The Tax Institute’s Tax Policy and Advocacy team explored, in its weekly email to members: TaxVine (7, 11/3/22), two recent High Court decisions that considered the characterisation of workers as employees or contractors.
Overview
The recent decisions by the High Court in 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), which examined whether workers were employees or contractors, have caused the tax profession to pause and reflect. What is paramount in unpacking these decisions is understanding the extent to which these industrial law cases impact on the application of the tax and superannuation laws.
The contemporary working landscape has changed dramatically, with the advent of the sharing (or gig) economy and the COVID-19 induced trend (likely to become mainstream) of working remotely. In the context of sharing economy platforms, one of the main revenue concerns is the non- or under-reporting of income derived from the provision of services. It is no coincidence that the Australian Taxation Office (ATO) has increased their compliance focus on employee and contractor relationships, given the implications for PAYG withholding, Superannuation Guarantee (SG), Single Touch Payroll reporting and GST purposes. There are also payroll tax and workers’ compensation implications at a State level.
Interestingly, the majority of what are termed ‘employee versus contractor’ cases that have come before the courts have not been tax or superannuation cases. They generally involve disputes under either the Fair Work Act 2009 (FWA) or personal injury law, where injured workers or third parties have sought to hold businesses vicariously liable for the actions of one of their workers on the basis they are an employee of that business; such as the famous case involving a bicycle courier, Hollis v Vabu Pty Ltd [2001] HCA 44.
In another such case, Stevens v Brodribb Sawmilling Pty Ltd [1986] HCA 1, the majority found that the two workers were both independent contractors and therefore Brodribb Sawmilling Pty Ltd was not vicariously liable for the injuries sustained to one of the workers by the other worker. In its judgment, the High Court noted that:
… the common law has been sufficiently flexible to adapt to changing social conditions by shifting the emphasis in the control test from the actual exercise of control to the right to exercise it …
Key ATO guidance
The ATO provides an online employee/contractor decision tool that assists employers in identifying the correct working arrangement based on a number of determining factors. ATO web guidance explains the difference between an employee and a contractor, and set out the six common features that assist in characterising a worker:
- Delegation: Ability of the worker to subcontract/delegate the work
- Basis of payment: Whether the worker is paid for the time worked, a price per item or activity or by way of commission
- Equipment: Extent to which the worker is required to provide equipment, tools and other assets, or is reimbursed for the cost of them
- Risk: Extent of commercial risk borne by the worker, and whether they are legally responsible for the work done and liable for the cost of rectifying any defective work
- Control: Extent to which the worker has control over the work or is directed by the business as to the way in which the work must be done
- Independence: Whether the worker operates independently from the business or is working within it and is considered part of the business.
Recent High Court decisions
The courts also apply their own methods; those that have been used include the master-servant control test, the multifactorial test and the terms of the contract test.
On 9 February 2022, the High Court ruled in two ‘employee versus contractor’ cases. The decisions are significant because they emphasise the importance of written contracts.
CFMEU case
The High Court ruled that a labour hire company that provided a ‘self-employed contractor’ to various construction sites was not liable for compensation and penalties under the FWA for alleged breaches of the relevant award. While the primary judge and the Full Court on appeal applied a multifactorial approach to the question of whether the worker was an employee of the labour hire company (the primary judge’s finding that he was not an employee was upheld on appeal by the Full Court), the High Court considered this approach was problematic. See related TT Article.
Instead, the High Court preferred to consider the ‘totality of the relationship between the parties’ and observed at [43] that:
In cases such as the present, where the terms of the parties’ relationship are comprehensively committed to a written contract, the validity of which is not challenged as a sham nor the terms of which otherwise varied, waived or the subject of an estoppel, there is no reason why the legal rights and obligations so established should not be decisive of the character of the relationship.
The High Court had primary regard for the contract between the labour hire company and the worker and held the arrangement constituted an employee relationship. The use of the label ‘self-employed contractor’ in that contract was not determinative and did not change the character of that relationship, which was rightly characterised as a contract of service (i.e. an employee) rather than a contract for services (i.e. a contractor).
Jamsek case
The workers, who were originally employees and drove trucks provided by the company, began to contract their services in the mid-1980s using their own trucks. In 2017, they alleged statutory entitlements were owed to them as employees on termination of their contracts. These alleged entitlements included compensation under the FWA, long service leave entitlements and an SG shortfall. See related TT Article.
Consistent with the approach taken in the CFMEU case, a majority of the High Court held that where:
- there is no suggestion that the contract between the parties is a sham or has been varied or otherwise displaced by the conduct of the parties; and
- there is no claim to set aside the contract either under statute or pursuant to equitable doctrines such as those relating to unconscionable conduct,
the character of the relationship between the parties should be determined by reference to the rights and duties created by the written agreement which comprehensively regulate that relationship.
What does this mean?
The multifactorial test has been used since the mid-1980s by the courts to identify and weigh up the factors in characterising the relationship between the parties as one of principal/contractor or employer/employee. The High Court now says that is an imprecise and uncertain approach.
The recent decisions in CFMEU and Jamsek mean that the multifactorial approach should be used only if the contractual terms between the parties are unclear on their face or have resulted from a sham arrangement or another breach of the law. That said, a worker cannot be characterised a contractor by merely labelling them as such.
Gageler and Gleeson JJ astutely recalled a remark attributed to an English commentator: ‘… it may not be entirely unfair to observe that “[t]he accumulation of case law has added weight rather than wisdom”’.
In the absence of a sham, or some other variation or displacement by conduct, the High Court has effectively endorsed the acceptance of the terms of the contract over the traditional multifactorial test. This signifies a subtle shift in characterising the relationship between the parties. Practically, and ideally, the contract should address the key factors of delegation, basis of payment, provision of equipment, liability, control and independence so that the terms of the contract can be accepted on their face.
EDITORIAL COMMENT
These were two cases where claims were brought, by the original applicants, alleging they were entitled to additional employment style benefits, on the basis that they were really employees, not independent contractors (as the relevant contracts stated). In the CFMEU case, the High Court overturned the the previous decisions and held the individual WAS an employee (of the ‘labour hire’ company). In the Jamsek case, the High Court upheld the earlier decisions, and confirmed the applicants were ‘independent contractors’.
What these cases have in common is that the High Court adopted an approach to this ’employee v’s independent contractor’ issue, which is consistent with construing any contract. It rejected (and where applicable over-ruled) cases that treated them as different. Previously, the gist of the case law was that a review of subsequent behaviour (often by way of a ‘multi-factorial’ intuitive approach) was required to get at the ‘reality’ of the situation (in apparent contra-distinction to what the ‘contract’ said). There are some occasions where an analysis of subsequent conduct might be in order. It might, for instance, demonstrate that the written agreement was a sham, or that it had been varied, in line with that conduct; or that some kind of ‘estoppel’ had been established. These are exceptions, which the High Court accepts. But leaving them aside, the High Court has held the ‘rights created under the written contract’ mare paramount. This allows the contract to be construed, immediately on execution, as either one of engaging an ’employee’ or an ‘independent contractor’.
The end result need not be different from the ‘subsequent conduct’ approach. The High Court reached the same conclusion as the lower courts in the Jamsek case (agreeing that the applicants were ‘independent contractors’). And, in the CFMEU case, the High Court was able to look through the ‘independent contractor’ label the parties had adopted, in the written contract, to find the individual WAS an employee (looking at the substance of the rights created). It did this without looking at subsequent conduct to come at the ‘reality’ of the situation. Similarly, it applied the same type of ‘control’ and ‘integration’ tests, as have underpinned this area of the law, for a long time. Now, however, the Court applies them, to the rights created, on executing the contract (not the subsequent conduct).
The two TT Articles referred to above (one for each case) are worth reading, to see how these principles hit the ground.
Perennial challenge for employers
Employers face a perennial challenge in not only correctly characterising their workers under the law as a contractor or an employee, but also identifying the purpose of that characterisation. A worker can be an SG employee under the Superannuation Guarantee (Administration) Act 1992(SGAA) without being a common law employee who is subject to PAYG withholding.
In the case of SG, the ambiguity that can arise from the extended definition of ‘employee’ in section 12(3) of the SGAA as it applies to certain contractors is highlighted by the recent decisions in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 and The Trustee for Virdis Family Trust t/a Rickard Heating Pty Ltd v FCT Commissioner of Taxation (Taxation) [2022] AATA 3.
The ATO has accurately summarised the dilemma for employers in TR 2005/16 at [18]:
The Courts have considered the common law contractual relationship between parties in a variety of legislative contexts, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee. As a result, a substantial and well-established body of case law has developed on the issue. There are often many relevant facts and circumstances, some pointing to a contract of service, others pointing to a contract for services.
Whatever the facts of each particular case may be, there is no single feature which is determinative of the contractual relationship; the totality of the relationship between the parties must be considered to determine whether, on balance, the worker is an employee or independent contractor.
As mentioned above, the contractual relationship between parties commonly arises in the context of industrial relations and vicarious liability. The corollary question is how the characterisation of a worker for these purposes informs their characterisation for income tax and SG purposes. Broadly, the principles established by the courts in charactering a relationship between parties for FWA and personal injury purposes are equally pertinent to tax and superannuation law. But it is naïve to suggest that this is a straightforward process. While tools and resources are available, it remains a difficult task, and businesses and workers should always seek professional legal and tax advice. Significant penalties and charges may apply if the nature of a worker’s relationship is incorrectly categorised.
Closing comments
The distinction between who is an employee and who is an independent contractor continues to be an evolving and ambiguous process. It is particularly important for all businesses and practitioners to review their contractual agreements as well as the true nature or substance of the working relationship. The developments in this area of the law will be of great interest to many of our members, given the High Court’s view that the contract terms take primacy over how the relationship between the worker and the employer operates.
Kind regards,
Tax Policy and Advocacy Team
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