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Independent-contractor

Sham independent contractor agreements

Can a person be legally an "employee" if he or she works casual or part-time for multiple businesses? What makes a person an employee and not an independent contractor?

In law the short answer is many factors. There are major financial and legal consequences. Employers have statutory obligations and employees have statutory entitlements, eg to superannuation payments.

The employees or contractors question arose in a 2011 court case involving the Australian Tax Office - On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366.

Brief facts

The brief facts of the case are that On Call was a translation business. It claimed it had 2,500 independent contractors and only 4 employees. These alleged contractors were in a “panel” of interpreters assigned to jobs by On Call. Each had either signed one of a variety of contracts with On Call or had no written contract with On Call.

There's a telling quote in Justice Bromberg's decision in the case: “The records of On Call in relation to written contracts made between On Call and panel members are shambolic.

Justice Bromberg noted certain features of the contractual relationship between On Call and the panel of 2,500 which in his view established that On Call engaged each in fact as an employee, not as an independent contractor. Thus the 2,500 were due unpaid superannuation.

Here are facts Justice Bromberg noted that point to the the 2,500 being employees.

  • Record keeping and version control – On Call were unable to establish who had signed which version of their contract, if they had signed a contract at all.
  • Work flow process – Against On Call was the paperwork used for interpreters to record when an interpreting assignment was completed. The form was essentially a method of confirming when an assignment had been completed. It was not an invoice. The majority of interpreters did not invoice On Call.
  • Goodwill – When performing an assignment, the interpreters wore ID badges identifying them as representing On Call. Thus they were contributing to the goodwill of On Call. The interpreters were not representing that they were carrying on their own businesses when they were on assignments.
  • Payment System – Interpreters were paid on a monthly basis, not by each assignment. On Call produced and sent a monthly remittance advice to the interpreter, this was accompanied by a payment.
  • Insurance – On Call had indemnity insurance policy had a special condition that extended the coverage of the insurance to people who had a contract of services with On Call to “perform the Firm’s Business”.
  • Risk of Profit or Loss – It was On Call who were taking the risk of profit or loss in its business. The interpreters were paid a set amount for performing the assignments. It was On Call who bore the risk of interpreters not turning up to an assignment.

Judgement

Justice Bromberg ruled that there was no difference between the way an On Call employee carried out an interpreting assignment and the way an On Call panel member carried out an interpreting assignment. He ruled that the panel members were in fact employees, not independent contractors.

This point was critical to the issue of superannuation payments due to employees under section 12(3) of the Superannuation Guarantee Act. The section provides: "If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract."

Under contract law in Australia, courts can look beyond the wording of contract to determine its true nature in the context of determining if it is an employee or contractor arrangement. Justice Bromberg stated: “...it is well settled that what a court will look at is the real substance of the relationship in question.” This approach “...also involves what may be described as a ‘smell test’, or a level of intuition.

Practical consequences

Many businesses seek to reduce cost by engaging people as contractors. They see advantages in:

  • Not paying superannuation
  • Not giving holiday and other leave allowances
  • Not drawing income tax from gross income
  • Not paying workers compensation insurance
  • Not having to issue pay slips and keep compulsory records on leave taken or hours worked.

Independent contractor and consultancy arrangements should be put in place where appropriate, not where it is a sham.This is such an important subject that we've made this video about it - People Contracts - Contractor or Employee?

If the are legitimate they should also be properly structured by an independent contractor or service agreement. These can be designed to have many commercial and management advantages, so they need not just be done for legal compliance.

Whether someone is an employee or contractor does not have a black and white answer in Australian law. Instead it requires review of many relevant facts. Failure to conduct a review can result in fines, penalty payments, unexpected financial burdens and considerable public embarrassment.

An important factor to note in this case, as is increasingly common in service sectors, is that th

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