In February 2022, the High Court handed down two defining judgements: CFMEU & Anor v Personnel Contracting Pty Ltd  HCA 1 (Personnel Contracting) and ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors  HCA 2 (Jamsek). These judgements provided guidance on the factors determinative of whether someone is an employee or an independent contractor, with the outcome being a significant change in the way businesses should assess independent contractors.
Off the back of this, the Australian Taxation Office (ATO) reviewed its previous guidance and in December 2022, released draft ruling TR 2022/D3, incorporating the High Court’s approach. At this stage, the ruling is open for consultation, however we do not expect the final version to vary significantly.
How has the ATO’s guidance changed?
Previously, all aspects of the employer and contractor relationship was assessed to determine the reality of the agreement between parties. This presented a challenge as the onus was on the taxpayer to prove the worker was a contractor, which could be quite subjective. With the decisions in the High Court, the ATO has now changed its approach and determined the relationship between an employer and a worker to be based on the contractual terms of the agreement. This implies, assuming all relevant information is included in the agreement, the ATO will not consider how the contract is carried out in practice.
While this new approach from the ATO may seem simple, where there is evidence of a contract carried out that contradicts the agreement, the ATO may consider this in determining factors such as:
- When the contract was established
- The contractual terms that were agreed to (i.e., where the contract is wholly or partially oral)
- Whether a subsequent agreement has been made or the original terms have been varied, or
- Whether the contract was a sham.
How to identify an employee
To determine whether a worker is an employee, the most distinctive test employed by the ATO is to consider whether the worker serves in the business of the employer and works as a representative of the business, or acts as an independent contractor providing services to the business.
While this distinction is vague and again, can be subjective, the ATO considers a list of other factors that will add further weight to the classification:
- Control: Whether the worker has control over how, when and where they perform their work.
- Ability to delegate: Can or does the worker delegate to other workers or contractors outside the engaging entity?
- Results contracts: Is the worker being engaged to achieve a specified result or are they more akin to task-based contracts and services?
- Tools and equipment: Is the worker required to bring their own tools of trade that are either significant to the role or do they possess specialised training and knowledge?
- Risk: Does the worker bear little or no risk in the event there is injury or defects in the work carried out by them?
- Generation of goodwill: Is the worker able to generate goodwill towards their own enterprise?
Key takeaways for business owners
The distinction between an employee and a contractor has always been a contentious issue, however with the recent High Court rulings and proposed ATO guidance, business owners should undertake the following:
- Review all contractor agreements: Ensure all terms and conditions with contractors are outlined in a written agreement and both parties agree to these terms. Where there has been verbal variations, a new agreement should be prepared.
- Do not use a checklist to classify workers: Previously a ‘multifactorial approach’ was used to classify workers as employees or contractors. This ‘checklist’ method is not sufficient and a review of the totality of the relationship between the business and the worker must be undertaken.
- Engage experts for the right advice: Adopting an incorrect classification can have wide ranging implications regarding employer obligations such as superannuation guarantee and payroll tax. If you are unsure of how to correctly classify a worker, engage the experts such as your lawyer or accountant, to ensure your business is complying with the legislation.
High Court judgements and ATO’s draft ruling offer additional guidance to determining a worker’s classification. We strongly recommend business owners review their contractor arrangements and update agreements that do not include all agreed terms and conditions of the arrangement, written or verbal.
If you would like help undertaking a review of your contractor relationships, reach out to your local William Buck advisor.