Creating artificial contractors

Employers should not mess with the weird legal science of creating artificial contractors. As once eloquently put by His Honour Justice Grey in the Federal Court, “The 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.”

This extends to the practice of engaging employees through a labour-hire company. In Orlikowski v. IPA Personnel Pty Ltd [2009], the Commission allowed a worker engaged through a labour-hire company to join the principal to unfair dismissal proceedings. SDP Lacy accepted that the arrangement was “payrolling”, that is, the labour-hire company was simply a conduit for paying wages, while actual control of the worker remained with the principal. This followed a similar decision by the Federal Court in Damevski v. Giudice which found that even though a formal contract existed between the principal and a service company, the “true” agreement was between the principal and the worker.

The ATO has adopted a similar stance in the recently issued Draft Taxation Ruling TR 2012/D4, which talks about ‘Kevin’, an engineer employed by Construct Co. Kevin is transferred to a labour-hire company on similar terms. Construct Co pays the labour-hire company fees which equal Kevin’s remuneration, travel expenses, and other employment benefits and charges, plus a labour-hire fee.

Construct Co has the right to determine whether, where and when Kevin will work, and provides him with the necessary tools and equipment. The ATO posits that Kevin’s employer will remain Construct Co because “in substance and reality, the relationship between Kevin and Construct Co has not been altered by the interposition of Hire Co.”

Although contractors aren’t covered by awards and cannot run unfair dismissal claims, there are significant liabilities that are often missed by employers.

Here are some of them:

Superannuation: If you engage an individual contractor principally for his own labour, then you must make contributions. Even though these may be sporadic engagements, the contractor is still only selling their work.

Unfair contracts: Contractors can seek the variation or cancellation of their services agreement on fairness grounds under the federal Independent Contractors Act 2006, where the person performing the work is a director or the directors are family members.

Health and safety: The Work Health & Safety Act 2011 requires you to ensure the health and safety of all workers who you engage, cause to be engaged, direct, influence or control. A ‘worker’ is defined to include a contractor, a sub-contractor and their respective employees.

Adverse action: These rights under the Fair Work Act 2009 extend to contractors. For example, you cannot victimise a contractor who asserts that they are entitled to employee rights.

Anti-discrimination: State and federal anti-discrimination laws extend to contractors and contract workers.

Workers compensation: Where your contractor engages its own employees, you may be responsible if the contractor does not have a workers’ compensation policy in place at the time of injury. You must also provide cover for contractors where the work they are performing is not part of a trade or business regularly carried out by them under a business name or their own name, and they are not delegating the performance of that work.

Tax benefits of contractor status have been reduced due to personal-services income rules, the PAYG instalment system and, in some cases, the PAYG withholding system (if the contractor does not provide an ABN). If a worker provides services through a company and derives 80 per cent or more of its income through this work, this income will be treated as the worker’s wages, and the company would have to deduct PAYG tax and contribute superannuation.

If business protection is a commercial imperative and the worker will have extensive access to your clients or confidential information, or is creating business-critical intellectual property, you should place a premium on employment. Unlike contractors, employees must act in the best interest of their employer. You also automatically own their creations.

Although contractors aren’t covered by awards and cannot run unfair dismissal claims, there are significant liabilities that are often missed by employers.

Here are some of them:

Superannuation: If you engage an individual contractor principally for his own labour, then you must make contributions. Even though these may be sporadic engagements, the contractor is still only selling their work.

Unfair contracts: Contractors can seek the variation or cancellation of their services agreement on fairness grounds under the federal Independent Contractors Act 2006, where the person performing the work is a director or the directors are family members.

Health and safety: The Work Health & Safety Act 2011 requires you to ensure the health and safety of all workers who you engage, cause to be engaged, direct, influence or control. A ‘worker’ is defined to include a contractor, a sub-contractor and their respective employees.

Adverse action: These rights under the Fair Work Act 2009 extend to contractors. For example, you cannot victimise a contractor who asserts that they are entitled to employee rights.

Anti-discrimination: State and federal anti-discrimination laws extend to contractors and contract workers.

Workers compensation: Where your contractor engages its own employees, you may be responsible if the contractor does not have a workers’ compensation policy in place at the time of injury. You must also provide cover for contractors where the work they are performing is not part of a trade or business regularly carried out by them under a business name or their own name, and they are not delegating the performance of that work.