The contractor ‘killing fields’ - life, death and liability for a contractor - Part 1

The history of labour relations tells us that the sacred ‘employer/employee’ relationship has often been under siege. The federal government tried to prevent the unfair re-designation of employees to independent contractors by an amendment to the Industrial Relations Act 1988 in 1994. And the new Fair Work Act 2009 (FW Act) has expanded the scope of the protections afforded to independent contractors to include an ‘adverse action’ claim where payment or treatment of independent contractors is not commercially fair.

Why independent contractors?

Superficially, engaging independent contractors offers many benefits to businesses. They fill skill gaps as needed and provide flexibility in labour during business variances without the cost and complexity of Industrial Relations. They frequently bring their own equipment and generally don’t have access to confidential information. And where the independent contractor is a corporate entity, the business can secure the contractor’s exclusive services by imposing a lawful commercial restraint under trade practices legislation. From a commercial perspective, contractors avoid business on-costs, including insurance, PAYG, superannuation and payroll tax.

Independent contractors also diminish legal risks, as principals owe them a lesser duty of care than that owed to employees. In the case of Leighton Contractors, the High Court recently affirmed that while a principal may owe a duty to an independent contractor to ensure that a safe system of work is prescribed, a business does not owe a duty to contractors to avoid any risk of injury. The court held that where a principal organises the workplace activities and engages contractors to undertake those activities, reasonable care must be taken to avoid or minimise risk of injury to independent contractors. However, unlike the employer’s duty of care towards an employee to avoid any risk of injury, the principal’s duty towards independent contractors is limited to avoiding unnecessary risks of injury and minimising risks of injury overall. It does not import a duty to retain control of working systems if it is reasonable to engage the services of independent contractors who are competent themselves to control their system of work without supervision by the business. Therefore, while the duty of care owed to contractors is not as onerous as that owed to employees, a principal must nevertheless take reasonable care in minimising clear risks encountered by contractors.

Contract for services: not as easy as it seems

In Victoria, the veil of protection afforded to principals is eroded by statute. Importantly, an independent contractor may be considered, in reality, to be an employee if ‘the true nature of the relationship’ is one of employment. In such a case, contractors attract all the statutory obligations and entitlements as ordinary employees. In particular, they will be subject to the same income tax and payroll tax obligations, superannuation charges, long service leave entitlements, workers compensation and unfair dismissal claims.

Under the PAYG system, employers must withhold an amount from payments made to employees for tax purposes. Under certain circumstances, these obligations also apply to independent contractors. In particular, a principal must withhold an amount from a contractor where the subcontractor:

• Fails to quote an ABN or exemption entitlement; or
• Has voluntarily entered into a withholding agreement.

Also, under superannuation legislation, a principal may incur costs associated with hiring independent contractors. The law provides that superannuation guarantee charges apply if the contractor is 'wholly or principally engaged for labour’.

So, having a contractor relationship isn’t always as clever as it seems, particularly given the complex test which governs whether a person is an independent contractor. Far too often, employers engage a person under the cloak of a principal/contractor relationship when it’s clear that it is really an employment relationship. When it goes wrong, the employer is hit with back tax, penalties, compensation, etc. As Forrest Gump explained: “Stupid is a stupid does.”

Who is an independent contractor?

An ‘independent contractor’ is a person or entity that provides goods or services to a business (the ‘principal’) under terms set out in a contract. Contractors are engaged for specific purposes to achieve a specific result. In this way, they are not employees of the principal’s business.

The distinction between employees and contractors is important because they attract different types of statutory obligations and entitlements. In most cases, the distinction is clear. However, sometimes the line is blurred by the nature of the working relationship and contractual terms under which the contractor is engaged. Where uncertainties arise, courts will look at several factors to determine whether or not a contractor is in reality an employee.

The High Court stated that a person is more likely to be regarded as an employee and not an independent contractor where the:

• person is paid a regular salary or wage;
• employer has a right to exercise control over the manner in which work is performed, including the place of work and hours of work;
• work is performed on the employer’s site;
• worker cannot sub-contract out their duties to anyone else;
• employer deducts PAYG tax, superannuation contributions and workers compensation insurance;
• person is paid sick leave and annual leave;
• person is engaged on an ongoing basis, rather than to do a particular job;
• person has no plant and equipment that they use as part of the engagement;
• person is paid under their own name, rather than through an ABN.

Parts 2 and 3 will address the implications of the FW Act and OHS legislation on contractor relationships, respectively.

*Andrew Douglas, Douglas Workplace and Litigation Lawyers