Who’s who in your business? The importance of clear status.


Who’s who in your business? The importance of clear status.

Recent cases have alerted businesses to the importance of establishing, with absolute clarity, the status of the people they engage. Employees? Contractors? Directors? Read about how business owners and individuals concerned can be protected. 

Whether people engaged by a business are employees, casuals or independent contractors has always been an important issue – for the business, and for the individuals concerned.

The decision of the Full Federal Court (WorkPac Pty Ltd v Skene [2018] FCAFC131) has rejected the commonly applied position that an employee described as a casual under an award or enterprise agreement is a casual for all purposes (i.e. describing an employee as a casual and paying them a casual loading is not sufficient to make them a casual at law).   

These outcomes have consequences, so employers need to make the important distinction between employees and contractors and ensure that they understand the different liabilities and responsibilities involved – for example, the consequent rights to annual leave for the employee, and the employer’s obligations with regard to tax, payroll tax, superannuation and workers compensation.

In many cases, the distinction is clear. An electrician who is engaged by a property developer to rewire the office premises is not an employee. That situation might change if, for example, the electrician was taken on to provide the developer with in-house, ongoing services over a period of time, and on a consistent basis.

The distinction is also important in the event that a business fails, and a liquidator is appointed to wind up the company. The Fair Entitlements Guarantee (FEG) and liquidators acting on its behalf must determine the status of any person engaged by the company at the time it failed. They must be able to distinguish between contractors, employees, and directors; this is essential for determining the allocation of funds and assets and what they are able to claim. In cases where it is not factually clear, the people concerned can attempt to substantiate their status within the business, which might have been unclear for some time.

Under the Corporations Act, employee claims are given priority; but contractors have no priority.  In addition, under the FEG, the government pays financial assistance to employees where there are insufficient company assets remaining to meet their claims. The FEG does not provide any assistance to contractors.

Example 1: Employee or contractor?

There are instances where a person that was initially engaged on a contractual basis can, in effect, be deemed an employee over time with its attendant liabilities (eg annual leave, LSL). Recently, however, FEG rejected a person’s claim to be an employee, even though at the time the company failed, he had been engaged by the company for some time.  There was no written employment contract, no tax or superannuation had been paid, and there was no other sufficient evidence that he ever was an employee. His lodgement of tax returns, as evidence in support of his claim to be an employee, was rejected; he had only lodged them when the company’s problems became apparent, and his statement was found to be “self-serving”.  A tribunal review upheld FEG’s decision.

Example 2: Manager, director or de facto director?

Further complications can arise, particularly when an employee is also a director of the company. As illustrated in this recent article, FEG does not pay employees who are also directors of a company in liquidation.

In the case mentioned in the above article, although the person was not formally appointed as a director, he was found to be a de facto director on the evidence that he commonly performed director-related tasks and “held himself out as a director”.

He had started on a casual basis but, over time he managed the business’ cash flow and finances, and its staff and clients. He developed the business over time without supervision. It was relevant that he had signed numerous credit applications as a director, and he gave a director’s guarantee for credit given.

Action Points to consider: 

  1. Employment status should be clearly documented, and its terms adhered to; any changes should be agreed and formally recorded. Companies need to be clear about working arrangements – e.g. casuals should be clearly employed as casuals, not as quasi-employees.
  2. Businesses should schedule regular reviews of their staffing situation, particularly for those staff whose status is not clear.
  3. It is, of course, necessary to ensure that all tax and superannuation payments are made on behalf of employees.
  4. It is vital that employees’ contracts reflect their situation; records should be kept up to date and checked to determine whether tax is being withheld.
  5. For all persons engaged by the company, there should be written contracts or evidence in support of their status.

Attention to these points will provide a level of clarity in relation to what is a significant relationship and will protect both business owners and the individuals concerned. They also have important implications for the way in which businesses engage the people they need to carry on their enterprise.

For businesses, individuals, and for business advisors, the key lesson here is that:
if any contractor is deemed an employee, any employee payments made are deemed wages and are then grossed up for PAYG and superannuation.  So, if you pay a contractor $100 (depending on total payments and relevant tax rates), this payment could be grossed up to $220 to include PAYG and superannuation.  Further, the grossed-up totals would then be used to calculate payroll tax and workers compensation insurance liabilities.  In effect, extending the payment of $100 to a further liability of another $132 for the $100 paid.

That person may also then have a claim for unpaid holiday and long service leave entitlements.  This needs to be considered where contractor payments are significant, as such latent liabilities can easily render a company insolvent.  This is especially a problem in such businesses using contracting labour such as security companies, cleaning companies, building companies and some labour companies.

An example of this is a current decision made by the Fair Work Commission in regards to the high profile Foodora Australia Pty Ltd case.  We will be providing an update of the possible appeal for this case and will address it in a future article.

Support is available: 

Sandra Parker, newly appointed Fair Work Ombudsman (FWO), says her office will continue to help small businesses navigate their way through what can be a difficult area, via the FWO small business helpline and by sending teams into targeted areas to listen to their problems and provide assistance.  See this article for more information.

Should you require assistance for your particular business, please contact Riad Tayeh from dVT Group on 02 9633 333 or email mail@dvtgroup.com.au.