Your rural property frequently hosts skilled professionals—electricians, veterinarians, and mechanics—who are engaged for specific tasks. Additionally, independent contractors are sometimes used for specialised jobs such as shearing or truck driving. Clearly defining a worker’s status as an employee or a contractor is crucial due to differing rules, rights, and responsibilities.

Contractors offer advantages to your agribusiness over employees by potentially sidestepping additional costs such as superannuation, leave, Workcover, and payroll tax liabilities. Yet, this path is riddled with potholes, and the devil often lies in the detail. Court rulings have also focused a spotlight on this issue, highlighting the crucial need for agribusinesses to make accurate distinctions between employees and independent contractors.

On February 9, 2022, the High Court issued rulings 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. These rulings hold significance concerning the ATO’s advice and directives affecting the classification of workers. The ATO has released new rulings and a decision impact statement for those interested or willing to explore further detailsi.

More recently, in October 2023, the High Court rejected the Commissioner of Taxation’s application for special leave to appeal the Full Federal Court decision in JMC Pty Ltd v Commissioner of Taxation [2023] FCAFC 76. This outcome is a notable victory for individuals seeking clarity regarding applying the ‘principally for labour’ definition of an employee within the Superannuation Guarantee (Administration) Act 1992 (Act)ii.

The case emerged from disputes over superannuation guarantee charges issued by the ATO to JMC Pty Ltd. The core of the JMC case revolved around determining the employment status of Mr Harrison, a lecturer, and whether he should be categorised as an employee or an independent contractor. Mr Harrison’s engagement was outlined in a contract that detailed his responsibilities and compensation and granted him the right to subcontract his tasks with the employer’s consent. The crux of the matter in JMC concerned the common law definition of an employee as per section 12(1) of the Act, as well as the alternative extended definition under section 12(3) of the Act, which states: 

“If a person works under a contract that is entirely or primarily for their labour, that person is considered an employee of the other contracting party.”

Distinguishing between contractor and employee

The ATO explains the difference this way: “Employees work in and are part of your business. Contractors are running their own businessiii.”

At its core, the fundamental divergence lies in the nature of the engagement. An employee operates within a contract of service, subject to the employer’s directives and often contributing within a more structured and directed environment. Conversely, an independent contractor enters a contract for service, running their own business, offering specialised services, and retaining substantial autonomy over their work.

The criteria for determining these distinctions often involve a multifaceted evaluation. Factors such as the level of control exerted over work methods and schedules, the hours invested, expectations of continued engagements, assumption of financial risks, provision of tools and equipment, payment methodologies, entitlements to leave, opportunities to engage with other entities, and the right to delegate or subcontract all contribute to this nuanced evaluation.

Who is a contractor?

Contractors, functioning as independent businesses, typically negotiate the terms of engagement directly with the client. This negotiation often includes outlining project scopes, timelines, service deliverables, and payment modalities. However, due to the diverse nature of projects, contractors might enlist the expertise of subcontractors to execute specific tasks integral to the project but beyond their direct expertise.

For instance, in an agribusiness scenario, a general fencing contractor might engage a subcontractor to handle the fencing of a paddock. In this intricate web of relationships, a distinct subcontractor agreement delineates the terms governing the interaction between the contractor and subcontractor. This agreement expands upon the responsibilities, deliverables, payment structures, and other pertinent clauses crucial for a successful collaboration.

Penalties and charges

The legal ramifications of misrepresenting these relationships are profound, especially under regulatory frameworks such as the Fair Work Act 2009. Instances where the nature of the association is misrepresented could result in the classification of a “sham contracting arrangement,” leading to potential legal repercussions for the party responsible for such misrepresentation.

Penalties and charges will also apply if you incorrectly treat an employee as a contractor, including:

• PAYG withholding penalty – for failing to deduct tax from worker payments and send it to the ATO
• super guarantee charge (click here for more information).

In addition to the super guarantee charge – which imposes nominal interest and an administrative charge in all cases on top of the super guarantee shortfall – the ATO can impose additional penalties of up to 200% of the super guarantee charge.

Distinguishing between an employee and an independent contractor requires a thorough assessment considering factors such as PAYG Withholding, Superannuation, Fair Work, LSL regulations, and Workcover laws in different areas. This evaluation ensures legal and operational framework compliance while promoting transparent and mutually beneficial professional relationships.

To gain a deeper understanding of the distinctions between contractors and employees and to safeguard your agribusiness from potential pitfalls, get in touch with Brentnalls SA.

i  https://www.ato.gov.au/Business/Employee-or-contractor/Difference-between-employees-and-contractors/

ii https://www.holdingredlich.com/jmc-pty-ltd-high-court-rejects-the-commissioner-s-leave-to-appeal

iii https://www.ato.gov.au/Business/Employee-or-contractor/Difference-between-employees-and-contractors/

Disclaimer

The information provided in this article does not constitute advice. The information is of a general nature only and does not take into account your individual financial situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.