Contractor or employee? New rulings and guidelines

Recent High Court case decisions have changed the way that businesses – and the ATO –determine whether a worker is classified as a contractor or employee. These classifications can be tricky, and your business can face significant penalties if you make mistakes, in the areas of tax, superannuation and other contributions.   Let’s take a brief look at the cases and findings, how these results may affect your business, and how to avoid potentially costly errors.

Results of cases in 2022 & 2023

In February 2022, the High Court ruled on two cases:  ZG Operations Australia Pty Ltd v Jamsek and Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd.

The first case involved two men who were working as truck drivers for a company for a period of 40 years, while the second involved a young British man who had travelled to Australia on a working holiday visa. In the first case, the two men were ruled to be contractors, while in the second, the man was determined to be an employee.

In both cases, the rulings were significant because they emphasised the importance of written employment contracts/agreements and what is in them. In addition, the following guidelines are key in determining if a worker is an employee at common law:

  • If the business has control over the worker (including the hours worked and how the work is done)
  • If the worker must perform the work him- or herself, rather than having the ability to delegate or subcontract the work to someone else
  • If the worker is paid like an employee (for example, at an hourly rate)
  • If the business supplies tools and equipment for the worker
  • If the business bears the risk and liability to outside parties for any defects in the work.

According to the Court, if the answer to most of these questions is yes, then the worker should be considered an employee.

In early June 2023, another case came before the Full Federal Court to decide whether a worker was an employee or contractor, and whether that worker was entitled to super contributions. Using the High Court’s findings from 2022, the Court examined the contract and found that the answers to some of the questions above were yes, while the answers to others were no.

In this case, the court found that because the worker had the ability to delegate or subcontract the work, the worker was not an employee for superannuation purposes at common law.

Major takeaways and guidelines

In short, the findings from the cases above dictate that the terms of a written employment agreement determine whether a worker is an employee or contractor. The results also dictate if that worker is owed superannuation at common law or not, with the condition that the employment contract must be legitimate. (Hiring someone as a contractor who should be considered an employee – basically, trying to get out of paying benefits and avoid tax and legal obligations – is called sham contracting, and this practice carries heavy penalties.)

Therefore, your first step is to determine whether the person you’re hiring is an employee or contractor, based on the questions above and your written employment contract. Anyone who is deemed to be an employee must be paid superannuation.

The ATO provides support and updated information (current as of the June ruling) online to help you determine whether a worker is an employee or contractor, and they also offer an online test to understand superannuation requirements. However, remember that these are guidelines, and it’s best to review any ‘grey areas’ with a professional.

If you currently hire independent contractors and are confused about whether they could be considered employees, we can help you work through the steps to minimise your risk of errors.  Contact our team today.

About the Author

Ainsley Coggins
Ainsley has a logical brain and likes things to balance. Coupled with a natural ability for maths (first evident early in school reports!) a career in accounting was always likely.

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