In the Management Rights Industry, many building managers enter into Agreements with people who they consider to be independent contractors. Some of these “contractors” may
attend to a number of the duties that are required of the Manager, pursuant to a Caretaking or Letting Agreement.
However, it is important to be aware that even though the parties may consider themselves to be in a principal/independent contractor agreement, the relationship may, according to the
law, be that of an employer and employee.
The distinction is important because there are significant consequences if the true legal relationship is misinterpreted. For example, an employer is responsible for remitting group
tax, paying statutory superannuation, providing award or other entitlements (such as annual leave, personal leave and long service leave) and the employer will also be liable to ensure
that the employee is covered under its policy of workcover insurance.
If a person considered by the building manager to be a contractor was, in reality, an employee, that person may seek to go back many years to claim entitlements. Also, the tax
office may sue the building manager (or if the building manager is a company, its directors) for things such as unremitted group tax and superannuation entitlements that are due.
There are several tests that are applied by the Courts in considering whether the person is a contractor or an employee. Essentially, those tests are as follows:
1. The Control Test
Generally speaking, the more control or supervision exercised over the manner or method in which the tasks are performed, the more the presumption there will be, of a relationship of
employer and employee. The main features of The Control Test are the right to control:
- how work is performed;
- when worked is performed;
- where work is performed; and
- who the work is to be performed by.
2. The Integration Test
The Courts will consider whether the worker’s services are an integral part of the building manager’s business undertaking. Activities which might indicate the worker’s integration into the business would include:
- the hours spent at the business enterprise;
- that the work is performed at the business premises;
- that the work is performed using substantial amount of the assets or equipment of the principal;
- the inability to perform other work which gives rise to a conflict of interest;
- the performance being monitored;the requirement to comply with the principal’s, policies, guidelines or directions;
- the requirement to maintain dress standards or uniforms or display signage;
- attending meetings on behalf of the principal or representing the principal’s business;
- receiving training by the principal;
- the provision of protective equipment from the principal.
3. The Results Test
If a worker is engaged on terms requiring the worker to achieve a specified result, then this is a strong indication that the relationship is one of principal and independent contractor.
Conversely, if payment is not necessarily dependant on or referrable to satisfactory completion of services and a specific result or outcome, then there is a presumption that the relationship is one of employer and employee.
4. The Delegation Test
If there is an unlimited power to delegate work, then this is an important indication that the worker is an independent contractor. This is because delegation is generally implied in a contract where the emphasis is on results. In this sense, the delegation of the worker is the ability of the worker to subcontract or to employ others to perform the work or to assist in the completion of the work.
5. The Terms of Engagement Test
Some terms of engagement are closely associated with employment and may therefore be indicative of an employment relationship. These would include:
- provision of benefits such as annual leave, sick leave and long service leave;
- provision of other benefits that are provided for under an award;
- proscribed times and location for performance of work;
- remuneration in the form of salary or wage; and
- the worker using assets and materials provided by the principal or the worker being reimbursed for any out of pocket expenses.
6. The Risk Test
Where the worker bears little or no risk of the cost arising out of any injury or defect in carrying out his or her work, he or she is most likely to be an employee.
In addition to the above tests, the Australian Taxation Office will also consider whether the contractor receives 80% or more of his or her income from the one source in any single year.
If this is the case, the Personal Services Income Legislation may apply. This has a bearing upon how the contractor will be taxed and the rate of tax that will be paid.
Finally, it should also be noted that the Fair Work Act 2009 provides serious penalties in the event that the parties enter into a sham arrangement whereby an employer attempts to disguise an employment relationship as an independent contracting arrangement.
Prosecution may apply in the event of a sham arrangement being established.
It is important that you regularly review your arrangements with contractors and/or employees.