Lessons for Labour Hire Providers: JP Property Services Pty Ltd v Chief Commissioner of State Revenue (2017).

Queensland has passed, and South Australia is considering, labour hire licensing laws that apply to labour hire providers, who supply workers to another person to perform work.

Neither the Queensland nor the South Australian legislation develops the notion of what it means to “supply a worker”. That notion remains problematic because workers are not mere commodities that can be supplied in any ordinary sense of the word.

What has been missing from the legislative developments in Queensland and South Australia has been a detailed legal analysis of the rights that are exercised; the obligations that are triggered; and the effects that are created whenever a so-called “supply” takes place.

In this article, I draw on some of the legal analysis that has taken place when courts have tried to give meaning to similar expressions contained within payroll tax legislation.

In particular, I look at the recent New South Wales decision of JP Property Services Pty Ltd v Chief Commissioner of State Revenue [2017] NSWSC 1391 (12 October 2017) and examine the extent to which the reasoning of the court in that case might provide useful insights into the direction of legal argument and the nature of the “fact sensitive enquiries” that will be necessary when applying the labour hire licensing legislation.

Close up 0370JP Property Services Pty Limited v Chief Commissioner of State Revenue [2017] NSWSC 1391 (12 October 2017) is a recent decision of the New South Wales Supreme Court, which might hold some important lessons for labour hire providers and for the state governments that have introduced, or are contemplating, labour hire licensing based upon the “supply a worker to another person to do work” formula.[i]

The decision provides some good insights into the direction of legal argument and the nature of the “fact sensitive enquiries[ii] that are likely to be necessary to establish whether a labour hire provider does actually “supply a worker to another person” so as to be caught by the licensing requirement.

It is important for the distinction that it makes between labour-hire and workforce contracting.[iii] So, it is worth a closer look.

The issue

The issue in JP Property Services was whether after-hours cleaning services contracts, which were entered into between JP Property Services and Franklins (and its other clients) were “employment agency contracts” within the meaning of the Payroll Tax Act 2007 (NSW) (PTA) in circumstances, where JP Property Services both used its own employees to perform the work and supplemented its workforce by engaging sub-contractors as either natural persons (individuals) or corporations.

The Commissioner for State Revenue assessed the contracts as liable to tax and issued assessments for $340,000 including penalty tax.  JP Property Services challenged the assessments and was successful in having them set aside.

The decision turned upon the meaning of the expression, “employment agency contracts” as defined in the PTA.

Definitions

The relevant definition of “employment agency contracts” appears in s. 37(1) of the PTA. It is worth noting that the same provision appears in s.13G of the Queensland PTA[iv] and in s. 37 of the South Australian PTA.[v]

Those provisions state:

…for the purposes of this Act, an “employment agency contract” is a contract, … under which a person (an employment agent) procures the services of another person, (a service provider) for a client of the employment agent.

A tripartite arrangement

As you can see, the definition contemplates a tripartite arrangement involving agency, worker and client.

Comparison with labour hire licensing definitions

Let’s reduce that a little to get a sense of what an “employment agent” is, or does, under the PTA so that we can make some comparisons with the Labour Hire Licensing Acts (LHLAs).

Using the same definition, we can say that:

…an employment agent procures the services of another person for a client of the employment agent.

Now let’s set that opposite a paraphrased meaning of “labour hire provider” under the Queensland and South Australian LHL legislation to check for similarities and differences.

PTA Labour Hire Licensing Acts
…an employment agent procures the services of another person for a client of the employment agent. A labour hire services provider supplies, to another person, a worker to do work.

Both definitions use the expression “another person”. But it is clear that they are referring to different parties in the agent/worker/client triad.

To get a better look at these definitions, side-by-side, we need to adjust for that difference. We can do that by substituting the expression, “worker” for the expression, “another person” where it appears in the PTA definition.

Doing that, the side-by-side comparison now looks like this:

PTA Labour Hire Licensing Acts
…an employment agent procures the services of a worker for a client of the employment agent. A labour hire services provider supplies, to another person, a worker to do work.

We could continue to equate the definitions further; however, this is perhaps enough for present purposes, as it will allow us to focus upon the similarities and differences.

Similarities and differences

Viewing the definitions in that way, we can observe the following:

  1. Both definitions involve an agent/worker/third-party triad;
  2. Both definitions involve the agent’s doing something in relation to the worker for the third party’s benefit;
  3. Both definitions view the third party as being the “target” or “destination” of the procurement of the worker’s services or the supply of the worker, as the case may be;
  4. The third party under the PTA definition is always a client. That need not be so under the LHLA definition;
  5. The LHLA definition speaks in general terms about a worker being “supplied” without saying how that is done.
  6. The PTA definition is more specific about how such a “supply” might be brought about – it is brought about by the agent “procuring the services” of a worker “for a client”.
  7. The LHLA definition speaks in general terms about the worker “doing work”. The relationship between the third party and the worker can be conceived of as an intermediated work relationship;
  8. The relationship between a third party and the worker under the PTA definition can be conceived of as a procured services relationship;
  9. Once allowance is made for the inappropriate use of “supply” language in relation to persons[vi] in the LHL legislation, there may be little practical difference between “procuring the services of a worker” and “supplying a worker to do work”.
  10. Perhaps, however, “procuring the services” can include a wider range of activities and allow for a wider range of relationships between agent and worker than is contemplated by a “supply”. If that is right, supplying a worker to a client might be just one means of procuring the services of the worker for the client.

An additional obligation under the LHLA

Though it is not apparent from the definition, it should also be noted that “worker”, under the LHLA, has a restricted meaning due to the provisions of s. 8, the effect of which is that a person (an individual) is only a worker for a provider if there exists between them an arrangement by which the provider may supply the worker to the third-party to do the work AND the provider is obliged to pay the worker in whole or in part for the work.

The LHLA says nothing about the nature or source of that “obligation”. Presumably, it must be an obligation that would be recognised by a court and something more than a mere hope or expectation.

Presumably, the obligation must be specific to the payment due to the worker and should not be confused with the obligation to pay the labour hire provider for the labour hire provider’s services.

Usually, such an obligation to pay a worker would arise out of a work/wage or a work/remuneration bargain made between the labour hire provider and the worker. However, it might also be sourced in arrangements reached with the third-party such as under a payroll or escrow payment scheme.

Need for a fact sensitive analysis

Despite those similarities and differences, the application of both definitions is likely, in the language of the NSW Supreme Court in JP Property Services, to:

 …require careful attention to both the service and the business of the [third-party] to whom it is being provided. It involves fact sensitive analysis of each of the service and the business and of the connection between the two.[vii]

Analysis

With that in mind, it might be helpful now to look at how the court in JP Property Services addressed the issue.

Procure and supply

One of the first things the court had to decide was what the expression “procures the services” entails. A similar issue will arise in respect of the “supply” necessary to bring a person within the LHLA definition of labour hire provider.

In JP Property Services,[viii] the court followed what had earlier been said in Freelance Global Ltd v Chief Commissioner of State Revenue,[ix] namely that:

…procure means more than facilitate or enable and requires that the employment agent cause the services of a … worker … to be provided to the employment agent’s client, with the expenditure of care or effort by the employment agent.

Transposing that into the labour hire licensing context, one might say that a labour hire services provider “supplies” a worker, when the provider expends care and effort in causing the services of the worker to be provided to the third person.

That accounts for what might be involved in a “supply”. There next arises an issue about the destination or target of the supply.

Destination or target of supply

In JP Property Services[x] the court cited with approval what White J had said in UNSW Global Pty Ltd v Chief Commissioner of State Revenue,[xi] namely that the destination or target is reached, when the provider “procures the services of [the worker] in and for the conduct of the business of [the third-party]”. (My underlining)

This is quite different from the situation, where the provider utilises the worker in its own business to provide services that are merely “for the benefit” of the third-party.

At para. 72 Kunc J developed this idea further, saying:

  1. Applying UNSW Global, I conclude that a contract … will be an [Employment Agency Contract] … if the services are procured “for a client of the employment agent” in the sense that they are procured in and for the conduct of the business of the employment agent’s client. That will be determined by asking whether or not the individuals provided by the employment agents comprise, or are added to, the workforce of the client for the conduct of the client’s business. Adopting White J’s language: are the individual’s services provided to help the client conduct its business in the same way, or much the same way, as it would through an employee, or are they services which, although provided for the client’s benefit, are not provided by the service provider [worker] working in the client’s business? (My underlining and emphasis).

Findings

In JP Property Services the court found that the contracts which JP Property Services entered into with Franklins and its other clients were not employment agency contracts. They were for after-hours cleaning services that were merely incidental to Franklins business.

At para 79, Kunc J observed:

…they are not in or for the conduct of Franklins business… In providing the services I am not satisfied that the [workers] are working in Franklins business.

The Commissioner for State Revenue advanced an argument that the cleaning services were necessarily a part of Franklins’ business in so far as they were required to comply with provisions of the Food Act 2003 (NSW). The Court did not accept that argument. At paragraph 86, his Honour said:

… a service performed to enable a client’s business to comply with its legal obligations need not be provided by someone working in the client’s business. It remains a factual rather than legal question. Putting it another way, it does not necessarily follow as a matter of abstract principle that in every case a person providing a service which enables business to comply with the legal obligation must be working in the client’s business as opposed to providing a service for its benefit. In this case the fact that JPs or the [workers] services allowed Franklins to comply with its legal obligations under the Food Act does not detract from the court’s factual characterisation of such out of hours services as ancillary or incidental to Franklins’ business.

Volatility of the fact sensitive inquiry

The volatility of the fact sensitive enquiry that his Honour undertook is perhaps best illustrated at para. 80, where his Honour was comparing the provision of after-hours cleaning services with the hypothetical supply of spillage clean-up services provided during shopping hours.

His Honour observed, in passing, that:

…if JP had contracts to supply such a cleaning service during the hours the supermarket was open to the public, then such contracts would be [employment agency contracts].

Lessons

JP Property Services demonstrates that, in the absence of well-developed statutory definitions, the Court will try to give legal meanings to lay expressions such as “procure the services of a worker” or “supply a worker”. It will do so by developing tests that examine in detail, and on a case-by-case basis, the precise relationship that exists between the provider, the worker, and the client or third party.

The case appears to be developing a line of authority, which suggests that a key test to apply, when examining that relationship is to ask:

Are the individual’s services provided to help the client conduct its business in the same way, or much the same way, as it would through an employee; or are they services which, although provided for the client’s benefit, are not provided by the [worker] working in the client’s business?

Business integration is problematic

The notion of working in the client’s business is problematic from the standpoint of the on-hire supply of independent contractors working under Odco type arrangements. That is because independent contractors work in their own businesses.

If the target of the integration is to be the client’s business, there are some hard proprietary boundaries to be penetrated before a supply can be said to take place.

Moreover, integration into a business or (commercial) undertaking – following s.7 of South Australia’s Labour Hire Licensing Act 2017 and cl.7 of the Victorian Labour Hire Licensing Bill 2017 – would seem to have the unintended consequence of excluding from the scheme any supply to a non-business sector – e.g. government, not-for-profit and consumer/domestic. There does not seem to be a lot of point in that given that the supplier would still have to be licensed if supplying to business or (commercial) undertakings.

Is a workforce integration test closer to the mark?

However, the cases do not have to be read as requiring an application of the integration test in that way.

A better view, in my opinion, is that the proper target of integration for a supply to take place is not the business or undertaking per se; but rather the workforce (adopting the terminology of White J in UNSW Global) that is utilised by the client or other person. The boundaries of the workforce will often be more permeable than those of the business and will be elastic enough to contain a wider range of work relationships – not necessarily limited to employment.

If the services are provided to help the client conduct its business or undertaking or augment its workforce in much same way as it would through an employee, there will likely be a “procurement” of the worker’s services sufficient to bring the arrangement within the “employment agency contract” definition for the purposes of the PTA.

It seems arguable, in the absence of any other or better test, that the same answer would suggest that there is a relevant “supply” of a worker for the purpose of meeting the “labour hire provider” definition under the labour hire licensing legislation.

However, if the work which, although performed for the client’ benefit, is not performed by the worker working in the client’s business or (commercial undertaking, or (more broadly) as part of the client’s workforce, the arrangement will not flow from an “employment agency contract” under the PTA; and, arguably, it might not establish the fact of a “supply” of a worker to another person that is necessary to bring the supplier within the coverage of the labour hire licensing legislation. 

One thing is certain – there are bound to be arguments about who is and who is not a labour hire provider under the LHL legislation. Those arguments will turn on whether the fact of a “supply of a worker” (whatever that might mean) can be established in each case.

JP Property Services suggests one test that might prove useful. Beyond that, it gives us a clear indication of the type of subtle distinctions and refined arguments that we can look forward to in the lead up to the commencement of the labour hire licensing laws.

I’m looking forward to them already… and not forgetting to keep an eye out for any guidance material, which the regulators might publish about what they think the labour hire licensing laws might mean. I hope we get to see some of that before too long!

 

Andrew C. Wood

 

[i] See Labour Hire Licensing Act 2017 (Qld) s. 7(1); Labour Hire Licensing Bill, 2017 (S.A.) cl. 6(1).

[ii] JP Property Services per Kunc J at para [75].

[iii] Workforce contracting is a type of employment contracting service, where the provider uses its own workforce, or an auxiliary workforce, to meet the requirements of a contract that it has with its clients to supply other services such as cleaning services, harvest services, trolley collection services, IT services and so on. Under the U.K. Gangmasters (Licensing Act) 2004 s. 4(4), it is recognised as a use form gangmastering model that does not involve the supply of a worker. Compare s. 4(2) for supply forms of gangmastering.

[iv] Payroll Tax Act, 1971 (Qld).

[v] Payroll Tax Act, 2009 (S.A.).

[vi] Keeping in mind that “labour is not a commodity” (Philadelphia Declaration, 1944); and that “no employee is an asset in the employer’s balance sheet to be bought and sold”- see: Noakes v Doncaster Collieries Ltd [1940] AC 1014; Minister for Employment and Workplace Relations v Gribbles Radiology Pty Ltd [2005] HCA 9; (2005) 222 CLR 194 per Gleeson CJ, Hayne, Callinan and Heydon JJ. See also, Wood, A.C. (2017) “Mind your Language!”, The H.R. & Recruiters Casebook https://recruiterscasebook.com/2017/05/25/mind-your-language/ accessed 21 October 2017 at 11.42 AM.

[vii] Per Kunc J at para [75].

[viii] At para [46].

[ix] [2014] NSWSC 47 per White J at para [115].

[x] At para [51].

[xi] [2016] NSWSC 1852 per White J at para [62].

2 thoughts on “Lessons for Labour Hire Providers: JP Property Services Pty Ltd v Chief Commissioner of State Revenue (2017).

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