Premium Hit: When WorkSafe Classifies an Employer’s Contractors as Workers

For employers who rely heavily on contractors, a decision by the regulator to classify those contractors as workers may have a significant effect on the employer’s WorkCover premium.

In Victoria, Part 1 of Schedule 1 of the Workplace Injury Rehabilitation and Compensation Act 2013 (WIRC Act) provides the relevant framework.  In simple terms, the test for whether a contractor is a worker is the “80% rule”, with an exception.  Clause 9(1) of Schedule 1 provides that where at least 80% of the contractor’s services are provided by the same individual to the same principal, and the gross income of the contractor derived from those services is at least 80% of the total gross income of the contractor during the relevant period, that contractor is deemed to be a worker of the principal in the relevant period.

Clause 9(2) provides the exception.  It states that the 80% rule does not apply if WorkSafe determines that, in providing services to the principal, the contractor is carrying on an independent trade or business.

So, how will WorkSafe determine the “independent trade or business” exception?

The usual starting point is the written agreement between the parties although the true nature of a relationship will not be defined by the terms and conditions of any such agreement. Neither will the intention of the parties be wholly determinative.

For example, many employers like to insert “labelling” clauses into agreements with their contractors that “deem” the relationship to be principal/contractor, or that attempt to remove the employer/employee relationship.  This will not be effective.  For example, the insertion of the words “Subcontractor’s agreement” at the beginning of an agreement will not make it so.

Employers also rely on other factors, such as remuneration for works completed, the absence of an obligation to perform duties other than those specified in the contract and the option to subcontract out the performance of duties, as indicators of a principal/contractor relationship.  Payment of workers compensation insurance by the contractor is another favourite.  But these are not conclusive either.  In simple terms, the primary question is whether the contractor is acting under a contract of service or a contract for services.

The WIRC Act does not define what constitutes a ‘contract of service’ and WorkSafe will rely on relevant case law. A major reference is the High Court’s decision in Humberstone v Northern Timber Mills (1949) 79 CLR 389.  There, Justice Dixon stated:

The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter’s order and directions… The essence of a contract of service is the supply of the work and skill of a man.’

Another regularly quoted decision is Hollis v Vabu Pty Ltd [2001] HCA 44.  The Court there stated:

the distinction between an employee and an independent contractor is rooted fundamentally in the difference between a person who serves his employer in his, the employer’s, business, and a person who carries on a trade or business of his own.

The test has become known as the “totality” test.  The courts will look at the totality of the relationship and the conduct of the parties in determining the true characterisation of that relationship. This will include consideration of a range of factors but the ultimate question to be answered is whether the contractor is carrying on a business.

The Federal Court in On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No.3) [2011] FCA 366 put the question as follows:

Viewed as a ‘practical matter’:

(i)         Is the person performing the work an entrepreneur who owns and operates a business; and

(ii)         In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

If the answer to that question is yes, in the performance of that particular work, the person is likely to be an independent contractor. If no, then the person is likely to be an employee“.

One of the most important factors for the regulator – presumably following on from the focus on entrepreneurship in the On Call decision – is the matter of risk.  This is because the risk profile of an independent contractor working for his or her own business is very different to that of an employee. An employee usually seeks the security of a regular pay packet and wishes to avoid the risks of running a business.  A contractor with a genuine commercial enterprise, on the other hand, is involved in an undertaking that involves risk.  A true business is prepared to invest time, money and effort in the hope of making a profit. So the true contractor, in the view of WorkSafe, is not only seeking remuneration, but profit.

Otherwise, in assessing the “totality” test, the Courts have provided a range of non-exhaustive factors to take into account.  These factors include:

  • The level of control exercised between the parties, and in particular whether the ability of the principal to direct or control the manner in which the contractor performs the services;
  • Whether the contractor provided skilled labour or labour which requires special qualifications;
  • The method of remuneration of the contractor;
  • The duration of service;
  • The exclusivity of service;
  • Whether the contractor employs or engages other persons to carry out its activities for the principal;
  • The ability of the contractor to dictate the place of work where the services are to be provided;
  • Whether the contractor carries out their services as an integral part of the principal’s business;
  • To whose business does any goodwill created by the contractor’s services, provided on behalf of the contractor, accrue;
  • Whether the contractor’s activity provides an opportunity for profit and involves the risk of loss or whether the payments made to them from the principal are largely consistent with the remuneration an employee of the principal would have received for providing that same activity;
  • Whether the economic activity represented or portrayed is perceived in the public domain as the activity of the contractor’s business or the principal’s business; and
  • Whether the contractor agreement is a contract of service or a contract for services.

If clause 9(1) applies and the exception under clause 9(2) does not, then under clause 9(5), the contractor will be deemed to be a worker and any payments by the principal to the contractor will be deemed to remuneration for the purposes of calculating premium.

If a contractor is deemed to be a worker at the time of the acceptance of a claim, there is an objection process for employers under Division 4 of Part 3 of the WIRC Act, which includes an avenue of appeal to the Supreme Court.  If the deeming process occurs as part of a premium audit, and an employer’s premium is adjusted as a result, Division 5 of Part 10 of the WIRC Act does provide a review process, but it is limited in scope.  Court proceedings following premium review are also specifically prohibited by section 458, although avenues of administrative review may be open, depending on circumstances.

This article was written by David Guthrie, Partner.

Important Disclaimer: The material contained in this publication is of a general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.