Contractor laws ‘rapidly evolving’, businesses warned

Correctly classifying employees and contractors has never been more critical for businesses with the case law in this area developing at a rapid pace, according to Cooper Grace Ward Lawyers partner Fletch Heinemann.

Mr Heinemann said recent court cases provide some useful lessons for businesses seeking to reduce their risks when contracting with sole traders.

Last year the High Court handed down two important decisions relating to the distinction between employees and independent contractors in CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.

“More recently, the Full Court of the Federal Court applied the principles in CFMMEU and Jamsek to JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76,” said Mr Heinemann.

The recent Full Court decision involved a higher education provider, JMC Pty Limited, that engaged Mr Harrison to provide teaching services to its students.

“Mr Harrison’s contract required him to deliver ‘teaching services’, which included delivering a course of lectures and marking papers. Mr Harrison was paid a separate hourly rate for lecturing and marking papers,” said Mr Heinemann.

In the contract, the parties agreed that Mr Harrison was a contractor. The contract also provided that Mr Harrison:

• Was provided with the necessary equipment to teach lessons
• Was required to provide lessons at the standard required in accordance with relevant legislation and at times set by JMC
• Had a right to subcontract marking papers and delivering lectures to others, after obtaining JMC’s consent
• Was required to comply with JMC policies
• Was required to provide JMC with valid tax invoices that comply with GST legislation
• Was responsible for his own workers’ compensation policy.

The Commissioner assessed JMC on the basis that Mr Harrison was an employee, either under the common law or under the extension in section 12(3) of the Superannuation Guarantee (Administration) Act 1992.

In the previous Federal Court decision last year, Justice Wigney said found that Mr Harrison was an employee of JMC.

“Applying the principles laid out by the High Court in Personnel Contracting and Jamsek, his Honour found that JMC had the right to effectively control how Mr Harrison provided teaching services by setting the time for lessons to be conducted and by requiring the lessons to be taught at a required standard,” said Mr Heinemann.

Justice Wigney also found that Mr Harrison was effectively integrated into JMC’s business and that Mr Harrison’s right to subcontract the teaching services was not to be given significant weight, because he was required to obtain JMC’s approval first.

JMC was successful in the appeal however. The Full Court held Mr Harrison was not an employee, and also that he was not paid under a contract wholly or principally for his labour (which would make him a deemed employee under section 12(3) of the Superannuation Guarantee (Administration) Act 1992.

In its analysis of JMC’s contract with Mr Harrison, the Full Court noted that if a person has a contractual right to delegate to someone else to perform the work, “that is inherently inconsistent with an employment relationship”.

The Full Court also outlined that if the right to delegate is unqualified, that may be conclusive evidence against there being an employment relationship and even if it is qualified, it will still count against an employment relationship.

The Court also stated that whether the right to delegate is actually exercised is not the point and that it is whether the person has the right to delegate that is relevant.

“The Full Court concluded that the primary judge was not correct in finding that Mr Harrison had ‘only an illusory or chimerical right to subcontract or assign’,” said Mr Heinemann.

“There was no suggestion of any sham in the agreement. And the evidence was that Mr Harrison had exercised his right to delegate work on a couple of occasions.”

Key lessons for businesses using contractors

Mr Heinemann said there are two important lessons from recent cases for businesses seeking to reduce their risks.

“The first is that the parties’ rights and obligations must be contained in a written agreement,” said Mr Heinemann.

“The second is that, if there is a right to delegate, this must be specifically dealt with in that written agreement.”

The ATO’s PCG 2022/D5 outlines the ATO’s proposed compliance approach to contractor arrangements.

“At a high level, to fall within the very low and low risk zones, the parties must have a written agreement and specific advice confirming the correct classification both under the common law definition of employee and the extended definition under section 12 of the Superannuation Guarantee (Administration) Act 1992,” said Mr Heinemann.