Employee vs contractor: Employer's legal obligations in 2022

The thrust into the gig economy has started to blur the lines between an employee and contractor, with unions and the courts becoming actively involved. The High Court of Australia has recently handed down two important decisions: In the case of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022), the High Court held that a construction worker was an employee of a labour hire company.

In ZG Operations Australia Pty Ltd v Jamsek (2022), the High Court held that the truck drivers were contractors notwithstanding their exclusive service to the employing company.  

“In the ZG Operations case, you had a truck driver who was essentially an employee of the company but, at some point in time the company would have wanted to keep the driver, but not as an employee, rather as a contractor,” Dr Mark Pizzacalla, partner, BDO in Australia, told HRD. “So that particular individual went out and purchased their own truck and set up their own partnership structure. The structure also meant they got some tax benefits and they continued to work for the company on the basis of a contractor.”

Ultimately, the High Court ruled that the rights and obligations of the contract were the main characteristics that defined the ruling.

“This means that you really need to focus on the contract and the rights and obligations under the contract when formulating the decision as to whether someone's an employee or a contractor,” Dr Pizzacalla said.  “Simply describing someone as a contractor, where that's not reflected in the rights and obligations under the contract, is not going to pass the test any longer.”

The fact that both cases went to the High Court shows the different interpretations each court put on both the contract itself, the work being performed, and the sum of the relationships surrounding both.

“The High Court has provided some level of clarity by indicating that the written contracts are an important component when analysing the employer/employee/contractor relationship,” Dr Mark Pizzacalla said. “Some previous lower court decisions preferred to consider looking at the totality of the relationship as between the parties and gave greater emphasis to taxpayer behaviours when reaching their conclusions. 

“Employers will need to make sure that they properly characterise the contractor’s role/responsibility in the agreement and that this properly reflects the rights and obligations of the parties. In other words, you cannot simply call someone a contractor in the agreement when the reality of the situation is something completely different. The contract is critical and needs to properly reflect the rights and obligations of the parties.”

There are differing laws on tax depending on whether someone is an employee or a contractor.

“The tax implications vary significantly depending on the contractor/employee status, and traverses many tax areas such as PAYG, superannuation guarantee, FBT, GST, and state taxes,” Dr Mark Pizzacalla said.  “Critically, superannuation (amongst other taxes) applies to employees and not contractors and the incorrect non-payment of superannuation is a director’s personal liability at law if the company does not meet the payments.”

Key Takeaways for HR leaders

1.    When drafting the contract, ensure it is based on outcomes (i.e., you're not paying someone for their time but rather for their results achieved)

2.    Make sure the contractor is not controlled in terms of the way they perform their work

3.    Ensure the contractor has the right to delegate

4.    Check that the contractor has their own insurance

5.    The contractor can work for other clients, that is, they don't work exclusively for the company that they are contracting with.