Theoretically, the distinction between an employee and a contractor is simple – employees work in your business and are part of your business, contractors run their own business and provide services to your business.
In practice, however determining whether an employed person is an employee or a contractor is a far more complex issue. The consequences of getting it wrong are considerable for an employer and its directors.
‘Sham contracting’, where an employer claims there is an existing independent contractor arrangement with an employee when, legally, there is an employment arrangement in place, is an offence under the Fair Work Act 2009 (Cth).
Employers found guilty of ‘sham contracting’ can be fined up to $51,000 (for a company), per offence. Company directors and other ‘persons’, such as HR Managers, can also be prosecuted, the fine for each offence is $10,200.
There are also taxation withholding issues and superannuation guarantee legislation requirements to be considered.
The TattsBet Case
In a significant decision, the Full Court of the Federal Court (the Court) recently reversed a first instance decision and held that the relationship between a former TattsBet agency operator, Mrs Morrow, and Tattsbet Limited (Tattsbet), constituted an independent contractor relationship rather than an employment relationship.
In its decision, the Court made the following propositions clear:
- while respective parties’ beliefs about their relationship (i.e. employer-employee relationship or independent contractor relationship) is of some weight, it is not necessarily correct;
- no single factor is likely to be able to consistently indicate whether a particular relationship between two people is that of employer and employee. Some factors will attract more weight in particular cases than they will in others; and
- the “test”, if there is one, is said to be multi-factorial. All of the relevant circumstances need to be weighed and the totality of the relationship identified.
In its decision, the Court pointed to the following factors as indicators that the operator at the betting agency, Mrs Morrow, was an independent contractor rather than employee:
- The agreement. The agreement with TattsBet provided that Mrs Morrow was an independent contractor by way of acknowledgment by Mrs Morrow and this was consistent with the arrangements Mrs Morrow set up for herself as a business operator;
- Remuneration. Mrs Morrow was renumerated by reference to the value of the business transacted at the premises she operated;
- Ability to employ others. Mrs Morrow was free to employ others to assist her or, on occasion, to work in place of her. She employed the staff working at the agency, and undertook, as principal, the conventional obligations of the employer such as paying the required workers’ compensation;
- Personal net income. There was a striking divergence between the gross remuneration received by Mrs Morrow for operating the agency and her personal net income from the arrangement; and
- Superannuation and Tax. The absence of PAYE deductions and the presence of GST collections by Mrs Morrow and her general compliance with the GST regulatory requirements, such as the preparation of the relevant BAS returns.
Although Mrs Morrow’s actual work requirements left little distinction between her position and that of an employee manager, the Court determined that these features, in combination, meant that Mrs Morrow was a contractor.
This decision marks a movement away from a recent emphasis in several court decisions as to whether the employee, in performing the work, was operating as an “entrepreneur” who owns and operates a business.
The Court held the so-called “entrepreneur” test was no more than one of the various factors to be considered in all of the relevant circumstances which needed to be weighed to identify the totality of the relationship.
The decision also highlights the significance of taxation arrangements such as the deduction of PAYG instalments or the remittance of GST.
This decision is a good result for employers who enter into genuine independent contractor relationships where the other party is aware that they are not entering into an employment relationship.
As an employer, if you have any unclear employment arrangements with staff or contractors, to avoid hefty fines associated with sham contracting, it is very important that you assess each employment relationship in terms of all factors the courts will take into account.
(Tattsbet Limited v Morrow  FCAFC 62)