In 2021, I was lucky enough to be seconded for a number of months to the Australian Tax Office to research possible reforms – including administrative policies – to try to achieve greater certainty about whether a worker is an ‘employee’ or a ‘contractor’. This research highlighted to me that while the gig economy has re-ignited the issue, it is not new, and it has been a vexed issue since the industrial revolution over 200 years ago. Also, the data demonstrated to me how important it is for the worker (and the appointer) to fully appreciate the difference between an employee and contractor, including the regulatory and financial consequences (both short-term and long-term).
For example, the gig economy is a major trend impacting worker status considerations. While Australia lacks official statistics about its size, it has been estimated that between 2015 and 2019 the gig economy grew 9-fold to account for about $6.3bn in consumer spending in 2019, with about 250,000 workers. Uber Eats in 2020 had approximately 59,000 monthly active delivery workers on its platform in Australia. This could be of particular concern in some ways, as gig economy workers are over-represented by financially vulnerable population segments: younger age groups, students and formerly unemployed people. However, participation through the Uber platform allows workers to generate some income. Uber in Australia has indicated about 60% of their workers found access to traditional work difficult due to visa restrictions, limited skills or experience and language. However, given their vulnerable backgrounds (including language difficulties), do these workers appreciate that as contractors they are conducting a business, and the consequential regulatory and tax obligations that arise from this? Research demonstrates that these types of business operators can have the lowest business tax literacy.
Another worker trend in Australia, is that since the 1970s there has been a trend towards larger companies using third-party intermediaries – such as labour hire companies – to engage workers, rather than employing people directly. In some circumstances such workers might be an employee or a contractor of the third-party – but much depends upon the contractual terms (as a recent High Court decision, CFMMEU v Personnel Contracting, illustrated). Other sectors have also seen an increase in the use of contractors, such as the National Disability Insurance Scheme, under which recipients have control over their funding and may prefer to hire support workers as contractors rather than employees to lower their own regulatory burden. While the number of active contractors in the community can be difficult to determine with precision, data suggests that approximately 17 per cent of the workforce was classified as self-employed (including both employing and non-employing contractors) as at August 2017.
It is not suggested that every worker should be an employee, both contractors and employees are important to the functioning of the economy. Engagement of workers enables business expansion and growth, as it allows owners to delegate and focus on expanding their business. Without workers, a business is limited and reliant on the owner’s own capacity and skill. However, for the goal of freedom to contract to be fully realised, there must be a level playing field, ensuring workers and engagers have full knowledge of the distinction in worker status and its consequences. It is also important that stakeholders can gain assurance against any sharp practices or phoenixing activity that could take advantage of vulnerable members of the community, and give non-compliant businesses an unfair advantage in the market, potentially jeopardising their compliant competitors. Additionally, it needs to be acknowledged that Australia has used the concept of ‘employee’ to help facilitate tax revenue collection and self-funded retirement savings. Increases in contractors has the potential to jeopardise these mechanisms. For example, the Pay-As-You-Go-Withholding (PAYG-W) from employee wages is an important mechanism for collecting income tax in Australia, amounting to over $215 billion in the 2020 financial year, amounting to nearly 50% of the tax revenue collected by the ATO. Contractors don’t have the same level of automatic engagement with the tax collection system, providing greater potential for non-compliance.
The bargaining power disparity between workers and engagers can see some workers forced to accept contractor status, resulting in the worker genuinely being a contractor, even where this is not the worker’s preference. At other times, workers who are actually employees (but may not know it) have no choice but to accept being treated as if they are contractors, who may require incorporation to add to a façade to support tenuous legal arguments about this status.
Recent High Court decisions have re-emphasised the orthodox contractual analysis that is required when considering whether the relationship of employment exists (CFMMEU v Personnel Contracting; ZG Operations Australia Pty Ltd v Jamsek). This has re-aligned and moved the ‘contractual terms’ from being just one of the factors to consider in the prior multi-factual approach to that the contracted terms are central to establishing the true nature of the relationship.
This means that if a comprehensive written contract exists then it has paramountcy in determining the nature of the worker’s status, which rebuffs the prior expansive approach taken in the United Kingdom. This meant that a prior decision of the Full Federal Court erroneously devoted to much attention in the way in which the parties actually conducted themselves, and their disparity of bargaining power, rather than the contract itself. The High Court’s approach means where:
the terms of parties’ relationship are comprehensively committed to a written contract, the validity of which is not challenged as a sham nor the terms of which otherwise varied, waived or the subject to an estoppel, there is no reason why the legal rights and obligations so established not be decisive of the character of the relationship (emphasis added).
This means that subsequent conduct of the parties will be more relevant where the contract was partly oral, or to consider whether the contract was formed, discharged or varied, a sham or whether a remedy in estoppel is appropriate. However, it was observed that contractual ‘labelling’ of a relationship in a certain way, cannot change the character of the relationship established by their rights and obligations. In the CFMMEU case the worker was found to be an employee as under the contract he had no right to exercise any control over what work was to be done, nor how that work was carried, despite the worker being labelled a ‘contractor’ in the underlying contract.
In case of ZG Operations the services provided by the partnership were the truck driving skills and the use of the trucks, which was held to be characteristic of a contractor not an employee. The use of a substantial piece of equipment by the worker appeared to be influential in finding that they were a contractor, as when the use of ‘a substantial item of mechanical equipment for which the provider of the work is wholly responsible, the personal is overshadowed by the mechanical’.
Considering the current tax law and tax administrative processes, together with the available data, I formulated recommendations centring around improving certainty and knowledge, trying to reduce administrative gaps and tax arbitrages, and lastly trying to address the increased tax compliance costs that can occur when small businesses engage an employee. These recommendations endeavour to provide greater integrity and certainty in the system. For example, I argue that greater certainty could be achieved if, when a business engages an ‘individual’ to do work, there was a rebuttable presumption that the individual is an ‘employee’ of the business. This would place all individual workers, by default, within the PAYG-W, SG and Fringe Benefits Tax (FBT) systems, unless this presumption is rebutted with evidence indicating a different status. Another reform idea centres around requiring an Australian Business Number (ABN) to be annually renewed, including a process to provide assurances about whether a business is actually being conducted.
To address the regressive compliance costs that small businesses can face, and the particularly high compliance burden around engaging an employee, I argue that eligibility for the generous lower corporate tax rate of 25% should be tightened. I argue that to ensure that these corporate structures are adding to Australia’s economic prosperity through employment, there should be an employment requirement to be eligible for the lower corporate tax rate (base rate entity), rather than just a passive income consideration.
I am fully aware that there is no easy fix when it comes to worker status, but hopefully reforms can and will occur. To find out more about these recommendations watch: