If you engage individual workers as contractors, it’s important to make sure they’re not employees in the eyes of the law.
Improperly characterising employees as contractors exposes businesses to backpay claims for employment entitlements such as leave, allowances and overtime as well as breaches of any applicable Modern Award. It may also mean investigation by regulators such as the Fair Work Ombudsman or the ATO for failing to withhold tax or pay superannuation.
Earlier this year the High Court handed down two decisions which make it easier for businesses to ensure their contractors are not found to be employees.
In contrast to previous approaches, the decisions put the focus on the written contract rather than how the relationship plays out in practice. This means it’s critical to ensure your contractor agreements are properly drafted to establish the relationship as one of principal and independent contractor, rather than employer and employee.
This article outlines the High Court’s refined test and the sorts of clauses that should be included in independent contractor agreements to avoid an employment relationship.
Examine the contract, not the conduct
Previously, Courts applied a ‘multi-factorial’ approach to determining whether an individual was a contractor or an employee. This involved looking beyond the written terms of the contract to see what happened in practice. Indicators of employment included directing the individual how and when to perform their work and providing them with equipment or uniforms – factors which played out in the day-to-day interactions, but less so in the agreement itself.
The High Court has now issued two decisions that return the focus to the four corners of the contract.
The High Court held:
- Where parties have comprehensively committed the terms of their relationship to a written contract, the characterisation of that relationship depends on the rights and obligations of the parties under that contract.
- It is only when the terms are uncertain (for example a verbal agreement) or the contract is alleged to be a sham or otherwise unlawful, that courts should look beyond the written terms of the contract.
- Whether the parties label the individual a contractor or an employee is irrelevant.
The level of control
If the contract gives the individual the right to control how the work is performed, that will be a strong indicator of a contractor arrangement.
Conversely, if the contract gives the business the right to control the contractor’s work, that will be a strong indicator of employment. For example, the court found that an obligation to “cooperate” with the company “in all respects” was an indication that a labour hire worker was an employee.
Is the individual working in their own business, or your business?
The other question emphasised by the High Court is: In whose business is the service rendered?
If the individual is working in their own business that will be a strong indicator of a contractor relationship. Factors that tend to demonstrate this include if the contract is with a company, rather than an individual (including an ABN holder) and if the person performing the work:
- supplies their (or their company’s) own equipment, tools or vehicle;
- can delegate the performance of the work;
- is free to perform work for others; and
- is paid to achieve a result, rather than for their time.
A recent Federal Court case that applied the High Court decisions appeared to prioritise this question over the extent of the control exercised over the worker.
In the Federal Court case, which will have been of great interest to rideshare companies, drivers engaged as contractors were required to “comply with any direction or instruction by the Principal” which is a great deal of control.
However, the fact that the drivers could be incorporated, were responsible for registering and insuring vehicles supplied to them and were responsible for finding replacement drivers led the Court to a finding that they were in their own business and were contractors, not employees.
Clauses for contractor agreements
Clauses that will help demonstrate an individual worker you engage as an independent contractor isn’t an employee are those that give control to the individuals over how they perform work, and demonstrate the contractor is working in their own business.
This is not necessary for a traditional head contractor and incorporated subcontractor agreement where the subcontractor supplies more than one worker. But it is recommended when you engage a single person to provide their skills or labour, particularly if there is not a company in the middle.
For example, clauses along the lines of:
- “The contractor has control over how and when they perform the services, but must provide regular reports to the company.”
- “The contractor may engage and provide personnel to perform the services.”
- “The contractor will provide all necessary tools, vehicles and equipment, at the contractor’s expense.”
- “The contractor may offer services to other clients.”
- “The contractor is responsible for any insurances required at law to carry out the work”
These are the types of clauses that will assist, but will obviously need to be tailored to work for your business.
Contractors and superannuation
Regardless of what your contract says, superannuation legislation will deem a contractor to be an employee if they are an individual (not a company) engaged wholly or principally for their own labour.
Ensuring you engage incorporated contractors (who can in turn employ/engage the individual who does the work) is the best way to ensure you do not have to pay superannuation to the contractor. Engaging contractors to achieve results, rather than for their labour, also generally means they are not entitled to super.
If your contractor is deemed to be an employee using this test, you must pay the minimum superannuation contribution to the individual’s superannuation fund (not directly to the individual).
Takeaways for businesses
To avoid your workers who you engage as independent contractors from being found to be employees, you should have a comprehensive written contract which:
- engages them as an incorporated entity, rather than as an individual (this will also mean you don’t have to pay them super);
- affords them control over how they perform work; and
- demonstrates that the contractor is working in their own business, rather than in the principal’s business.
Batch Mewing lawyers drafts independent contractor agreements to reduce the risk of a finding that a contractor is an employee and advises businesses on their risk in relation to their current contractor agreements – and how to fix them.