A recent decision by the Administrative Appeals Tribunal (AAT) should serve as a warning for any employer who employs independent contractors. In a case brought by the Tax Commissioner, a company that employs over 1,000 contractors to provide interpretation and translation services is now potentially liable for superannuation guarantee payments to all of its contractors – now and retrospectively.
So what went wrong? The problem is that there is no conclusive definition of who or what an independent contractor is. The fact that an agreement might state that someone is a contractor is considered merely a ‘label’ by the court.
Where the contractor primarily supplies their personal labour, the dividing line between an employee and a contractor is even harder to distinguish, as the tools of the contractor’s trade is their knowledge and expertise. The case before the AAT, Associated Translators and Linguists Pty Limited and Commission of Taxation  AATA 260 is a case in point.
The ATL case
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 1,000 interpreters and translators fulfil between 1,300 and 1,500 client assignments per month. The panel of consultants are 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 Commissioner singled out one panel member from ATL’s pool, Mr Sani, who started contracting to the company in 2003. The Tax Office was of the view that Mr Sani was an employee of ATL not a contractor and issued ATL a superannuation guarantee assessment for a shortfall in superannuation guarantee payments to Mr Sani. ATL objected. The ATO held firm on its view that Mr Sani was an employee and therefore the super guarantee should apply.
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.”
The case before the AAT first had to determine if Mr Sani was an employee under its ordinary meaning. If not then the tribunal had to decide if Mr Sani was an employee under the extended definition of employee in the SGA Act. As it turned out, the case didn’t get that far, with the AAT deciding that Mr Sani was in fact an employee of ATL under its ordinary meaning.
When is a contractor not a contractor?
Generally, to determine if an independent contracting relationship exists the courts have looked at factors such as:
- 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 contractors ability to generate goodwill or saleable assets during the course of the contract.
- How the contractor is paid (for hours worked or a result).
- The level of risk the contractor bears.
- Whether the contractor is independent or in reality, simply ‘part and parcel’ of the organisation they contract to.
No single factor is determinative; it is the weight of evidence, on balance, across all of the factors. However, the last point, called the organisation test, was a significant factor in ATLs loss to the Tax Commissioner.
Weighing up the case, the tribunal saw that ATLs panel members were not only part and parcel of the business, they were the business. ATL has no capacity to deliver their services across the range of languages and geographic locations without them. Following this decision it would be hard to see how any business that relied predominantly on independent contractors to fulfil its services could establish the independence of its contractors under this definition.
What you should do
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 might have a superannuation guarantee exposure.
Greg Hayes is a director of accountancy firm Hayes Knight. He is a regular commentator on business and taxation issues and is former national chairman of the Small Business Centre of Excellence, CPA Australia. www.hayesknight.com.au