Courts consider employee versus contractor issue

The issue of whether a person is an employee or a contractor has been a controversial one for some time now. Employers have different responsibilities (eg. super, tax, payroll tax, etc) depending on whether a person is treated as an employee or a contractor. The associated issue of so-called sham contracting also crosses this area.

The courts and tribunals have had a steady stream of cases where they have had to consider this issue.

In a recent case, the Federal Court held that interpreters engaged by a business to provide interpreting and translating services were “employees” for superannuation guarantee purposes, and not independent contractors. That means the employer was required to make the compulsory 9% super for them.

The company in this case operates a business providing interpreting and translating services to its clients (mainly large institutions).

For the period July 1, 2002 to June 30, 2007, it did not make superannuation guarantee contributions (ie. the 9%) for the 2,500 interpreters it engaged. The company regarded the interpreters as self-employed independent contractors primarily by reference to a perceived absence of control because there was no obligation on the interpreters to work.

The Tax Commissioner determined that the interpreters were casual or part-time employees for superannuation guarantee purposes and issued the company with superannuation guarantee charge assessments for the relevant period.

The interpreters were free to accept or reject an assignment offered by the company and most worked for more than one agency. The company required interpreters to follow its Code of Ethics and to wear an identification badge provided by it when on an assignment. Interpreters were able to swap assignments but were not permitted to sub-contract work without permission. The interpreters did not invoice the company for services provided.

In upholding the superannuation guarantee assessments, the Federal Court found that the interpreters were common law employees for super guarantee purposes.

Despite the earlier preoccupation of the law with the “control test” to determine whether an employment relationship exists, the Court said the modern approach considers the “totality of the relationship”.

Whether a person is an employee or an independent contractor is to be answered not simply from the contractual terms, but by the systems and work practices which establish the totality of the relationship, the Court said. While a range of factors may be examined, the Court noted that some factors will be more useful than others due to the diversity of modern work arrangements and the ingenuity of those fostering “disguised employment relationships”.

Simply expressed, the Court said the question of whether a person is an independent contractor may be answered as follows:

• Is there a business? Is the person performing the work for an entrepreneur who owns and operates a business?
• Whose business? In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

Is there a business?

The Court said the company had not established that the interpreters owned and operated a business. The Court said the totality of the evidence strongly suggested that the market for interpreting services involves agencies providing services to large institutional clients. The Court considered there was little scope for one-person businesses in that market.

While most of the interpreters had multiple purchasers of their services, the Court noted that the bulk of the purchasers were agencies. In this respect, the Court considered that the pattern of work for the interpreters was not much different to that of casual or part-time employees working for a small number of employers. The Court also noted that the interpreters performed their work personally and did not delegate or engage in sub-contracting (as opposed to swapping assignments). They also generally accepted the rates set by the company without negotiation.

Whose business?

The Court concluded that the activities of the interpreters were performed in and for the business of the company. That is, they were employees for superannuation purposes. In reaching that decision, the Court took into account each of the following indicators (largely taken from the decided cases) – which SMEs might note form the basic tests for employee versus contractor status:

• Control test: the Court did not regard the extent to which the company could and did exercise control of the interpreters as a determinative factor. The company said it did not have control over the interpreters in that it couldn’t require them to take assignments. However, the Court noted that a lack of obligation to work is a feature of both an independent contractor and a casual employee.
• Representation of user’s business: the economic activities of interpreters were represented and portrayed as the activities of the company, and not the activity of the businesses of the interpreters. The requirement for panel interpreters to wear identification badges, and the content of those badges, portrayed panel interpreters as representing the company and as being an emanation of the taxpayer, the Court said.
• Goodwill: the goodwill created by the work performed by the interpreters overwhelmingly attached to the company.
• Result test: the Court was not satisfied that interpreting or translating was remunerated for an agreed result. However, the fact that the work had a connection to time and dislocation was neutral in this case and did not mean the interpreters were employees. The Court said great care needed to be taken with the results indicator in the modern age as remuneration of work by reference to time and dislocation is also a common practice for independent contractors.
• Delegation: a key element in an employment relationship is the personal performance of work. The Court said the absence of delegation tended significantly against the conclusion that the work provided by panel interpreters was performed in and for their own businesses.
• Integration test: the Court considered that economic dependency, integration and exclusivity was not an indicator of any use in this case. While the lack of exclusivity and the fact that interpreters also worked for competitors suggested a lack of integration, the Court said this is also a feature of casual and part-time work.
• Profit and risk: the interpreters took little or no risk but had some capacity to manage their affairs so as to maximise their remuneration. Although poor performance may have led to no further assignments, there was no penalty or denial of payment. The risk was borne by the company who took out insurance.
• Characterisation of work: the Court did not attach much weight to this factor as the label of independent contractor adopted by the company and the interpreters did not appreciate the substance of the relationship.

The Court also held that the interpreters were “employees” of the company within another provision of the superannuation law (s 12(3) of the Superannuation Guarantee (Administration) Act 1992) as they were engaged under contracts that were wholly or principally for the labour of the person. The Court said s 12(3) sought to facilitate occupational superannuation for workers who sell their labour in employment and employment-like settings. In this respect, the Court said the company had failed to establish that its relationship with the interpreters was not employment-like.

In the current employment environment in Australia, it is likely that the employee versus independent contractor issue with continue to “simmer”. The cases that continue to come before the courts suggest that not all employers have got it right. SMEs might be wise to take some good counsel on the issue before deciding to treat a person as a contractor.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .

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