David Sofrà and Owen Coyle, Employment Services Advisory, outline some potential unforeseen results of engaging independent contractors.
It was famously remarked in the Federal Court of Australia that contracting parties “cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck”.
The key message here is that engaging a worker as an ‘independent contractor’ has unforeseen consequences from an employment law and employment tax perspective if the relationship between the business and the worker has the features of an “employer/employee” relationship. Further to this, where a liability is found to exist, Directors are now held personally liable.
The issue of contractor arrangements has been prevalent in the headlines recently, with cases of door to door sales workers and charity fundraising workers demanding back pay, leave payments, superannuation guarantee and other employee entitlements, claiming they had been misclassified as contractors. In the case of Fair Work Ombudsman v Australian Sales and Promotions (November 2016), the company was found to have entered into a contract arrangement to avoid employee entitlements and employment tax obligations.
In addition to penalties being issued to the company, a personal fine was issued to a Director as an accessory to breaches of the Fair Work Act. Whilst this case clearly has implications for the practices of the contracting company, it also resulted in negative press for the charity who engaged the contracting company to source the workers. At a time when tax transparency is of critical importance to businesses, media coverage of this kind can cause reputational damage.
A recent UK tribunal decision (October 2016) casts further concern for businesses who engage independent contractors, particularly those operating in the ‘sharing economy’. The tribunal held that drivers of a car sharing service, long considered contractors running their own enterprise, were in fact employees who ought to enjoy the protections and benefits afforded by employment law. Interpretation by the Courts in the UK and Australia is largely aligned on this topic, providing a timely reminder of the risks associated with the engagement of contractors.
Where the Australian Taxation Office and State tax authorities are successful in piercing the veil of purported independent contractor relationships, it opens up a raft of employment tax obligations for the business including Superannuation Guarantee, Payroll Tax, Workers Compensation Insurance, Fringe Benefits Tax and Pay-As-You-Go withholding.
Even where parties successfully execute an independent contractor arrangement, there are still some traps of which to be mindful. For example, payments to contractors (including ‘one-man companies’) are prima facie subject to Payroll Tax in the absence of a specific exemption. The fact that these exemptions differ between States and Territories adds further complexity. With regard to Superannuation Guarantee, sham contractor arrangements and contracts principally for labour will be caught by the wide net of the Superannuation Guarantee legislation.
Given the ever-increasing focus by the authorities on this issue, and the potential for directors to be held personally accountable, it would be prudent for businesses who engage contractors to revisit existing arrangements, ensure that processes for on-boarding new contractors are robust, and be on the lookout for any roosters dressed as ducks.