Contractor or Employee the Good, the Bad and the very Ugly

Transcription

1 Contractor or Employee the Good, the Bad and the very Ugly 23 rd May 2013 Web Presentation of the Institute of Public Accountants Presenter: Philip Lye Industrial Relations Advisory Group Topics Covered Who is a Contractor, Who is an Employee, How can I tell the differences, Determining the status of a Contractor and an Employee (High Court Control Test); Case law Examples; Deming provisions in various acts and there impact on; Tax ATO Superannuation; Payroll Tax; Health and safety Worker compensation Question and Answer time 1

2 Contractors Are your Contractors Really Contractors There are many reasons why businesses engage contractors and the most common are: The desire for a simple arms length engagement structure. Flexibility within the engagement, such as mutual no cause termination provisions, entitlements and minimized risk. The engagement falls outside industrial legislation and regulations. Less full time equivalent employees. Budget and cost certainty with the less likelihood of budget blow-outs. Evidence that contractors are more productive and task oriented, requiring less supervision and time off. Higher skills retention due to project ownership. 2

3 The Difference between an Independent Contractor and an Employee An Independent Contractor can be distinguished by a number of indicators such a the level of control the Principal or Hirer has over their worker and the workers level of independence to perform the work amongst other indicators outlined in this presentation. An Employee has a greater level of control over their duties under and employment agreement Be aware that other types of relationships can also exist such as work may be performed under a labour hire agency, or a partnership agreement. Be aware that Fair Work has wide sweeping powers to investigate claims against you which may result in large penalties and awarding of employee entitlements if the decision goes against you. Fair Work are currently on a witch hunt to find employees hiring workers who are avoiding their employment obligations by hiring sham contractors. A recent survey found that over 90% of employers were not aware of the dangers and implications of employee v contractor issues. A Contractor can complain to Fair Work alleging that they were induced or under duress to become a contractor resulting in significant repercussions for an employer even if the persons claim was made falsely made. Are your Contractors Really Contractors Many businesses will enter into contracting arrangements without the full knowledge or understanding of the factors that impact upon the engagement, potentially to the detriment of both parties. Do the contractual terms and essence of the assignment reflect the common law characteristics of an Independent Contractor? Can the contractual arrangements be construed under Fair Work Australia s Sham Contact provisions as a breach of those provisions. Is the arrangement fair to both parties (Independent Contractors Act)? Is the arrangement compliant with the provisions of the Income Tax Assessment Act (Personal Services Income (PSI). Is the contract arrangement compliant with current case law and other legislation. 3

4 Are your Contractors Really Contractors The contractor has an ABN isn't that enough? It is a common misconception that the provision of an ABN by an individual is sufficient to establish their status as an independent contractor. Many companies wrongly believe that anyone providing an ABN automatically relieves them of statutory responsibilities for PAYG tax and superannuation guarantee contributions. On its own, the holding of an ABN simply means that the individual is registered with the ATO for the purposes of collecting and remitting GST. Specific taxation and superannuation rulings defer to the common law principles for determination of an individual s status as employee or independent contractor, and those rulings make it quite clear that an ABN is not automatic presumption of contractor status for the purposes of PAYG and SGC. Are your Contractors Really Contractors The High Court Test Probably the most recognised test is the 'control test'. The control test is not a rule of law but it has been historically considered to be a commonsense criterion for determining the existence of a legal relationship and its application always turns on the facts of a particular case. The test was set out by McCardie J in Performing Right Society Ltd v Mitchell & Booker Ltd: The...test to be generally applied, lies in the nature and degree of detailed control over the person alleged to be a servant...an independent contractor is one who undertakes to produce a given result, but so that in the actual execution of the work he is not under the order or control of the person for whom he does it, and may use his own discretion in things not specified. The High Court has, however, made a move away from a singular control test and has showed a preference for considering the totality of the relationship between the parties. Control held over the worker, however, still remains a distinctive consideration taken by the courts when considering the classification of the relationship. 4

5 Are your Contractors Really Contractors Organisation Test The organisation test was developed due to the difficulties posed by the control test in determining the distinction between an independent contractor and an employee. The organisation test was developed as a 'subsidiary check on a conclusion to which an analysis in terms of control was tending in any event'. The High Court's move away from the control test has also seen a shift in reliance on the organisation test. Nevertheless, the organisation test is still recognised as a distinctive consideration in determining the status of the employment relationship. The organisation test was formulated by Denning LG in Stevenson, Jordan and Harrison Ltd v McDonald and Evans.. Under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business [and is 'part and parcel of the organisation']; whereas, under a contract for services, his work, although done for the business, is not integrated into it but only accessory to it. Are your Contractors Really Contractors The Multiple Indicia Test The approach currently being adopted by the courts is that it is only by making a balanced evaluation of all the features of a relationship that one can determine whether there is a sufficient quality and quantity of control by one party over another to indicate the existence of an employment relationship. This test is known as the multiple-indicia test and the High Court of Australia considers it the primary test to be used. The High Court in Stevens v Brodribb Sawmilling Co Pty Ltd outlined the multi-indicia approach: The existence of control, whilst significant, is not the sole criterion by which to gauge whether a relationship is one of employment. Other relevant matters include, but are not limited to, the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work and provision of holidays, the deduction of income tax and the delegation of work by the putative employee. (Continued next page) 5

6 Are your Contractors Really Contractors The Multiple Indicia test continued It is 'no longer sufficient to consider only the extent to which the employer may exercise control (whether actual or the authority to do so) over those sought to be characterised as employees'. However, it must be noted that in most cases it is still appropriate to apply the 'control test' in the first instance because it remains the surest guide to whether a person is contracting independently or serving as an employee. The approach adopted in Stevens was confirmed in the High Court decisions in Vabu and Sweeney. The facts in Vabu were that the plaintiff, Mr Hollis, was struck by one of Vabu's bicycle couriers and as a result suffered permanent damage to his knee. Mr Hollis sued Vabu, alleging that it was vicariously liable for the negligence of the courier as they had been engaged as an employee. Vabu sought to avoid liability on the basis that its couriers were engaged as independent contractors. The High Court ultimately decided, overruling the courts below, that the courier was an employee and that Vabu was vicariously liable for the courier's negligence. In the argument before the High Court and the NSW Court of Appeal below, Vabu had relied upon the findings of a previous decision of the NSW Court of Appeal involving the same relationships (ie those between Vabu and its couriers) in litigation with the ATO relating to Vabu's liability to pay statutory superannuation contributions. In the earlier decision, the NSW Court of appeal had relied on a number of factors to conclude that the couriers were contractors so that superannuation contributions were not payable for them by Vabu: Are your Contractors Really Contractors The multiple indicia test continued The couriers supplied and maintained their own vehicles at their own cost. The couriers described themselves as independent contractors (and they were taxed as contractors, not employees). The couriers provided the tools necessary to do their work. The mode of remuneration was a fixed rate per kilometre rather than a wage or salary. In determining the claim by Mr Hollis, the High Court disagreed with these conclusions. The couriers had little or no control over the manner in which they performed their work. The couriers were required to wear a uniform which presented them to the public as emanations of Vabu. Vabu was aware of the dangers which its couriers presented to pedestrians, yet failed to adopt any means for personal identification of individual couriers by the public. Vabu administered the couriers' finances and offered no scope for couriers to bargain for their remuneration. In addition, their employment left the couriers with limited scope for undertaking any business enterprise of their own. The fact that the couriers were required to supply their own transport and equipment was not determinative. (SUMMARY PROVIDED IN YOUR HANDOUTS) 6

7 Ten (10) characteristics of a contractual relationship (Contractor) 1. The Worker does not work under supervision. 2. The worker provides services regularly to a number of different principals. 3. The Worker is not given paid leave. 4. No tax is deducted from payment made to worker. 5. The worker is only paid for the work completed. 6. The worker can contract out some of the services without seeking permission from the principal. 7. The workers provides their own equipment. 8. The worker has flexible workers hours. 9. The worker does not wear a uniform or use equipment with the principals branding of logo. 10. The workers advertises their own business to the world at large. Recap: 2 Questions to help you if a worker is an Employee or a Contractor 1. Is the worker running their own business or enterprise with independence in the conduct of their own operations? If so the worker is a CONTRACTOR 2. Is the worker operating as a representative of the principals business with little or no independence in the conduct if their operations? If so the worker is an EMPLOYEE 7

8 Are your Contractors really Contractors - the Ugly Sham Contracting under Fair Work You must not represent that a contact that you made, or proposed to make, with a worker is an independent contractor agreement when in fact it is an employment agreement. If you do you may be up for penalties of $33,000 for a company and $6,600 for an individual. There are a number of protections under available under Fair Work for an independent contractor. Dismissing or threatening to dismiss an employee in order to engage the person to do the same work as the contractor. Making a false statement to an employee in order to persuade the employee to do the same work as a contractor. Acting with the intent to coerce another person to engage, not engage a particular contractor or give a contractor certain duties. Refusing to engage, terminating your contract with a contractor because its employees are not covered by an enterprise agreement or that covers or does not cover a union. Refusing to engage, or terminating your contract with a contractor because they initiate a complaint or an inquiry. Are your Contractors really Contractors - the Ugly Tax The ATO view: The ATO is collecting information in relation to payments made to contractors for the to the income years by businesses audited by the ATO employer obligations area. Data will also be collected from businesses being audited by the ATO employer obligations area in The collected information will be electronically matched with certain sections of ATO data holdings to identify non-compliance with lodgement and reporting obligations under taxation law. This program is called the Contractor Payments data matching program and it enables the ATO: to identify and address the compliance behaviour of contractors who may not be correctly meeting their taxation obligations to be more strategic in its approach to determine appropriate educational and compliance strategies to encourage voluntary compliance for contractors. This program also allows the Registrar to verify the integrity of the information held on the Australian Business Register. 8

9 Are your Contractors really Contractors - the Ugly Tax & Superannuation The ATO view: If you incorrectly treat an employee as a contractor, you can face penalties and charges for not meeting your required employee obligations. These penalties and other charges include: PAYG withholding penalty for not meeting your PAYG withholding obligations. super guarantee charge for not meeting your super obligations, made up of; super guarantee shortfall amounts (amount of super contributions which should have been paid into a complying fund) Interest. an administration fee. Unlike super guarantee contributions, the super guarantee charge is not deductible. Are your Contractors really Contractors - the Ugly WorkCover Qld Who is a worker. Under section 11 of the Act, a worker must be an individual. Therefore, if you engage a corporation they will not be a worker as only an individual can be a worker. Sole traders are engaged as individuals and if you engage a partnership to do work for you, then each of the partner/s may be individually engaged by you and may be a worker for you. This is because, under partnership law, the partners are liable as individuals for all contracts the partnership enters into. Unlike companies, a partnership is not regarded as a separate legal entity and as a result, a partner may be an individual. A worker is likely to be a person who performs the same work in the same way as an employee. Even where a person calls themselves a sub-contractor, if you engage them for work and control the what, when, where and how, they are likely to be a worker under the Act even if the have an ABN. A person who works substantially for labour only is also a worker. When deciding whether a person is a worker or not, you must consider whether you are engaging a person working under a contract, or at piecework rates, for labour only or substantially for labour only. A person who is engaged for labour only or substantially for labour only, will be considered a worker. In other words, if the payment to the person is mainly for labour, then the person will be a worker and you must include them in your calculation payment. 9

10 Are your Contractors really Contractors - the Ugly Payroll Tax - Qld Please turn to your handout provided with your notes Are your Contractors really Contractors - the Ugly Health & Safety You are responsible for the health and safety of all workers, regardless of whether they are classed as employees or independent contractors. Independent contractors should be made familiar and inducted with you health and safety policies and have this process signed off by management and the contractor. Include contractors in your work method statements and ensure they comply with any onsite requirement. In construction ensure they have a blue card for health and safety. Include your contractors in regular update toolbox meetings. 10

11 Are your Contractors really Contractors - the Ugly Discrimination You may be held liable if a worker engages in acts of sexual harassment or discrimination. You (the Employer or Principal) will be held vicariously liable for acts occurring in your workplace even if you had nothing to do with the acts in question. The liability will exist until you can demonstrate that you took reasonable precautions to prevent the acts from occurring. It is important to induct a contractor with all your codes of conduct, policies and procedures, have these documents signed off. Include in the contractor agreement that the contractor or any or their employees are to comply with company policies and procedures and the consequences of failing to do so.. Genuine Employees A person is more likely to be an employee if: 1. The person is remunerated by way of salary or wages; 2. The person is entitled to annual, personal/carers (sick) or long service leave; 3. The person is employed for a set purpose and cannot change his or her duties as they please; 4. The person is supplied with the equipment and tools to perform their duties; 5. The business commercial risk is borne by the employer; and/or 6. The employee has the obligation to obey the lawful commands of their employer. 11

12 Genuine Employees Are entitled to the 10 National Employment Standards as a minimum Safety Net; 1. A maximum standard working week of 38 hours for full-time employees, plus reasonable additional hours. 2. A right to request flexible working arrangements to care for a child under school age, or a child (under 18) with a disability. 3. Parental and adoption leave of 12 months (unpaid), with a right to request an additional 12 months. 4. Four weeks paid annual leave each year (pro rata). 5. Ten days paid personal/carer s leave each year (pro rata), two days paid compassionate leave for each permissible occasion, and two days unpaid carer s leave for each permissible occasion. 6. Community service leave for jury service or activities dealing with certain emergencies or natural disasters. This leave is unpaid except for jury service. 7. Long service leave. 8. Public holidays and the entitlement to be paid for ordinary hours on those days. 9. Notice of termination and redundancy pay. 10. The right for new employees to receive the Fair Work Information Statement (copy in your notes). Are usually subject to a Modern Award or maybe award free if they fit certain criterion. Fair Work Act and Regulations the two strands Genuine Employees 10 National Employment Standards The 10 National Employment Standards are the safety net for every employee covered by Fair Work. This includes both award and award free employees. All employees, award and award free, must be given a copy of the Employee Information Statement on commencement of employment. Modern Awards 122 Modern Awards written and commenced 1 January Some professionals are award free. The Awards are updated by 1 July each financial year to reflect increase in wages and allowances given by the Fair Work Minimum Wages Panel. Increases normally apply to the first pay period after 1 July. 12

13 Genuine Employees Induction & Training Induction is the structured process of introducing or orientating a new employee into your business; This process must include employee details, TFN, next of kin, choice of superannuation fund and such other documentation required when hiring an employee. You should/must also ensure you have the employee sign off on their Job Description, Employment Agreement, your Policies and Procedures, have had the opportunity to ask questions and seek clarification and have them complete an induction sheet. The courts have determined that in the event of a dispute you must be able to prove that the employee was inducted, adequately trained and kept up to date. You must have proof. All employees should be re-inducted with your Policies and Procedures at least annually. We assisted an organisation that was sued for $325,000 for psychological injury claiming they had not been inducted and were there mentally impaired. Risk Management Review you position / job descriptions employees pay and classifications are based on what they do and must be aligned with modern award job classifications. Review and update your employment agreements you can be snared into paying an entitlement that you may not be obliged too e.g. You have less than 15 people however your employment agreement provides a clause granting the employee redundancy payments. Review and update your human resource and employee policies and procedures manual. The courts are starting to import clauses from these documents to interpret employment agreements. The most favourable condition in either agreement will likely be applied in favour of the employee. Reinduct or reorient your employees at least annually with your policies and procedures. You have an obligation to provide your employees were informed and understood their obligations to you. Fair Work has bought about widespread change conduct a professional human resource audit this process can save you considerable time and money. 13

14 Risk Management Review your contractor agreements to ensure they comply with statute and case law. Update them or renegotiate them ensuring that they contain as little labour components as possible and nothing that can be construed as an employment entitlement. Review these agreements yearly; Ensure you actively manage your contractors to ensure they comply with you policies and procedures, health and safety and include them where possible in your toolbox meetings. The High Court of Australia recently awarded 5 employees who had been signed on as contractors by and Insurance company all with an ABN $500,000. Fines upwards of $250,000 are not unusual. QUESTIONS & ANSWERS 14

15 Our Services Advice and consultation on employment and workplace relations issues Employment Agreements, Contractor Agreements, Individual Flexibility Agreements Job Descriptions, Checklists, Documents, Forms, Letters and Templates Human Resource policies, procedures, documents Policy and Procedure Manuals Grievance and Discipline investigations and resolutions including mediation Training Not For Profit and Non Government organisation specialists Coaching and mentoring via telephone or SKYPE Australia wide and Internationally IMPORTANT We are a boutique business that vets prospective clients carefully (and ask you to do the same with us) and do not guarantee that we will provide service to other businesses as we see relationships as more important than dollars. Naturally this works both ways. Contact Us: Industrial Relations Advisory Group Philip (Phil) Lye CEO & Principal Consultant Telephone: Mobile: Web-site: 15