Employee vs contractor: it's all about the contract
The High Court recently handed down a significant decision dealing with the distinction between employees and independent contractors. The case concerned an “independent contractor” labourer and a labour hire company. The labourer had signed an Administrative Services Agreement (ASA) with the labour hire company to work as a “self-employed contractor” on various construction sites. Although the ATO was not a party to either case, it has since released a decision impact statement as the High Court’s decision impacts on the ordinary meaning of the term “employee”.
Full Federal Court decision
The Full Court of the Federal Court had initially held that the labourer was an independent contractor after applying a “multifactorial” approach by reference to a number of things including the terms of the ASA. However, the High Court overturned the Full Federal Court’s decision, finding that the labourer was an employee of the labour hire company.
High Court decision
The majority of the High Court stated that where the parties have comprehensively committed the terms of the relationship to a written contract and no party is disputing the validity of that contract, the characterisation of the relationship must proceed based on the legal rights and responsibilities established in the written contract. The High Court therefore concluded that a multifactorial approach examining the relationship between the parties over the entire history of their dealings was unnecessary and inappropriate. In certain circumstances however, an examination of post-contractual conduct may be permissible, such as when the contract is not in writing, is oral or partly oral, or is being challenged or varied.
The minority view of two High Court Justices considered the multifactorial test to be a well-established principle for characterising the totality of the legal relationship and that the Court was permitted to examine the whole employment relationship and was not restricted to the written contract. Even though there were different approaches taken in their reasons for judgment, the High Court agreed that the critical question in these circumstances was whether the supposed employee performed work while working in the business of the engaging entity. That is, whether the worker performed their work in the engaging entity’s business (i.e. the labour hire firm) or in an enterprise or business of their own.
ATO decision impact statement
In its decision impact statement, the ATO noted that the High Court has not disturbed the well-established practice of examining the totality of the relationship. While the multifactorial test was rejected by a majority, there are still instances where it could be applied. In addition, the ATO observed that the decision recognised that long-established employment indicia are still relevant, although they must now be viewed through the focusing question of whether the supposed employee is working in the business of the employer. This, according to the ATO, reflects its current understanding of the application of the business integration test that the High Court has now elevated as one of the primary aspects of contractual examination.
As a result of the decision, the ATO will review relevant rulings that may be impacted by the High Court’s decision, including super guarantee rulings on work arranged by intermediaries and who is an employee, as well as income tax rulings in the areas of PAYG withholding and the identification of employer for tax treaties.
If you run a business and have dealings with contractors, we can help you understand how this decision will affect you. If you would like to keep up to date with any developments or changes to ATO’s rulings impacted by the High Court’s decision, contact our office today.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.