The line between independent contractor and employee can often become blurred, writes Pooja Kapur, an employment Lawyer at Owen Hodge Lawyers. Even if someone is engaged on a contract basis, legally they may still be considered an employee for tax or superannuation purposes.

The law is designed to protect contractors and prevent employers from using contract agreements to shirk their responsibilities. However, it creates a lot of confusion for employers who legitimately want to engage contractors. Do they need to pay their contractors’ super? Should they pay long service leave or other entitlements? Do they need to withhold and pay tax on behalf of contractors?

The biggest concern for employers is to ensure that whenever they do engage a worker as a contractor, the arrangement is airtight. This avoids the possibility of that worker later claiming that they were in fact an employee and therefore were entitled to the same benefits that an employee would receive. If it is found that a contractor should have been treated as an employee, the employer can be liable and subject to penalties.

The difference between independent contractor and employee

The High Court in ZG Operations Australia v Jamsek (2022), recently changed the way we assess whether a particular worker should be classified as a contractor or employee.

Until now, Courts would assess whether a worker was an employee or a contractor by considering the substance and totality of the relationship between the employer and that worker. A multi-factorial test was applied, in which Courts looked at various characteristics of the relationship such as the amount of control the employer exerted over the worker.

In ZG, the High Court departed from this traditional approach. It instead focused on the mindset of the parties at the time they entered into the contract, as well as the express and implied terms of that contract.

The ZG Operations Australia v Jamsek (2022) case

The decision of the ZG Operations Australia v Jamsek (2022) case was handed down in the High Court on 9 February 2022.

The facts of the case are as follows. Mr Jamsek and Mr Whitby worked for ZG Operations as truck drivers from 1977. Engaged as employees for the first 8 years, in 1985 the company proposed (with the threat of redundancy) that Mr Jamsek and Mr Whitby purchase the company’s truck and transition to independent contractors with the company. They would go on to work with the company on this basis for another 30+ years. They worked full-time hours and invoiced ZG Operations for their services.

The contract was terminated by ZG Operations on 20 January 2017. Mr Jamsek and Mr Whitby commenced proceedings in the Federal Court of Australia alleging they were owed entitlements such as superannuation and long service leave by virtue of being employees and not contractors for ZG Operations.

Allowing the appeal, the High Court unanimously agreed that Mr Jamsek and Mr Whitby were not in fact employees of the company because of the nature of their contract, as well as the fact that they owned and paid the maintenance and operational costs of the truck.

When can a contractor be considered an employee?

To understand when a contractor may be considered an employee, first we need to unpack what it means to be a contractor.

Contractors work on an independent contract basis for a company or companies to provide materials, services, or products. They are paid on a project, hourly or daily basis, unlike employees who get paid a regular salary. Contractors will usually earn more in lieu of other entitlements such as paid leave.

Contractors will have an ABN and will invoice the client in return for work delivered. They will have more control over their work than employees and will have the option to sub-contract work. They may work more flexible or inconsistent hours than employees. Both parties can end the contract agreement on short notice, depending on the terms of the contract.

In some cases, employers will employ someone on a contract basis who is actually considered an employee under the law. If you have a high amount of control over how the contractor performs their work; pay them a set amount per hour, day, week or month; and don’t allow them to sub-contract the work, then you will likely have an obligation to pay them superannuation and withhold and pay tax (PAYG withholding).

How can employers ensure they are compliant?

The implications of non compliance can be very serious. In the instance of unpaid superannuation, you will be required to back pay any owed superannuation, often with interest and additional administrative fees. If you don’t pay, you could face fines of up to $10,500 or even face up to 12 months imprisonment.

A good starting point for determining whether or not you’re compliant, is to check out the ATO’s Employee/Contractor Decision Tool to determine how your team members should be classified and what your obligations may be.

In the case of ZG Operations Australia v Jamsek (2022) one of the factors which protected the employer was the terms of the contract. It’s crucial that your contractor agreements are watertight. It’s a good idea to audit existing contracts with your solicitor, create new contracts as required or shift contractors to employment contracts if suitable. Your solicitor will be able to advise on the best course of action to ensure you’re compliant.

Review of ZG operations v Jamsek

 The judgments in ZG Operations are highly relevant and emphasise that while there is a clear distinction between an employee and an independent contractor, the process for establishing this distinction is not necessarily methodical.

The judgement highlights that Courts will first turn to the contracts between parties for interpretation, and that such contracts need to be clear and well-drafted. Whilst a review of a contract is usually the first and most important step in the process of establishing whether or not an employee/employer relationship exists (as highlighted in this case), in order to make this establishment it is imperative to consider the “substance and reality” of the relationship in question. As noted by the High Court, this is not the same as asking whether the worker conducts his/her own business.

The High Court looked at the totality of the relationship between the parties, beyond the terms of the written contracts. They considered the control ZG Operations exerted over the workers, amongst other factors such as rate increases, payment methods, requirement of uniforms, and the workers’ autonomy over the work they did.

The following factors were key distinguishers in the High Court’s decision that the workers were in fact contractors, not employees:

Direction

Undoubtedly, there is almost always a provision in an employment contract for an employee to follow the reasonable direction of the employer. The contract between ZG Operations and the workers, in spite of being a contract for independent contractors, contained a similar provision.

However, the High Court astutely noted that the clause outlining an obligation to undertake work “as reasonably directed” was not incorporated with the intention for the company to micromanage and control the workers.

Rather, taking into account the context of the provisions, it was clear that the workers, through their partnerships, were able to control the conduct of their deliveries. The obligation referred to what conduct was to be undertaken, as opposed to how it was to be undertaken. This obligation would be at the core of any engagement of an external courier to deliver goods. It was incorporated to ensure that the company would not bombard the workers with so many deliveries that it may put them in breach of their obligations under the contract.

Some element of control is always present between a contractor and principle whereby the principle controls what work is to be done by the contractor. Discretion is then given to the worker. There was little constraint on the workers’ discretion and flexibility as to how the delivery was to be completed.

Partnership

Furthermore, a key factor considered was the fact that the workers set up a partnership through a new company to continue working for ZG Operations. Ordinarily, contractors are engaged through their individual business/company and employees are engaged in their personal capacity.

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