High Court decisions re employee v contractor spark ATO ruling
Following the landmark High Court decisions in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2, the ATO has issued TR 2023/4 seeking to clarify who is an employee for PAYG withholding purposes. The High Court’s decisions clarify and definitively state the test for determining whether a person is an employee or an independent contractor in the context of a labour hire company and two truck drivers operating through partnerships to provide delivery services to their former employer.
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Personnel Contracting
In the first case, Personnel Contracting, the High Court ruled that a labourer engaged by a labour hire company to work on construction sites under the supervision and control of a builder was an employee of the labour hire company. The High Court clarified and decisively stated the test for determining whether a person is an employee or an independent contractor in the following way:
“Where the parties have comprehensively committed the terms of their relationship to a written contract the validity of which is not in dispute, the characterisation of their relationship as one of employment or otherwise proceeds by reference to the rights and obligations of the parties under that contract. … there is no occasion to seek to determine the character of the parties’ relationship by a wide‑ranging review of the entire history of the parties’ dealings.” [per Kiefel CJ, Keanne and Edelman JJ]
A similar statement was made in Jamsek.
Justice Gordon said:
“Where the parties have entered a wholly written employment contract, as in this case, the totality of the relationship which must be considered is the totality of the legal rights and obligations provided for in the contract, construed according to the established principles of contractual interpretation.”
That the parties chose the label “contractor” to describe the labourer did not change the character of that relationship. This decision overruled the earlier Full Federal Court decision which held that the labourer was an independent contractor after applying a ”multifactorial approach”.
Jamsek
In the second case, Jamsek, the High Court held that two truck drivers were not employees of a company for the purposes of the Fair Work Act 2009 and the Superannuation Guarantee (Administration) Act 1992.
The principles and approach adopted by the High Court in Personnel to determine whether a person is an employee or an independent contractor were repeated in Jamsek.
The Court also observed that the provision of such services has consistently been held, both in Australia and in England, to have been characteristic of independent contractors (and not employees). In the present case, the High Court said there was no reason to reach a different conclusion.
Taxation Ruling TR 2023/4
Due to these landmark High Court decisions, the ATO has now released Taxation Ruling TR 2023/4 which states that whether an individual (i.e. worker) is an employee of an entity under the ordinary meaning of “employee” is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship. To ascertain the relevant legal rights and obligations between the worker and an entity, the contract of employment must be construed in accordance with the established principles of contractual interpretation.
Following the High Court’s approach in Personnel and Jamsek, the ruling states that where the worker and the entity have comprehensively committed the terms of their relationship to a written contract and the validity of that contract has not been challenged as a sham, nor have the terms of the contract otherwise been varied, waived, discharged or the subject of an estoppel or any equitable, legal or statutory right or remedy, it is the legal rights and obligations in the contract alone that are relevant in determining whether the worker is an employee of the entity.
The Ruling notes that evidence of how the contract was performed including subsequent conduct and work practices cannot be considered for the purpose of determining the nature of the legal relationship between the parties. However, this evidence can be considered to establish the contractual terms or to challenge the validity of a written contract with general contract law principles.
It should be noted that the Ruling now states that the various indicia of employment that have been identified in cases prior to Personnel and Jamsek (i.e. control and right to control, ability to delegate subcontract or assign work, achieve a specified result, bearer of risk, or generation of goodwill) remain relevant, but are only to be considered in respect of the legal rights and obligations between the parties.
Therefore, according to the Ruling, the terms of the contract between the parties must be considered holistically to determine whether, on balance, the worker is an employee or independent contractor. This requires an approach which involves standing back and viewing the contract from a distance such that an informed, considered, qualitative appreciation of the whole can be undertaken.
In conjunction with the Ruling, the ATO has also released a Practical Compliance Guideline (PCG 2023/2) which sets out the ATO’s compliance approach for businesses that engage workers and classify them as either employees or independent contractors. The PCG adopts a risk matrix approach to ATO compliance activity.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.