Fair Work Australia - Action Over Contractor


A recent court case, involving Fair Work Australia and a business, has highlighted the necessity for businesses to be very careful, relative to the classification of people who work for the business.  There are legal implications if classifications are incorrect.

The employment relationship revolves around 'control'.  In a normal employer-employee relationship, the employer has the ability to control how work is done by the worker.

The type of relationship with an independent contractor, is that the business principal will not have 'total control' over the work being undertaken by an independent contractor.  The contractor is responsible for his/her own performance, and the supply of tools, equipment, devices and materials to the job site.

Another very important test, as to whether a worker is an employee or a contractor, is how 'prominent' the worker figures in the organisational chart/structure for the business.  If the person is branded as part of the organisation, it would probably be difficult to argue that the person is not an employee.  If they are a contractor, they should be retaining their own identity.

Some years ago, the Australian Taxation Office introduced an 80% rule, as a way of trying to regulate the deductions for PAYG tax, but that is not the prime determination of Fair Work Australia.

In a recent court case, the Fair Work Ombudsman claimed a 'sham contract'.  The Ombudsman claimed the 'people' were employees and not contractors.

Fair Work Australia has the right to prosecute 'employers', and they did so in this case, on the basis that Fair Work Australia alleged the persons were not contractors and that they were employees.  The court found that the 'people' were not contractors but employees, and fined the business $170,000, and the company director who was responsible for the engagement of the persons, $28,000.

Fair Work Australia targets various industries from time to time, and may demand to see employment records.  Complaints can also be made to Fair Work Australia by disgruntled employees, past or present.

The message in this case is, employers need to be very careful in hiring people who are going to be regularly involved with the business, and who will be accepting directions from the business' management relating to the performance of their duties.  Management should ensure that proper systems are in place, to ensure that a potentially 'dubious engagement' is referred to senior management before being finalised.  Questions might relate to:
•    The 'person's' estimated working hours per week.
•    The control and reporting obligations of the 'person'.

If the 'person' is being engaged on similar terms and conditions to those which relate to a 'normal employee', then senior management should seriously consider whether it's worth the risk to engage someone as a 'contractor'.

The employer could also face action from the Australian Taxation Office, because PAYG tax has not been deducted, and superannuation has not been paid.  This is a real area of 'risk management' for businesses.  It is advisable that, any person engaged under independent contractor agreements, should be reviewed every six months, to ensure the engagement process is appropriate for the work being undertaken by the 'person' during that time.

When engaging a 'person', who you believe is a legitimate contractor, it is very important to document the contractual obligation; who will the 'person' report to, what are the contract milestones and how are they going to be paid.  Proper written documentation is also required between the employer and the contractor's entity, which clearly identifies the commercial agreement that has been reached.

Another area that the employer should be monitoring closely is the situation where a decision is made to terminate an employee, and then engage that former employee as a contractor within a reasonably short period of their termination as an employee.  This is a high-risk area that needs to be closely managed and scrutinised to ensure the person being engaged as a contractor is a legitimate contractor.  Does the new contractor have:
•    public liability insurance;   
•    come and go as they wish;
•    sickness and accident insurance;   
•    report as a contractor;
•    professional indemnity insurance (if appropriate);   
•    milestones that are achieved; or
•    supply own tools, computers and research materials;   
•    are they being supervised on an hourly basis, as if they were an employee?

If you have any questions relating to the engagement of an independent contractor, please do not hesitate to contact us.

 Cashflow Management Is Important for Success

Cashflow management is very important for the ongoing success of the business.  It need not be complicated, but it is a way to increase the value of the business.  Cashflow management can be divided into three categories.

1.    Operating Activities - What do you do in your business?  You make a product or supply a service, and sell it.  You send a tax invoice (perhaps a statement), and ultimately get paid by your debtor?  How you manage that activity is important in trying to shorten the time it takes to receive your money.  If there is a delay in sending the tax invoice or the statement, or if you do not follow 7.5*20.6
up debtors, there will be a delay in payments being made.

Dun & Bradstreet recently indicated that debtors' days outstanding in Australia is 55 days.  This highlights a major reason for improving the management of debtors, which is an intricate part of cashflow management.

2.    Investing Activities - What assets does the business own that are not being used?  Why not prepare a list of the surplus assets you have, which might be plant and equipment, vehicles, properties, stock, or fixtures and fittings.  Why not have a 'fire sale', and turn that unutilised asset into cash which could be deposited to the bank account to improve the business' cashflow.

The key strategy is not to have too much money tied up in unproductive assets.

3.    Financing Activities - When you purchase products or services, do you negotiate payment terms with your creditors and pay your creditors according to the negotiated payment dates?  In some businesses, payments are made earlier than what has been negotiated.  Why?

In other cases, you need to be mindful of payments being made well after the creditor's stipulated terms.  What would happen if the creditor suddenly demanded that payments be made by the stipulated date?  Could you pay the arrears?  What would happen if your supplier cut off supply?  Can you purchase similar goods and services from other suppliers?

What is the cost of your overdraft and term loans?  Could you have a conversation with your bank manager and negotiate lower interest rates?  If you don't ask, you won't know.

Does the business need to spend capital expenditure at this particular time? Would it be better to lease an asset rather than pay cash upfront for the purchase of an asset that will be used over the next four or five years?

Whole Business

Cashflow is a 'whole business' operation.  Money can be saved by improving terms and conditions of debtors monitoring.  Money could also be saved by analysing the investment in stock and work in progress, and conducting 'fire sales' to dispose of assets that are not being used.  Avoid major capital expenditure, perhaps lease an asset rather than paying cash up front.

The concept of 'whole business' operation for cashflow management is that the sales and stock team and factory foreman should be involved in reviewing the cashflow situation of the business on a weekly basis.  In this way, the team can be aware of the problems relating to the debtors not paying on time, stock turn being too low (thus meaning that there is excess investment in stock), invoices not being raised for progress claims each month for work in progress (thus leading to an increase in the investment in work in progress), and creditors' invoices being paid early rather than waiting to the agreed payment date.  It is also important that the whole team has an appreciation of what might be the effect, if the business is paying creditors on a delayed basis, as to what the position will be if the creditors demand payment in accordance with their stipulated payment terms.  Where will your business find the money to urgently pay the creditors?

If you would like our assistance on reviewing your business' cashflow management, please do not hesitate to contact us.

 IMPORTANT: Appointments & Phone Calls

We expect clients to book ahead if they would like to access a staff member so we can schedule our appointment rooms and also to assist us in providing the highest level of service to all clients. That is, unexpected interruptions are detrimental to the service being provided to the client we are working on at that time.   

If you need an appointment please ring 03) 5722 9595 or you can request an appointment via our website. Otherwise we are more then happy for you to leave your work with us and should we have any queries we can contact you.

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