Contractor or employee – what’s the difference?
If you’re an employer who has contract staff, a recent decision by the Administrative Appeals Tribunal (AAT) may have you checking the contract conditions of your independent contractors. In a case brought by the Tax Commissioner, a company that employs over 1000 contractors to provide interpretation and translation services is now potentially liable for superannuation guarantee payments to all of its contractors – both currently and retrospectively.
So, how did this happen? The main problem is that there is no definitive definition of “independent contractor”. Where a contractor provides personal labour, the line is even more blurred between a contractor and an employee. While an agreement may be in place stating that someone is a contractor, when it comes to supply of knowledge and expertise, this may be regarded merely as a “label” by the courts. The case before the AAT, Associated Translators and Linguists Pty Limited and Commission of Taxation [2010] AATA 260, is a case in point.
To provide some background information, Associated Translators and Linguists Pty Limited (ATL) provide interpretation and translation services in 90 different languages across the country. ATL has two full time interpreters and translators but the bulk of the service is managed through a ‘panel of consultants’. The panel of over 1000 interpreters and translators fulfill between 1300 and 1500 client assignments per month. The panel of consultants is predominantly individuals who contract back to ATL when a job comes up in their area of expertise that cannot be fulfilled by the full time staff.
In this case, the Tax Commission looked at one of the panel of consultants, Mr Sani, who began working for the company in 2003. According to the Tax Commission, Mr Sani was an employee of ATL, not a contractor. The ATO issued the ATL with a superannuation guarantee assessment for a shortfall in superannuation guarantee payments to Mr Sani. Despite the ATL objecting, the ATO held firm.
Interestingly, the Superannuation Guarantee Assessment (SGA) Act requires that superannuation guarantee payments are made by the employer for employees (using the ordinary term for employee). Then, the Act goes one step further stating that “if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.”
So, was Mr Sani an employee under the ordinary meaning and if not, was he considered an employee under the extended definition in the SGA Act. As it turned out, the AAT decided Mr Sani was an employee under the ordinary meaning.
Previously the courts have looked at a number of factors to determine if an independent contracting relationship exists:
- Whether the work involves a particular profession or skill set
- The level of control the contractor has over how the contract is executed
- The ability of the contractor to delegate work to another person
- Whether the contractor supplies his own tools or equipment
- Whether the contractor has his own place of business
- The contractor’s ability to generate goodwill or saleable assets
- How the contractor is paid (for hours worked or a result)
- The level of risk the contractor bears, and
- Whether the contractor is independent or in reality, simply ‘part and parcel’ of the organisation they contract to
There is no one defining factor, it’s based on all the weight of all factors. In the case of the ATL’s loss, the last point was a significant one.
There were other factors that came into play during this case:
- Procedurally, panel members complete the interpretation or translating assignments in the same way as employees: They agree to attend a particular assignment at an allocated time, complete the assignment, and report back on the time taken. ATL pointed out that unlike employees panel members have the right to refuse an assignment.
- ATL exercised strong controls over how work was completed. Panel members cannot delegate the assignment without permission from ATL. They are also required to comply with a code of conduct that covers punctuality, dress, confidentiality etc.
- Panel members also need to report back to ATL within 24 hours of the completion of the assignment. ATL argued that the code of conduct was consistent with the ethics for all interpreters and translators as part of their professional membership and that the administrative requirements are merely for efficiency. It was argued that these same arrangements would apply to a totally independent interpreter engaged for a one-off assignment.
- Complaints were not dealt with by the panel member but by ATL. The Tax Commissioner argued that complaints affected ATL’s goodwill not the contractors. The Commissioner also noted that the panel member did not have the capacity to develop goodwill with the client or generate business. Panel members had to refer any assignments requested by clients back to ATL.
- The payments and invoices were managed by ATL. In the event of a complaint or poor conduct, panel members may be subject to some sort of warning or sanction. Where payment was withheld, it was generally because the client had withheld payment. In effect, the panel member did not bear the risk of the assignment.
- Panel members carry ATL business cards, or identification cards, with their name, confirmation that they are an ATL panel member, and their NAATI accreditation number. ATL pointed out that the identification cards are simply a way of confirming to the client that the interpreter is an ATL panel member and properly accredited. The Tax Commissioner saw that the panel members were represented as being part of ATL not independent to it. Commercially, this issue would pose a problem for many businesses if they followed the Commissioner’s logic as it would mean diluting the prominence of their own brand by exposing their client base to and developing the contractor’s personal profile.
- ATL also noted that panel members were free to accept and generate business in their own right including from competitors. This fact however was disregarded by the tribunal.
- ATL also noted that it does not place controls over how the panel member completes an assignment. However, the tribunal saw that employees also did not face these controls and the company’s capacity to review all of the assignments was limited.
- In deliberating the case, the AAT came to the decision that the contractors were not just “part and parcel” of the business – they were in fact “the” business. Without the panel of consultants, the ATL would not be able to conduct their business across the range of languages and geographic locations. Following this decision, they AAT maintained that it would be hard for a business that relied predominantly on contractors to fulfill its services to maintain the independence of those contractors.
- But it was two other factors that tipped the scales in favour of the Tax Commissioner:
- Control – while panel members can decline an assignment, once they have accepted they are under fairly tight control by ATL. The view of the tribunal was that a contractor would generally not be expected to report back to the contracting organisation within 24 hours. ATL argued that this is merely an administrative necessity of how their services are sold.
- Lack of freedom – panel members did not have the capacity to delegate an assignment. They could not complete the assignment as they saw fit.
Another key issue considered, was whether the contractors were employed to produce a ‘result’. The results test is widely used to consider whether someone is employed as an employee or as a contractors. ATL contested that panel members are paid for an assignment. Contentiously, the tribunal agreed with the Commissioner’s view that panel members are not contracted to produce a result but paid for their time because if a client cancels at the last moment, ATL still charges the client and the panel member will still be paid - therefore, the panel member is not paid to produce a result in these circumstances because there is no result.
The tribunal’s decision is interesting as cancellation fees are a standard policy of many businesses to compensate for time being wasted or the opportunity cost of the cancellation. In this case, the fact that a panel member is paid even if an assignment is not completed is merely an extension of the penalty applied by ATL.
This case deals with independent contractors who are individuals. The use of an interposed company structure is often seen as a way of overcoming this problem (where the company represents an individual only and is the vehicle to provide their personal services) but there still may be a risk.
If you employ contractors, take a close look at the arrangements in place and whether you have a superannuation guarantee exposure.
How to succeed by getting organised
Recent research shows that more that 90% of business owners don't use a diary to keep track of appointments and the day to day running of their businesses.
How many opportunities pass you by each day because you don't record important information, keep track of it and get it done?
Organisational and time management skills can put you ahead of 90% of your competitors. So, what do you need to know for good time management? Here's an easy 5-step plan. 1. Get organised
- Buy a simple A4 spiral bound notebook and commit to recording EVERYTHING in it.
- Start a new page for each goal, new meeting or topic. Always write the name of the topic, goal, company or person you are meeting with at the top of the page and date it.
- At the end of each meeting write an action plan of what you and others have to do, along with set deadlines.
2. Weekly Review
This is one of the most important steps and requires discipline.
- Review all meeting notes and create a 'to-do' list for the week for outstanding items.
- Use a highlighter to cross out the pages where all items are completed so you know you don’t have to read them again. Over time when you go back through your notebook you will only look at the pages that aren’t crossed out.
3. Completing your to-do list - get number ONE done
The secret to success isn’t about getting everything done; it’s about getting the most important things done.
You may find that your to-do list can get a bit daunting so what you need to do each day is decide on what the Number One thing is that you must get done before you go to bed that night and be satisfied that you got that done. If you could get the most important task done each day, five days per week, 50 weeks per year that means you have completed 250 of the most important tasks each year. This will put you way ahead of the competition and ensure you achieve the goals you set out at the start of the year.
4. You don’t have to do it all – learn to delegate
Review your to-do list, decide on what you want to do or only you can do, and DELEGATE the rest.
5. Use a diary to track deadlines
Success is not only about you doing things; it is also about making sure others get things done. If you choose to delegate tasks then use a paper-based diary, Outlook on your computer or even your mobile phone, to make a note of the date/time when the person you delegated a task to is meant to have it completed. You will be amazed how things start to get done when people know you will be following them up. A little prompt from you a day or two before the deadline always helps as well.
How do you find things later on?
A majority of issues are taken care of over a two or three month time span and that most people roughly remember which week/month they were discussed, so by keeping things in chronological order it doesn’t take long to find them.
You can go further than this as all the time management courses will tell you. But if you can commit to at least starting with the simple idea of just writing EVERYTHING into a simple A4 notebook and using a diary, you will be well and truly on the path to success.
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