i.e. court developed) tests exist when determining whether an entitlement exists to, for example, NES based benefits and statutory protections (for example unfair dismissal protection). In the latter case, expansive (and often confusing) principles apply that require consideration of a number of factors and an evaluation of the totality of the relationship.  Those factors include:

  1. the degree of control exercised over the individual
  2. what contractual terms exist with the individual
  3. whether the individual has the right to delegate
  4. whether the individual is free to provide services to others
  5. does the individual operate his/her own business
  6. is the individual able to elect not to work etc.

Conclusion

A detailed analysis explanation of these factors is well beyond the scope of this article. Understanding, however, the complex and inherently subjective/imprecise nature of the various tests that exist, and the fact that no one test exists, should confirm in an employer’s mind the need to get it right from the outset by seeking appropriate professional advice and guidance. By doing so an employer will be in a position to properly justify its decision should it need to, and defend the multitude of monetary (and non-monetary) claims that may (and, in all likelihood, at some point in time will) be brought against it.

You can contact our team on (03) 8540-0200 or at employmentlaw@mst.com.au