It’s a big and very important question for a recruitment (labour-hire) company operating within the Federal Government ICT Contractor market, and not an easy one to answer.
Over the past three years, Recruitment Hive has taken a deep dive into relevant State and Federal government employment legislation and Case Law. We have spent many thousands of dollars with multiple legal firms, participated in numerous industry seminars and webinars, read many legal firm’s blogs and industry group summary documents and perused the High Court of Australia Order (s) detailing considerations made by Judges in recent and relevant cases.
Before attempting to offer an answer to the question Are federal government ICT Contractors independent contractors or employees of Labour-hire companies? we need to understand the features and characteristics of federal government ICT Contracting through recruitment (labour-hire) companies. We specifically need to examine the key contractual clauses that demonstrate that labour-hire companies are required to perform the function of employer control over the ICT professionals whom they engage to provide work effort for federal government clients.
In order to provide labour-hire services to federal government organisations, recruitment companies must first sign their agreement to the terms and conditions stated within a panel Deed. After winning work, recruitment companies must also sign their agreement to the resulting Work Orders.
The Head Agreement(s) include:
- Where a Work Order specifies named personnel, you must only use the named personnel and not replace, reduce or supplement them without prior written approval from the buyer, and,
- Except as set out in the Work Order, you must not subcontract any aspect of the deliverables without obtaining the buyer’s prior written consent.
Work Orders issued under panel Head Agreement(s) include:
- A clear date as to when the work is expected to start;
- 2. An initial work term (12 months is not uncommon), often with confirmation that the buyer has options to extend the work-term for an additional 24 months;
- A location where the work is expected to be conducted;Â®
- Name of specified personnel who must carry out the work;
- The specified personnel must follow the instructions and any directions of the buyer that relate to the role they are performing for the buyer;
- Work will be paid for on a time & materials basis and the specified personnel must submit timesheets for client approval on a regular basis, often to a specific deadline;
- The buyer will provide standard material accorded to APS staff for use in accordance with the buyerâ€™s access and usage polices and permissions assigned to specified personnel;
- Specified personnel are to work up to 8 hours per day;
- The hours worked by the specified personnel are to be worked during specified core business hours, and
- A total number of hours (or budget) to be worked over the course of the contract (generally indicating either 37.5 – 40 hours to be worked each week throughout the duration of the contract).
All of these factors indicate that the federal government Client agreements, signed by recruitment companies, require the recruitment companies to exert a degree of control over the workers. This includes, but is not limited to, where and when to work, how to work and how to get paid. Significantly, the worker is not exposed to any financial risk. If they work for 37 or 40 hours per week and get a timesheet authorised by the host-client, they will get paid by the Labour-hire (recruitment) company.
When Recruitment Hive asked a leading employment lawyer the question: “Are federal government ICT Contractors independent contractors or employees of recruitment companies?”
He summarized his carefully considered legal opinion as:
“Employment law is a blender of risk. Throw it all together – tax, super, insurance, safety, employment – and what comes out is a smoothie full of downside that the recruitment company is left to suck on through a soggy paper straw!”
Perhaps the Fair Work Ombudsman might be of assistance in confirming if Federal government ICT Contractors are employees or independent contractors of recruitment companies. They have a whole page dedicated to defining what an Independent Contractor is. It states:
Whether someone is an independent contractor or an employee depends on a number of indicators. These include:â€¢ the amount of control over how work is performed
- financial responsibility and risk
- who supplies the tools and equipment
- ability to delegate or subcontract work
- hours of work
- expectation of work continuing.
It will come down to what is agreed to at or before the start of the working relationship. What happens after the contract has been agreed to will usually not be relevant to determining whether someone is a contractor or an employee.
I have underlined the word, “usually”, in the above paragraph written by the Fair Work Ombudsman as I reasonably suspect it has been included as recognition that a worker is able to challenge a contact as a Sham Arrangement if that worker was instructed, or encouraged, by a Labour-hire company, to enter into an independent contract agreement for the provision of services when, in reality, it is for the provision or work.
CFMMEU V’s Personnel Contracting Pty Ltd case (2022 HCA appeal)
- The High Court also confirmed the worker was not an independent contractor as the Labour-hire company retained control over how and when the work was conducted and how payment would be made, &
- The High Court described the business model of Labour-Hire Companies as “being in the business of actually providing labor” and “not in the business of introducing suppliers of labor” to their clients.
Both points 1 & 2 of this case ruling suggest that for a Labour-hire company to influence a worker to engage with them as an independent contractor they are contravening the Sham Arrangement clauses within The Fair Work Act (2009) and risking an $82 500 fine.
In response to this case ruling (2022 HCA appeal), the legal firm Squire Patton Boggs wrote on their website:
“Relevantly, labour hire suppliers who operate under an Odco-style arrangement (i.e. a triangular arrangement where the labour hire supplier engages independent contractors to perform services for a client) need to be aware that there is a real risk that where the underlying independent contractor agreement includes provisions under which the labour hire supplier retains elements of control over the worker and the work the worker is performing, this will be sufficient to risk a finding that the independent contractor is actually an employee.”
In another recent case ruling, that of ZG Operations Australia Pty Ltd v Jamsek:
- The majority of the seven Judges sitting on the High Court appeal for ZG Operations Australia Pty Ltd v Jamsek ruled that where parties have comprehensively committed the terms of their relationship to written contract and where such written contract is not challenged as a sham contract or otherwise ineffective, the characterisation of the relationship must proceed by reference to the rights and obligations of the parties under that contract.
- The primary judge concluded that the company’s right of control was less extensive than was typical of an employer-employee relationship. In this regard the primar ®y judge emphasised the absence of control over the manner in which the respondent conducted their deliveries.
It appears that some recruitment companies operating within the federal government ICT Contracting industry may be clinging to point one above of this case ruling as justification to continue to offer work to ICT professionals using independent contractor agreements as their preferred engagement model. These recruitment companies would most likely include clauses in their independent contractor agreements that clearly negate any control the recruitment company has over the work done by independent contractors.
However, as we have read earlier, the federal government Head Agreements and Work Orders, that recruitment companies sign, clearly state numerous areas of control that the recruitment company is agreeing to have over the worker. If a recruitment company encourages an ICT Professional to sign an independent contractor agreement, while the recruitment company is contractually obligated to their federal government client to exert employer control over the ICT Professional, Recruitment Hive has come to the conclusion that this could be determined to constitute a Sham arrangement and would be in contravention of The Fair Work Act (2009). This could result in a recruitment company being:
- Taken to court by a long-term federal government ICT Contractor who is seeking a significant payment for multiple years of holiday leave because the recruitment company directed, or encouraged, the ICT Contractor to work under an independent contractor agreement. It is Recruitment Hive’s opinion that the ICT Contractor could have reasonable grounds to argue that they should have been offered an employment agreement from the recruitment company. Recruitment Hive is of the opinion, in such a circumstance, that there is a significant risk that a Court would decide in favour of the ICT Contractor and rule that the recruitment company should have offered
the ICT Contractor an employment agreement and order the recruitment company to make a payment to the ICT contractor for multiple years of un-taken holiday leave, and
- Fined $82 500, for each instance to have been found to have contravened the Sham arrangement clauses of the Fair Work Act (2009).
What does the Fair Work Act 2009 say?
Division 6 – Sham arrangements
357 Misrepresenting employment as independent contracting arrangement
A person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.
359 Misrepresenting to engage as independent contractor
A person (the employer) that employs, or has at any time employed, an individual to perform particular work must not mak® e a statement that the employer knows is false in order to persuade or influence the individual to enter into a contract for services under which the individual will perform, as an independent contractor, the same, or substantially the same, work for the employer.
While employment legislation is independent of other State and Federal legislation, such as for tax, superannuation and workers compensation, it is worth examining how these other Acts consider the relationship between an ICT Contractor and the recruitment companies.
What does the Australian Tax Office say in the Income Tax Assessment Act (1936) & Income Tax Assessment Act (1997)?
“Whether a worker is an employee or contractor is not a matter of choice, but depends entirely on the working arrangement and the specific terms and conditions.”
“The High Court’s commentary that the use of labels in a contract should not be determinative of the nature of a relationship is consistent with existing views articulated by the (ATO) Commissioner”.
The Difference Between Employees and Contractors
Delegation: An employee can’t delegate the work to anyone else, an independent contractor can.
Payment: An employee is paid for time worked; an independent contractor is paid for a result achieved.
Tools: An employee is supplied with the required tools, an independent contractor isn’t.
Risk: An employee has no risk, if they work they get paid. An independent contractor doesn’t get paid if they don’t deliver (no matter how hard they have “worked”) and are liable to rectify any defect.
Independence: An employee is considered part of business workforce, an independent contractor is not.
Superannuation Guarantee (Administration) Act 1992, Subsection 12(3):
An employee includes a person who works under a contract that is wholly or principally for the labour of the person
A person is an employee if:
- the individual is remunerated (either wholly or principally) for their personal labour and skills;
- the individual must perform the contractual work personally (there is no right of delegation), and
- the individual is not paid to achieve a result
State Revenue Office, Victoria Payroll Tax Act 2007, Division 8, 39:
“For the purposes of this Act, the person who performs work for or in relation to which services are supplied to the client under an employment agency contract is taken to be an employee of the employment agent.”
Revenue Office, Australian Capital Territory: Payroll Tax ACT 2011, Division 3.8 Employment Agents
“For this Act, the person who performs work in relation to which services are supplied to the client under an employment agency contract is taken to be an employee of the employment agent.”
“If the effect of an employment agency contract is to reduce or avoid the liability of any party to the contract to the assessment, imposition or payment of payroll tax, the commissioner may—
(a) disregard the contract; and
(b) determine that any party to the contract is taken to be an employer for this Act; and
(c) determine that any payment made in relation to the contract is taken to be wages for this Act.”
WorkSafe ACT, Australian Capital Territory: Workers Compensation Act 1951
For this Act, an individual is taken to be a worker employed by a person (the labour hirer) if
(a) the individual has been engaged by the labour hirer under a contract for services to work for someone other than the labour hirer; and
(b) there is no contract to perform the work between the individual and the person for whom the work is to be performed; and
(c) the individual personally does part or all of the work.
The laws that the Superannuation Guarantee (Administration) Act 1992 describes are legally independent from the law laid out for the Australian Tax office through the Income Tax Assessment Act 1997, which is legally independent of the Fair Work Act 2009, which – of course – is legally independent of the Victoria Payroll Tax Act 2007; and so on and so on.
So – is a Federal Government ICT Contractor an employee or independent contractor of a recruitment company?”
Each individual legislative act must be considered as we formulate our answer to the original question. The most reasonable and perhaps accurate answer, from a legal perspective, is: “Only a Judge can decide.”
This might be considered an acceptable answer to our politicians responsible for defining legislation, but with our employment lawyer telling Recruitment Hive that we are
“sucking on a smoothie of employment risk thr ®ough a soggy paper straw” we have to make a decision.
Our considered decision
Therefore, after extensive consultation with legal advisors, peer competitors and industry groups; and following careful consideration and internal debate, Recruitment Hive has made the decision that:
Federal government ICT Contractors should not be engaged as independent contractors. They should be offered employment agreements by recruitment companies that are required, through their Host-Client agreements, to exert a significant degree of control of how their work is to be conducted.
Recruitment Hive is of this opinion for the following reasons:
1. While independent of Fair Work Act 2009, the majority of other relevant legislation (Taxation, Superannuation, State Revenue and State workers compensation Acts), all clearly confirm that a worker engaged through
a recruitment company and working for a third party(Host-Client), is considered to be an employee of the recruitment company;
2. It is clear through the case ruling of CFMMEU V’s Personnel Contracting Pty Ltd case (2022 HCA appeal) that Judges do recognise the Odco-style arrangement (i.e. a triangular arrangement where the labour hire supplier engages independent contractors to perform services for a client) as a different type of work arrangement to when only two parties are involved in a work agreement; and further, the ruling confirms that Labour-hire companies are not in the business of finding other companies to find people to conduct work for their Clients, as would be the case if Labour-hire companies engaged with independent contractors(who, by definition, are able to sub-contract the work to others);
3. Multiple recent employment case law decisions suggest that Judges are most interested in understanding which entity has control over a worker in order to establish who the employer of the worker is;
4. The federal government Head Deeds and Work Orders, signed by Recruitment Hive, confirm that recruitment companies are expected to control multiple and significant aspects of the work performed;
5. To offer a worker an engagement as an independent contractor when that worker, due to the levels of control exerted by the recruitment company over their work and the absence of financial risk to the worker, should be engaged as an employee is contravening the Fair Work Act (2009) Sham arrangement clauses and risking a $82 500 fine in each instance, and
6. A recruitment company is at very real risk of a Court ordering it to pay-out multiple years of accrued holiday-leave to an ICT Contractor if found to have contravened the Fair Work Act’s (2009) Sham arrangement rules.
Some labour-hire companies operating within the federal government ICT Contracting market are clinging to the case ruling in ZG O ®perations Australia Pty Ltd v Jamsek that confirmed the written contract is the prime factor in determining if a worker is an employee or independent contractor. However, Recruitment Hive does not feel this is wise because:
1. This case only involved two entities (and a truck jointly owned by the workers through their partnership). It was a company and a partnership (with two workers) directly engaged as an independent contractor. There was no Odco-style arrangement (i.e. a triangular arrangement where the labour hire supplier engages independent contractors to perform services for a client). To use this Case Law to definitely determine the employment nature within an Odco-style arrangement, clearly recognised by the Court as a different type of arrangement, would, in Recruitment Hive’s opinion, be foolish;
2. The Court was clearly focused on determining which entity controlled the workers, &
3. The ruling confirmed that it is still legitimate to challenge an independent contractor agreement on the basis that it was a Sham arrangement.