The distinction between whether a worker is an employee or an independent contractor for the purposes of PAYG withholding, payroll tax, workers compensation, superannuation and other employee entitlements is one that has come under increased scrutiny in recent times. However, the High Court has recently handed down two key decisions that provide much greater guidance and certainty as to how the distinction may be determined.
In short, the cases of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (“CFMMEU”) and ZG Operations Australia Pty Ltd v Jamsek (“ZG Operations”) clarify the High Court’s position that where there is a contractual agreement in place, the legal rights and obligations under the contract should be given primary consideration in determining whether a worker is an employee or a contractor. This position departs from the previous multi-factorial test that was confirmed by the High Court in the 2001 case of Hollis v Vabu, wherein a number of indicia of employment would be weighed against how the relationship between the parties operates in practice. Previously, the courts operated in a way that looked at the substance of the working relationship as opposed to the written form of any agreement that was in place; however, these two key High Court decisions have conclusively stated that the written contract will prevail over the substance of the working relationship and how it plays out in practice.
The case of CFMMEU concerned a young labourer who had entered into an Administrative Services Agreement with a labour hire company, wherein he was described as a “self-employed contractor”. He worked on building sites run by builders who were clients of the labour hire company, but there was no contractual relationship between himself and the builder. The High Court considered that the terms of the contract between the labourer and the labour hire company lent to the conclusion that he was working as an employee, due to terms in the agreement that provided the labour hire company:
- determined the labourer’s amount of pay, and paid the labourer directly;
- retained a degree of control over the labourer that was fundamental to its business as a company providing workers to hosts; and
- was able to terminate the agreement if the labourer failed to follow its directions, or the directions of the client builder.
Importantly, the High Court made it unambiguously clear that the label that the parties choose to place on their working relationship is entirely irrelevant. Instead, focus is to be given to the rights and obligations contained within the contract, rather than the nature of the relationship as it operates day by day.
Additionally, the case of ZG Operations provides similar clarification in relation to contractor arrangements. In this case, two truck drivers entered into partnership agreements with their respective wives and entered into contracts for delivery services with the company, ZG Operations. The truck drivers purchased and maintained their own trucks from which they carried out the deliveries. The High Court found that the terms of the contract were indicative of a principal and independent contractor arrangement, due to the fact that:
- the contracts effectively required each of the partnerships to purchase, operate and maintain their own truck for the delivery of ZG Operations’ goods;
- ZG Operations had little opportunity to exercise control over the provision of the delivery services; and
- while the truck drivers did have set working hours under the contract, an element of flexibility was incorporated into its terms to allow for extra remuneration to be provided in the case of extra work.
Therefore, these recent decisions handed down by the High Court can allow for a degree of extra certainty for parties who have their working arrangements set down in writing. Provided that the relevant contract is properly drafted, the fact that the contract terms will be given primary consideration should provide that the working relationship between the relevant parties does not attract any adverse consequences in relation to PAYG withholding, payroll tax, workers compensation, superannuation and other employee entitlements.
We can assist you with the preparation of appropriate contract documents for a variety of working arrangements.
If you have any questions or require any further information about working arrangements or payroll tax, please do not hesitate to contact our office on (02) 9687 3755.