Australia: Flexible work - recent developments on independent contractors

Critical Path

Most organisations today, including those in the building and construction industry, require flexibility in their workforce.

In addition to the core group of employees who are highly trained, skilled, committed and who are employed on a permanent basis, organisations increasingly rely on a peripheral workforce. These workers and businesses are no less important. They may or may not be employees of your organisation. They may have fewer skills, or more specific skills. They may be called up for projects, for one-off tasks, or at short notice.

This peripheral workforce, and in particular independent contractors, have come under the spotlight from a number of different directions in recent times.

Below are a number of recent developments that you should be aware of if you engage independent contractors.

Sham contracting

Employers that engage in "sham contracting" are at risk of hefty penalties under the Fair Work Act 2009 (currently $6,600 for individuals, and $33,000 for corporations).

A recent Fair Work Ombudsman investigation into a partially targeted sample of enterprises identified that most instances where employers had misclassified employees as independent contractors were not deliberate. However, some employers had either done so recklessly (with little or no thought as to whether the individuals were actually contractors), or deliberately, in order to circumvent paying employee-related entitlements.

Sham contracting provisions in the Fair Work Act 2009 prohibit conduct by an employer that purports to treat people who are really employees, as independent contractors, by:

  • misrepresenting to an individual that an employment contract is an independent contractor arrangement (this does not apply if the employer proves that when the representation was made, it did not know and was not reckless as to whether the contract was an employment contract);
  • dismissing, or threatening to dismiss employees, in order to engage them as independent contractors to perform the same or substantially the same work; and
  • making false statements to persuade or influence an employee to enter into an independent contractor agreement under which the individual will perform the same or substantially the same work for the employer.

These provisions (and the penalties) also apply to persons who are "knowingly concerned" in the contraventions, such as directors and HR managers of the employer.

Fair Work Building & Construction – focus on sham contracting

On 1 June 2012, Fair Work Building & Construction (FWBC) replaced the Australian Building and Construction Commissioner (ABCC) as the building and construction industry IR watchdog.

In a recent speech to the Industrial Relations Society of Western Australia (IRSWA) State conference, Leigh Johns, Chief Executive of the FWBC, stated that the FWBC has a mandate to investigate and litigate across the full range of civil penalty breaches in the Fair Work Act, but that the FWBC’s focus will be on six key areas of concern; unprotected industrial action, freedom of association, coercion, right of entry, wage and entitlements, and sham contracting.

More generally, Johns stated that the FWBC intends to broaden the functions exercised previously by the ABCC, including by providing “advice, assistance and education about harmonious, productive and cooperative workplace relations in the building industry.”

Johns also stated that the FWBC will build on changes in its operating capability implemented by the ABCC, including by commissioning research into sham contracting recommended by the ABCC’s Sham Contracting Inquiry Report of December 2011. The aim of the research is to build an accurate picture of sham contracting in the building and construction industry.

The report also recommends that the outcomes of the research be reviewed in order to consider matters such as whether legislative amendments to eliminate sham contracting in the building and construction industry would be effective. We will keep a watching brief on developments in this space.

Workers’ compensation changes in Victoria

Workers’ compensation is regulated by State law. The Accident Compensation Act 1985 (Vic) was amended last year to simplify the test applied to determine when an independent contractor is a "worker” for payroll premium calculation and entitlements in Victoria.

The old test for who is deemed a "worker" was almost identical to the test for payroll tax in Victoria. The new test requires principals to determine if the following three conditions apply:

  • the provision of materials or equipment is not the principal object of the arrangement; and
  • at least 80 per cent of the work is performed by the same individual; and
  • at least 80 per cent of the contractor’s overall services income is earned from the principal during the financial year.

If the three conditions apply, then the independent contractor will be deemed to be a worker of the principal for that period. The new test may mean that your organisation has to ask more questions at the time that contractors are engaged.

An exemption applies where WorkSafe determines that, in providing services to the principal, the contractor is carrying on an “independent trade or business”. WorkSafe will consider a range of factors.

Taxable Payments Reporting

On 1 July 2012, Australian Tax Office (ATO) new reporting requirements commenced which impose reporting obligations on businesses in the building and construction industry that make payments to contractors for services. The new reporting system is similar to the Prescribed Payment System and obliges businesses in the industry to report payments by 21 July each financial year. The first report under the new system is due on 21 July 2013.

A Taxable Payments Annual Report needs to include the name, address and ABN of the contractor, as well as the gross amount paid to the contractor in that financial year, including GST. The information collected will then be used by the ATO for data matching purposes to ensure that contractors are paying the appropriate amount of tax.

Superannuation Guarantee Contributions (SGC)

Organisations have long been aware of the distinction between employees and contractors applied by the ATO in Superannuation Guarantee Ruling 2005/1. According to the Ruling, where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship between the individual and the other party for the purposes of SGC. This means that the principal is not liable for the SGC of any employees of the corporate independent contractor.

A 2011 case1 appeared to cut across existing authorities on the issue of whether principals are liable for SGC, in particular, in instances where contractors are incorporated. The case considered whether, in a particular instance, individuals classed as independent contractors were employees of the principal for SGC purposes and decided, although some of these contractors operated as incorporated entities, the individuals carrying out the work were nevertheless common law employees of the principal, which consequently had SGC obligations in respect of the individuals.

Unsurprisingly, the outcome confused many. Although the case stopped short of calling the arrangements "shams", it did determine that once the totality of the relationship was considered (including consideration of whether the contractor was incorporated), that the relationship was in fact one of employer and employee.

Since that case, an ATO Decision Impact Statement confirmed that the ATO approach to interpretation and enforcement of a principal's SGC obligations has not changed, and that SGR 2005/1 will still be applied by the ATO.

However, it is also clear that Courts are increasingly willing to look behind the corporate veil to determine whether an individual is a contractor or an employee, and incorporation is treated as just one factor of the relationship that can be outweighed by other factors more suggestive of an employment relationship.

What should you do?

If you have not reviewed your contracting arrangements lately, it may be a good time to conduct a thorough review of the totality of the arrangements between your organisation and any contractors.

This is especially important for businesses that have long-term contractors, where it is possible that arrangements have changed over time to become closer to an employment relationship.

In light of the renewed focus on building industry participants, compliance with industrial relations law, including by the FWBC, it is important that industry participants review arrangements that may be of concern and employ a best practice approach to compliance.

Lastly, even though the first Taxable Payments Annual Report is not due until 21 July 2013, the reporting obligations will relate to a period that has already commenced. You should therefore have systems in place now to ensure that all relevant payments are recorded and easily accessible next year.


1On Call Interpreters and Translators Agency Pty Ltd v Commissioner Taxation (No. 3) [2011] FCA 366

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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