Contractors

Wednesday, April 12, 2017

There are plenty of reasons to engage a worker as a contractor as opposed to an employee, but the fact that someone expresses a preference for being a contractor isn't one of them, says HR Business Direction's Melissa Fitzpatrick.

"I see this a lot," Fitzpatrick told a recent Employee or Contractor? Seminar.

"Often they want to be their own boss – or want to feel like they're their own boss – but they'll be the first ones running to Fair Work or WorkCover when something goes wrong.

"It might also be that they would prefer to pay income tax at a company tax rate; I've also seen circumstances where people want to avoid child support payments," she warned.

Another reason not to engage someone as a contractor is that it can have a negative impact on existing employees. Because contractors tend to come and go, employees often feel less inclined to engage with them, and might feel less secure in their own jobs, both of which can diminish productivity.

Contractors can also be seen to be receiving greater entitlements or benefits than employees, which can cause resentment.

Riskier still is the rationale that by engaging workers as contractors you'll be able to avoid meeting employee-related obligations, Fitzpatrick said.

A decision handed down in July this year (FWO v Happy Cabbie) saw an employer fined more than 10 times the amount it had underpaid seven "contractors" who were deemed to be employees.

"If [your aim] is primarily to avoid obligations under the Fair Work Act or an Award, that's sham contracting and it attracts heavy penalties," she said.

Fitzpatrick also warned employers to beware of various other laws that impact on the use of contractors, including the Super Guarantee Administration Act, the Tax Administration Act, the Independent Contractors Act, and the Work Health and Safety Act.

She said a contracting arrangement should only be entered into when it satisfies "genuine business requirements".

A business might, for example, require a short-term or specialist service, or the flexibility to terminate without notice. Alternatively, an employer in a high-risk industry might legitimately opt for contracting arrangements to avoid vicarious liability for insurance reasons.

Look at the relationship "as a whole"

Even in cases where contracting agreements have been set up and formalised, Fair Work Australia could deem a worker an employee, Fitzpatrick told the webcast seminar.

"The problem lies in the fact there really is no single test that can be applied in all situations," she said.

"We need to look at the relationship as a whole.

"When we look at the main factors the courts have told us are indicative of a contractor, we see that contractors have the ability to sub-contract or delegate their work to others. They're also paid for achieving a set result; they provide their own tools or equipment without reimbursement or allowances paid by the principal; they bear their own commercial risks; and they bear liability for the cost of rectifying defects," she said.

Further, the contractor controls the way in which work is carried out (though the principal can set some broad parameters) and remains independent of the principal.

The fact that the leading case in this area, Hollis and Vabu went all the way to the High Court – and even then was only decided by a four-three majority – shows just problematic the "contractor or employee" question can be, Fitzpatrick said.

In that case, an unidentified bike rider wearing a courier company uniform hit a pedestrian who then sued the company for negligence.

"The interesting thing about this case is there were quite a lot of 'contractor-type indicators' in the terms of the arrangement between the courier company and its couriers," Fitzpatrick said.

"They included that the couriers supplied and maintained their own bikes; they provided their own street directories; they received no salary or wages but were instead paid for each successful delivery; they could use a business name or incorporate themselves; they bore the risk of providing their own capital and incurring any losses; and they were free to work for other businesses so long as they satisfied their commitment to the company."

But noting that no signi´Čücant investment in capital for equipment was made by the company's "contractors", and that they were not providing skilled labour, the High Court found that the courier was an employee, rendering the company vicariously liable for its actions.

The Court did say, however, that a different conclusion might have been reached if the investment in capital was more significant, or if greater skill and training was required to operate it.

Fitzpatrick also told the seminar, what to include in contractor agreements, explained why employers should be careful when rolling over fixed-term contracts, and noted that it's possible for employers to minimise risk but maintain flexibility by being "a bit creative" in the way they structure their employment relationships.