To you and me it does not make a difference. We see them the same way. But to the ATO it seems the difference means a lot.
So much so that there has been so many cases going to court that I have lost count.
And each case comes out with a different conclusion that it is so mixed up nobody knows what to do. This means we must rely on lawyers, and we all know what that means.
One thing is true. Get it wrong and you could end up selling your house to pay the taxman.
A recent case shows how difficult it can be to determine if someone is a contractor or employee. The simple way that I used to explain it to clients is this:
- Do you control and direct the person you have employed? Can they refuse to work?
- Do they operate as a genuine business – ie they have their own insurance, work for others and quote for work?
- Do you pay on a project basis or hourly basis?
- Who provides tools and is there any risk?
Generally, the more control a business has the more are likely there are to be employees. The less a contractor looks like a business the more they are likely to be an employee. The less risk they take the less likely they are contractors.
And I have always said that it does not matter what a contract says. What matters is what actually happens in reality. And it was not just me that said so. The ATO, lawyers and case law said so too.
But it seems even this basic review is not good enough.
JMC Pty Limited was a business providing accredited higher education programs to students. JMC contracted with Mr Harrison to deliver teaching services to its students.
Mr Harrison’s contract required him to deliver ‘teaching services’, which included delivering a course of lectures and marking papers. Mr Harrison was paid a separate hourly rate for lecturing and marking papers.
In the contract, the parties agreed that Mr Harrison was a contractor. The contract provided Mr Harrison:
- was provided with the necessary equipment to teach lessons
- was required to provide lessons at the standard required in accordance with relevant legislation and at times set by JMC
- had a right to subcontract marking papers and delivering lectures to others, after obtaining JMC’s consent
- was required to comply with JMC policies
- was required to provide JMC with valid tax invoices that comply with GST legislation based on hours worked
- was responsible for his own workers’ compensation policy.
Based on the above in my opinion Mr Harrison is an employee because JMC mostly controlled the work he did.
The ATO Commissioner also thought so. It went to court. And the judge thought so too because he said:
- JMC effectively controlled how Mr Harrison provided teaching services by setting the time for lessons to be conducted and by requiring the lessons to be taught at a required standard
- Mr Harrison was effectively integrated into JMC’s business
- Mr Harrison’s right to subcontract the teaching services was not to be given significant weight, because he was required to obtain JMC’s approval first.
But then JMC appealed to the Full Court.
The Full Court held Mr Harrison was not an employee because:
- If a person has a contractual right to delegate to someone else to perform the work, that is inherently inconsistent with an employment relationship.
- If that right to delegate is unqualified (e.g. there is no requirement to obtain the consent of the other party), that may be conclusive evidence against there being an employment relationship.
- If that right to delegate is qualified, it still counts against an employment relationship.
- Whether the right to delegate is actually exercised is not the point – it is whether the person has the right to delegate that is relevant.
In other words, we advisors have been, not for the first time, wrong! It seems what the contract says does matter.
And it also means that if 2 judges can’t work it out how the hell are we supposed to work it out?
What does this mean for you?
Well basically you should always have an agreement or contract – this will make the lawyers happy. And secondly if there is a right to delegate, this must be specifically dealt with in that written agreement.
Working out if a worker is an employee or contractor is a minefield. Don’t take it lightly. Tread carefully otherwise there is a chance you will get blown up.