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1).With the introduction of the Personal Services Income regime, is the concept of “income from personal exertion” now redundant?

2).With the increasing casualization and increased specialisation of the Australian workforce which largely involves contracting arrangements, the traditional dichotomy between employees and contractors is becoming increasingly blurred. The Personal Services Income regime recognises this and attempts to alter the tax attributes of some contractors to be similar to that of employees. Rather than adjusting the income derived and the expenses incurred, could the government achieve the same result by deeming “employee-like” contractors to be employees?

3).With the increasing specialisation of contractors, is the concept of control still a relevant test for determining if a person is an employee or contractor?

4).The common law tests for distinguishing between an employee or independent contractor are no longer relevant in light of the incorporation of statutory definitions of an employee (or its equivalent) in certain tax regimes (e.g. superannuation). Discuss.

5).When providing advice in relation to personal services business (PSB) determinations, the Commissioner of Taxation always retains the right to apply Part IVA if he considers it necessary, for example, where there is income splitting. Given the Commissioner determines that a PSB exists, can he ever be justified in applying Part IVA. Could something else be done?

Legal Consequences of Mischaracterizing Employees and Relationships of Independent Contractors

Legal framework differentiating employees from Independent Contractors:

The recent cases bought forward in Australian judges and court of law have in the last years handed huge penalties and compensations against those individuals that are caught in act of mischaracterising employees and relationships of independent contract. Such cases reflects the managers, employers, directors and the companies that hire labour to be more understanding and utilising the definition of employment and arrangement for independent contractor (Brokelind 2014). According to the “Fair Work Ombudsman” strong standpoint against the bogus contracts and mischaracterised employment relationships acts as the warning for those individuals that are either irresponsibly or decisively falsifying their employees or arrangements for contracts.

The increasing amount of strong standpoint by the “Fair Work Ombudsman”, high court and the tribunals against those individuals that are failing to appropriately apply the contract arrangements, it is necessary to recognize the difference between the contractors and the employees (Coleman and Sadiq 2013). Similarly, difficult trading environment and higher costs of labour have created some of the contracting relationships to businesses that are looking forward to maintain the competition and flexibility of labour in Australia. Nevertheless, there are hazards in indulging the individual as the contractor without having correct understanding of the law. There might be an instances where a person is considered to be an Australian employee under the law and this accompanies numerous lawful obligations and liabilities if it is incorrectly interpreted.

Factors determining the individual to be employee and independent contractor:

According to the common law of Australia it identifies a differences between an employer working relations and the employee relationship. The common law also identifies the differences between the working relationship of the principal and the independent contractor. The former is identified as the “Contact of Service” while the latter is identified as the “contract for services”. There are significant lawful consequences whether the employee is the worker or the independent contractor (Grange, Jover-Ledesma and Maydew 2014). The concrete consequence of this outcome is that prior to indulging with any worker as the independent contractor, employers are required to evaluate the substantive nature of the working relations in order to ascertain whether the worker is actually an employee or the independent contractor.

Correctly evaluating the differences between the employee and the independent contractor is important for four chief causes;

  1. Initially the two types of relationships is considered as mutually exclusive and as defined each of the relationships results in fundamental different rights and obligations in contractual tortious and fiduciary contexts (James 2014).
  2. Statutory rights together with the responsibilities that are assigned to the independent contractors are occasionally enjoyed. Likewise, the liability to tax for both the workers and the employers creates a significant influence on the latter classifications.
  3. The acts that are done by the worker especially in respect of the vicarious liability originates for the employer chiefly where the workers is the employee, but not in the situation where a person is an independent contractors (Kenny 2013).
  4. Lastly, under some jurisdictions there are statutory restrictions that would impact the rights of the employees but would not affect the independent contractors, in respect of the ability to prosecute for damages that originates during the employment course.

According to Krever (2013) differentiating between the employee and the independent contractor is considered to be vital element of the Australian employment law. Consequently, there is a noteworthy form of well-defined principles that helps in helping the court in distinguishing between the two arrangements.

Importance of Correctly Distinguishing Between Contractors and Employees

There has been very restricted movement amid the statute or the common law as the attempt to define the employment or the employment relationship with particular reference to employee-contractor contradiction. Instead, the status of worker is ascertained with reference to the established principles of common law (Morgan, Mortimer and Pinto 2013). The principles of common law is considered significant, since it helps in preventing the parties from the construing the relationship that bears the aspects of the employer-employee since the employer-contract relationship is entirely to reap the advantage that entails such forms of characterisation.

The court of law states that the parties cannot create something that possess each and every aspects of the roaster. When enquired to ascertain whether the particular worker is considered as the employee or the independent contractor the Australian courts have placed their emphasis on the substances of the relationship instead of label that are provided to the parties (Sadiq et al. 2014). The Australian high court have stated that there are numerous relevant indicators to ascertain whether the worker is considered as the employee or the contractor. The indicators includes that medium of remuneration, the provision for holidays, the responsibilities to work, deduction to taxation and work delegation by the supposed employee.

According to Woellner (2013) the Australian high court have placed their emphasis that even though the principles are held relevant it is entirety of the relation among the parties which should be taken account of in every cases. The prevailing factor approach of the high court have been adopted to assess whether the worker is entirely held as the contractor or the employee is based on the multifactor test (Woellner et al. 2014). According to the multifactor test, judges are required to place their weight on the particular characteristics of the relationships that are in question and then creating an overall impression on those characteristics to assess whether there is a better description of the relationship as the employment or the contractual one. It turns out to be immediately obvious that the nature of the test is considered as necessarily subjective and in several cases different adjudicators have bought different answers.

The below stated following factors states that the worker is the independent contractor

  1. The contract is provided to achieve result instead of the mere provision of the labour based on the continuous basis (McKeown 2016).
  2. The worker is required to maintain the higher level of discretion and should be flexible in performing the work in spite of the contract containing specific precise terms.
  3. The workers must bear the risk related to commercial laws or profit originating from the job.

The below listed are the circumstances where the worker is regarded as the employee;

  1. The remuneration of the worker is in the form of salary or wages
  2. At the time of paying the worker PAYG is deducted from the wages or salary of the worker by the company
  3. The worker cannot carry out identical work in other companies.
  4. The organization should provide the equipment and the materials to the worker for work.

As evident from the above stated multifactor test it is necessary understand that the there are no set of numbers or combination of factors that would determine the worker as the employer or the contractors (Sutherland and Riley 2016). This is entirely based on the matter of overall impression. Eventually, the court of law would evaluate the totality of the workplace relationship in order to determine whether the worker is on the balance, an employee or the independent contractor. This consist of examining the wide range of indicators to ascertain the entire character of the particular relationship.

Multifactor Test Used by Australian Courts to Evaluate the Nature of the Workplace Relationship

Having a contract on writing:

In the statement bought forward by Tan, Braithwaite and Reinhart (2016) it is not uncommon for the business to indulge with a person to carry out the work because of the pressing nature of the work to be carried out or backlog of the administrative work, failure to record the terms of the involvement in the written contract. It signifies that if there is any later dispute regarding the individual contractor or the employee or dispute regarding the contract terms then there might be a noteworthy disagreement among the parties that ultimately leads to lawsuit. Consequently it becomes necessary to prudently keep track of the employment terms in writing prior to engaging with both the parties affixing their signature.

The common law tests:

The common law tests for ascertaining whether the relationships is one of the independent contract or employment is regarded as the multifactor test. The common law test comprises of recognizing and weighing the numerous features of the relationship to determine the balance.   

Application of tests:

As stated by Cao et al. (2015) to determine an individual to be employee or the contractor at law it initially requires the implementation of common law tests. The court of law traditionally evaluated the relations against the variety of indicator and when all of them are combined they are helpful in determining the true nature of the relationships.

Mode of remuneration:

As stated by Robin and Barkoczy (2018) there are notable and indicatory differences among the modes of remunerating an employee in contrast to those that are contractor. The employees are generally paid on the periodic basis depending upon the hours of work. The independent contractors on the other hand are paid based on the pre-negotiated sum following the submission of an invoice upon the completing the service. Additionally, the receipt of fee is opposed to the regular wage or salary that forms an indication of the contractor relations. Wages that does not forms the basis of skills and toil of assignment or allocations of time for completing the job provides a suggestion ordinary relation of employment (Blakelock and King 2017). Even though the court of law does not takes into the account the medium of remuneration solely as the dependable reflector of the workplace relations because of the contemporary modes of payment, the court of law has already regarded remuneration based on hours as one of indicative factors of employment relations.  

Factors Used in the Multifactor Test: Mode of Remuneration, Rights to Delegation, and Employment Obligations and Entitlements

Rights of delegations:

According to Knox (2018) rights to delegation refers to the requirement that a person carries out the work to themselves be generally considered as the typical relationship in employment. The independent contractors on a frequent basis have the powers to delegate the work to the others either without or with the authority of the party that are contracting their services. The court of law in “Australian Air Express Pty Ltd v Langford (2005)” held that in determining the whether the person is held as the employee it is necessary to understand the entirety of the relationship Mathews and Roufeil (2017). The court held that the right of delegating or providing the substitute holds a noteworthy weight but it cannot be held as entirely decisive. Therefore, the contractor agreements must consists of the right for delegating their work to others or entities based on the supervision of contractors.

Employment obligations and entitlements:

Even though the court of law in previous instances have considered the treatment relating to employee entitlements and obligations namely tax deductions, contributions to superannuation and leave entitlement as they indicative workplace relations but these matters are not held as determinative (Blakelock and King 2017). Characteristically, the employer withholds the tax deductions that are applicable and the superannuation contributions from the remuneration of employees while the independent contractor must be paid the untaxed sum and should be accountable for administering their respective tax liability and superannuation planning. Additionally, the employee is entitled to yearly leave, person and parental leave while the independent contractors does not have any such leave entitlements. Considering these obligations and the entitlements would help in assisting the court in ascertaining the intention of the parties.

Legislations that deems a person to be an employees:

According to Tan, Braithwaite and Reinhart (2016) there are some individual that may appear to be contractors can be determined by the legislations that considers to be employee for the purpose of the relevant legislation.

Superannuation: The “Superannuation Guarantee Act 1992” requires an individual to make contributions in their superannuation for the benefit of the employees. This takes into the account the employees under the common law and those individuals that are governed by the extended decision of the employee (Sutherland and Riley 2016). This extended definition of employee includes a person that works under the contract which is principally for the labour of the person, the person is held as the employee of other party under the contract. The extended definition provides that if an individual indulge as the contractor they would be required to pay the superannuation contributions for their benefit even though the written contract does not provides for this.

Payroll tax: In majority of the Australian states there are particular provisions for contractor that considers payment to contractors as the part of the assessable wages that are subjected to payroll taxation (Woellner et al. 2014). Accordingly, the available jurisdictions and exemptions must be reviewed where the service is performed by the labour.

Workers compensation: Employers are required to be aware of the workers compensation legislations where the employers are required to takeout the workers compensation insurance for individuals that indulge as contractors.

PAYG Withholding: The PAYG withholding usually does not requires to be withheld from their payments to the individual contractor given the individual is genuinely held as the contractor (Kenny 2013). The applicable test for ascertaining whether the person is considered as the employee for the purpose of PAYG is that there is no such thing in the legislation that would deem genuine for the contractors as the employees. The independent contractors are not entitled to withholding benefits.

Trends and specific cases:       

The numerous industrial and the employment authorities in Australia along with the Fair Work Ombudsman have undertaken a strong step in monitoring, investigating and punishing the misrepresented relationships of employment. The high court of Australia in “Work Ombudsman v Happy Cabby Pty Ltd & Anor (2013)” have held in their decision to increase the penalties that are related with the bogus arrangement for contract (Brokelind 2014). The business was noticed to have breached the “section 357 of the Fair Work Act 2009” for misrepresenting the employments of contract in the form of independent contractor arrangement additionally with section 45 for being failure in fulfilling the award entitlements.

In another case of “Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (2013)” the high court of Australia passed its verdict relating to the question of the fake contracts and the correct method of converting the contracts of employment to the odco system of independent contracting. The case highlighted the requirement of the employers for the correctly managing the re-classification of the employees to the independent contract with the help of open and consensual procedure (Coleman and Sadiq 2013). With the help of this system the workers were re-characterised from the employees to the independent contractors.

Conclusion:

On a conclusive note, the relationship of employment is largely regulated than the relation of independent contract. If the employer inappropriately classifies the individual as the contractor whereas under the law they are an employee, the employer in this case may be at the risk of breaching of the law. The findings from the research suggest that if the employer incorrectly classifies a person as the employee or the independent contractor then they may be held liable for the superannuation charges that they have been failure in making the superannuation contributions for the benefit of the person. This may be either due to the employee at the common law or due to the employee under the extended definition of the superannuation guarantee act. Additionally the employers may also be held liable for payroll tax as well where they may have wrongly claimed the exemptions of contractor for the payments under the common law employees.     

Contracting has turned out to be a substitute in respect of the old-style employee-employer relations. A contract might engage with an enterprise either directly or as the natural individual with the help of trust, through partnership, or company or may engage with labour hire agency (Barkoczy 2014). At times contracting is regarded as the necessary element where an individual may require the skill of expertise which is not easily obtainable by hiring an employee. There are some individual that wish to be indulged as contractors especially in the event of providing service to numerous multiple clients. Contracting may prove as the more cost efficient tool than employment.

The current research study would be providing a thorough outline of the law, relevant rules, appropriate structures and the trends that creates an impact on the employment and independent contract arrangements. The initial part of the research study would be based on the discussion of the lawful framework that governs the contract and the arrangement for employment in Australia (Belloc 2017). Whereas the later part of this research would be discussing the related associated risks and exposure. The research would be addressing the correct structures and methods involved in structuring the arrangements for independent contracts. Finally the research would deal with the current trends and cases along with the implications of the cases on the employers and employee.

Reference:

Barkoczy, S. 2014. Foundations of taxation law 2014.

Belloc, H. 2017. On. Freeport, N.Y.: Books for Libraries Press.

Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.

Brokelind, C. 2014. Principles of law: function, status and impact in EU tax law. Amsterdam: IBFD.

Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and Wende, S., 2015. Understanding the economy-wide efficiency and incidence of major Australian taxes. Canberra: Treasury working paper, 2001.

Coleman, C. and Sadiq, K. 2013. Principles of taxation law 2013.

Grange, J., Jover-Ledesma, G. and Maydew, G. 2014. 2014 principles of business taxation.

James, M. 2014. Taxation of small businesses 2014.

Kenny, P. 2013. Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.

Knox, A., 2018. Regulatory avoidance in the temporary work agency industry: Evidence from Australia. The Economic and Labour Relations Review, p.1035304618765526.

Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.

Mathews, R. and Roufeil, L., 2017. If it quacks like a duck: Independent contractor or employee?. InPsych: The Bulletin of the Australian Psychological Society Ltd, 39(2), p.30.

McKeown, T., 2016. A consilience framework: Revealing hidden features of the independent contractor. Journal of Management & Organization, 22(6), pp.779-796.

Morgan, A., Mortimer, C. and Pinto, D. 2013. A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.

Robin and Barkoczy woellner (stephen & murphy, shirley et al.), 2018. Australian taxation law 2018. Oxford University Press.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W. and Ting, A. 2014. Principles of taxation law 2014.

Sutherland, C. and Riley, J., 2016. Major court and tribunal decisions in Australia in 2015. Journal of Industrial Relations, 58(3), pp.388-401.

Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.

Woellner, R. 2013. Australian taxation law 2012. North Ryde [N.S.W.]: CCH Australia.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation law 2014.

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