Employee vs Contractors: Are Written Contracts Important for Determining the Status of Your Worker?
O*NO! You’ve probably just got caught up on all the different factors you need to consider when determining if your contractor really is a contractor, or if they might just be an employee. Well, there’s one more thing we wanted to add to your long list of considerations: a recent Full Federal Court decision around contractor agreements that could impact this determination – JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76.
But why is it important your written agreements reflect these landmark cases? Because misclassifying a team member isn’t just a minor mistake—it can lead to significant legal and financial consequences, including hefty fines, back taxes, and potential lawsuits. Understanding these distinctions and staying current with legal developments is crucial to protecting your business and ensuring compliance.
So, let’s take a closer look at this case, and what the decision means for your agency, and the classifications of your team members.
Background: What is JMC Pty Ltd v Commissioner of Taxation about?
JMC is a business that provides higher education programmes. JMC hired Mr Harrison as a lecturer to provide his teaching services to students. He was engaged for his work under short term written contracts, with 22 in total.
Mr Harrison was hired as an independent contractor. Therefore, JMC paid Mr Harrison for his work but did not make superannuation contributions. Well, the Commissioner/ATO issued assessments of superannuation charges to JMC. Why? Because the ATO held that Mr Harrison was an employee under the Superannuation Guarantee (Administration) Act 1992 (Cth). Specifically, the ATO argued that Mr Harrison was an employee under its ordinary meaning, and he worked as an employee under a contract that was wholly or principally for his labour.
The Wrong Decision: The first instance ruling
JMC appealed to the court against this decision. In the first instance, the judge agreed with the ATO, holding that Mr Harrison was an employee. Here’s why:
Control: The arrangement was such that JMC had control over how, when, and where Mr Harrison was required to provide the contracted services. This control manifested by supervision and monitoring by JMC. Under the contract, Mr Harrison was only able to assign or sub-contract his services with the JMC’s written consent.
Remuneration: Mr Harrison was paid for an hourly rate rather than towards producing a result or product, which leans more towards an employee-employer relationship. Mr Harrison was also not required to provide his own equipment or tools.
Intellectual Property: Rights to any IP created by Mr Harrison while providing his services, would be vested in JMC. This is generally what happens when an employee creates IP for an employer.
Own Business: The terms of the contract made it so Mr Harrison was engaged to work in JMC’s business rather than conducting his own business, this also included being on JMC’s website and promotional materials.
The Right Decision: Why the ruling was overturned
In 2023, the Full Federal Court found that Mr Harrison was not an employee. Here’s why:
Control: Mr Harrison did have a right to subcontract, it wasn’t just illusory. Just because Mr Harrison had to get consent to subcontract, did not mean the right did not exist. There was nothing remarkable about JMC imposing a consent restriction on subcontracting. This restriction afforded JMC the protection to ensure the services would be provided by a subcontractor qualified to do the work.
The judge also noted that this right to subcontract was real because it wasn’t limited in scope, meaning Mr Harris was able to subcontract the whole of his service rather than only discrete tasks (eg. invoicing).
The first judgement also argued that right to subcontract would not ever likely be exercised because of the consent restriction. However, the law is only concerned with the existence of the right. If it exists, then it lends more towards a contractor arrangement.
Remuneration: Whether a contractor is paid hourly or by project does not point either way.
Intellectual Property: Just because JMC wanted to retain ownership over the IP created in their service, also was seen to be a neutral requirement.
Own Business: The way in which Mr Harris was obligated to charge for his services under the contract pointed towards an independent contractor relationship. In particular:
using a registered business name when invoicing;
including an ABN on his invoices;
provide invoices in the form of a tax invoice if registered for GST;
be responsible for workers compensation and income protection insurance, and indemnify JMC for any workers compensation claims;
the ability of JMC to deduct costs or withhold payment.
Beyond this, there was strong evidence Mr Harrison conducted business outside of whatever he did for JMC. This is because Mr Harrison was engaged by several other businesses at the same time, for example he was a multimedia producer at Cultural Infusion and trainer at Medicorp whilst engaged at JMC.
Also, the fact there was no provisions for sick leave, holiday pay, or super in the contract favoured a contractor arrangement.
Notes for Employers: What does this mean for you?
Like many cases before it, and many to come after, this case again sheds more light on what you need to be looking at when determining whether someone is a contractor or employee.
Here are the three lessons you need to take away from this case:
Written Contracts: This case has again emphasised the importance of written contracts when it comes to determining someone’s employment status. If you are wanting to engage a contractor, you need to pay close attention to the clauses you do include (eg. invoice requirements, ABN, sub-contracting) and the clauses you do not include (eg. sick leave, super).
Right to Subcontract: This was the critical deciding factor in this case. Having the right to subcontract, whether it was ever likely to be exercised, is important in defining a contractor arrangement. In essence, if a contract gives a person the right to subcontract, then it is not requiring that person to provide their labour wholly or principally like you would an employee. For contractors, ensure your contracts include a clear right to subcontract. You are more than able to add restrictions to this, which may include obtaining your consent, or finding qualified sub-contractors.
Review: Don’t wait for the ATO or the courts to come knocking on your door. Know exactly what your arrangements with your team members are. If you engage a contractor, ensure your written agreement accurately reflects the latest case law on contractor relationships. By having JMC review their contract terms, they were confident they had the key ingredients for a contractor-principal relationship, saving them from having to back pay taxes they weren’t legally obligated to.
Key Takeaways
Your written contract plays a big role in determining whether someone you’ve engaged is an employee or contractor. For contractor arrangements, review the included and omitted clauses carefully—these will be key indicators of the nature of the relationship.
For contractor arrangements, you must give them the right to sub-contract. You may put barriers in place (eg. consent restrictions) to protect yourself, however you cannot require a contract to provide their services wholly or principally. If you do, then they are considered employees.
Ensure you include obligations in your contracts that make clear the contractor has their own business – this includes registered business names, ABN on invoices, GST tax invoices, providing workers comp.
Review your documents! It’s crucial to determine the status of anyone you engage, as your obligations will differ. If your contracts are ambiguous or you’re unsure they
Your Next Steps
Unsure if your team member is a contractor or an employee? Worried your contract isn't covering you’re a*rse, legally speaking? As experts in real estate agency and workplace law – we can help you get it right – Book your free call now!
Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.