Independent contractors & incorporated workers: Hair-splitting, fact sensitive inquiries needed under new labour hire licensing laws

The position of independent contractors and incorporated workers under Queensland’s and South Australia’s new labour hire licensing laws is complex and warrants closer attention than it has received to date. Detailed, fact sensitive inquiries into supply arrangements are required; and there will be a lot of “hair-splitting” between now and the time, when these laws are eventually interpreted by the courts.

In this post, I’ll try to explain why; and highlight some of the issues that staffing agencies will need to consider if they are on-hiring independent contractors in either State and need to get on top of the new laws.

Different approaches

First off, there is a difference in approach between Queensland and South Australia – at the moment, at least. That may change, when Queensland finally gets round to making its regulations.

The difference in approach arises not so much from the definition of “worker”, which is essentially the same in both States, as from the way in which the two States have captured the type of supply that is considered to be a supply of labour hire services.

In Queensland, a person provides labour hire services if the person supplies a worker to do work for another person. That casts a very wide net. Queensland has not yet tried to explain what “supplies” means, or to qualify it in any way. It may do so in its regulations, which are yet to be published.

In South Australia, a person provides labour hire services if the person supplies a worker to do work for another person in and as part of that other person’s business or commercial undertaking.

The addition of those words is what makes the difference.

South Australia has been trying, with limited success, to explain what that means and has produced what has been described as quite possibly the longest explanatory note in any Act of Parliament – albeit a note that has virtually no legal effect!

South Australia’s use of the “integration test”

The integration test is most often used as a test to distinguish employees from independent contractors. An employee, and the work that an employee performs, is understood as being integrated into the employer’s business. It is performed in and as part of the employer’s business.

However, South Australia seems to be trying to use a form of the integration test (work is performed in and as part of the client’s business) to distinguish its concept of labour hire from a general contracting situation, where a worker performs the work in and as part of a different business (e.g, the plumbing business of a plumbing worker’s employer), or the worker’s own business (e.g. an I.T contractor’s own I.T. business).

The “plumber” example given in s.7 of the South Australian Act was its first attempt to explain what it has been trying to do.

The “plumber” example

Guy runs a plumbing business and has an employment contract with Tracey under which Tracey is paid to come to work each day at the plumbing business and be assigned work. Corey runs a grape growing business at which there is a problem with the plumbing. Corey enters into a contract with Guy to diagnose and fix the problem at the business and so Guy sends Tracey to Corey’s grape growing business to do the work. Guy does not provide labour hire services in sending Tracey to do work at Corey’s business.

The reason why Guy does not provide labour hire services is that Tracey performs the plumbing work in and as part of Guy’s plumbing business; not in or as part of Corey’s grape growing business.

The additional examples given on the South Australian website also go some way towards explaining what that State is trying to do. The I.T. examples may be helpful.

South Australia’s I.T. examples

A large retailer contacts an IT recruitment agency, requesting fulltime IT support for a big project. An IT consultant is provided to the retailer for 6 months. The consultant is paid by the recruitment agency and the retailer pays the recruitment agency directly. These IT consultants are part of the retailer’s work force for the 6 month contract and therefore the recruitment agency would need to be licensed.

Compare that with the example of where a licence is NOT needed in South Australia:

A law firm contacts an IT company about setting up their IT systems. After several discussions, the IT company is contracted to set up the law firms systems. The IT company uses its own IT consultants for 2 weeks. The IT company invoices the law firm at the conclusion of the work. These IT consultants are providing a specific service to the law firm under the direction of the IT company, as IT company employees.

Challenges posed

There are several difficulties with the South Australian examples of situations where a labour hire licence is not needed, in my view.

Supply through a staffing agency

The South Australian examples do not deal with a situation, where the worker is engaged or supplied through a staffing agency.

  • Tracey is simply the direct employee of a plumbing company.
  • The IT consultants are simply the direct employees (or independent contractors) of an I.T. company.
  • No example is given of a case, where Tracey is engaged as an independent contractor through a firm that is not a plumbing company, but is a staffing agency of some description.
  • No example is given of a case, where an I.T. consultant is engaged as an independent contractor and supplied through a staffing agency.

Those are serious omissions, because the examples given fail to address, directly, the very question that is most likely to be of concern to staffing agencies and to the workers and clients, who deal with them.

Can an independent contractor ever be supplied in the sense required by the S.A. Act?

On one view, a genuine independent contractor can never be “supplied” in the sense required by s.7 of the South Australian LHL Act, because a genuine independent contractor, acting as such, performs the work in and as part of his/her own business.

That presents South Australia with a problem, because it sets up an apparent inconsistency with LHLA(SA) ss. 7(3), which says that a person provides labour hire services “regardless of whether the worker is an employee”.

If that is supposed to indicate that independent contractors are included, you’ll immediately see how the problem arises. How can an independent contractor, who performs work in and as part of the worker’s own business, simultaneously perform the same work in and as part of someone else’s business?

South Australia appears to be trying to get around that inconsistency by saying  (in its I.T. consultant example) that integration into the customer’s work force, as distinct from integration into its business or commercial undertaking, might be enough.

To that extent, it could be trying to equate a work force to a business or commercial undertaking. Though that would be tricky because it may look, to some, like an attempt to stretch the meaning of the Act.

No example of supply of an incorporated worker

Neither do the examples deal with a case, where the worker is what in the UK is called, an incorporated worker.

RCSA calls these workers, On-hired Contractors (Incorporated). APSCo_AU calls them Pty Ltd Contractors.

What they’re called doesn’t matter so much as what they do; and how they structure themselves to do it.

  • In this instance, one has to look closely at the relationship between the worker, the worker’s incorporated entity and the staffing firm.
  • These relationships are set out in Fig. 1. below.

Pty Ltd Contractor Diagram

The arrangements between

  • labour hire agency, incorporated entity & principal (worker); and
  • incorporated entity, worker (principal) and labour hire client –

exhibit the triangular relationship, which the LHLA(SA) & explanatory materials identify as a “labour-hire” relationship.

This is so, regardless of any contractual relationship between the incorporated entity, the worker, and the labour hire client; and regardless of the intermediation of the labour hire agency – see ss.7(3)(b) and (c) of the LHLA(SA).

It therefore seems possible that, in some cases, both the staffing firm and worker’s incorporated entity may be involved in supplying the worker to the client to perform the work; and both may require a licence if, as a matter of fact, the work is performed in and as part of the client’s business or commercial undertaking.

Queensland

Although a late starter in addressing the shortcomings of its ambitious coverage, Queensland is starting to address the issue and has conducted a consultation about the exceptions that might be provided by its regulations. That consultation has now closed and we  await the outcome with interest.

However, it’s worth noting that Queensland is actively considering a limited exemption for those cases where the worker is a director or owner of their own business. That might not let the staffing agencies off the hook, if they’re on-hiring these owner/operator workers (incorporated workers); but it may provide some respite for the worker’s incorporated entities. And that would be welcome.

Of course, it begs the questions: “If Queensland is now thinking about the need for such an exemption, why has South Australia not dealt with it”; and “Are we yet to see more elements of the South Australian scheme unfold?”

So, it’s a case of wait and see. Hopefully, we’ll know the outcome well in advance of Queensland’s 16 April 2018 kick off, because the transition period is only 60 days.

What staffing agencies might now have to consider

The type of issues that staffing agencies might now have to consider in each case include:

How the worker is engaged and paid by his/her own incorporated entity

  • Is the worker engaged as an employee or as an independent contractor of his/her incorporated entity?
  • Is the worker paid for the work; or does the money reach the worker by some other means?
    • Does the worker work as a director and get paid a director’s fee?
    • Does the worker receive dividends as a shareholder, or distributions under a trust, instead?

Who the staffing agency contracts to provide the services (e.g.  I.T services)

  • Is it the staffing agency itself?
    • That is to say is the “staffing agency” really a services (e.g. IT services, engineering services, nursing services, cleaning services, fruit harvesting services…etc)  contracting company?
    • If so, does the “staffing agency” need a licence at all?
    • Even it it does not need a licence, does any sub-contractor, who supplies a worker to it need a licence?
    • If it has positioned itself as a services contractor, rather than as labour hire provider, is the attempted positioning borne out by the reality of the situation?
  • Is it the worker’s company; or the individual worker? The staffing agency needs to look closely at its method of engagement for this.
    •  Some methods engage only the worker’s entity and leave it to the worker’s company to secure the attendance and performance of the worker. These methods are probably more consistent with the notion that the worker is performing the work in and as part of the workers own business.
    • Some methods engage both the worker’s entity and the worker.  These may be more likely to tend towards a labour hire supply of the worker by the staffing agency. That is because the staffing agency will have an arrangement with the individual, who performs the work that may make the individual a worker of the staffing agency.
    • Some methods have only the worker as the services provider. The worker’s entity may act as a type of service entity or contract manager for the worker – handling payroll, the worker’s engagements and expenses, and co-ordinating arrangements between the staffing agency and the worker. These are more likely to involve both the staffing agency and the worker’s entity in a labour hire supply – in which case both may need a licence.

How  the worker operates when at work

This is going to require staffing firms to have a good grasp of the composition and structure of their clients’ work forces.

  • Do you know the boundaries of your clients’ work forces; or even how they are established?
  • Think about it. How many separate work forces might work at a hospital or community health service? Are they all business or commercial undertakings? Might some of them be operating under non-business or non-commercial government or NFP programs? Would that exclude them from the South Australian coverage?

Fact sensitive investigations likely to be needed

Unless South Australia creates a regulatory or administrative exemption for incorporated workers, staffing agencies are going to have to conduct fact sensitive investigations into the arrangements, which they have with their incorporated workers and into the arrangements; which those workers have with their own companies.

Essentially, that involves a hair-splitting, case-by-case investigation in which the staffing agency would examine its own documentation and also examine the documentation of the arrangements that exist between the worker and his/her own company.

My guess is that, in many cases, that documentation will be scanty or ambiguous.

They are also going to have to undertake fact sensitive investigations into the structure and composition of their client’s businesses, commercial undertakings (and work forces) to work out if the individual workers are integrated into any of them – i.e. whether they are supplied in the sense that they perform their work in and as part of those businesses, commercial undertakings, or work forces.

And they are going to have to make judgements about whether the work forces that their workers augment have the necessary business or commercial character.

All of that might not be as easy as it sounds. (Did it sound easy?)

In the JP Property Services Case, it required a Supreme Court decision to determine whether after hours cleaners were integrated into the workforce of  the supermarket, where they worked. The Court held that they were not, because they worked after hours. The result would have been different if they had worked to augment the supermarket’s cleaning workforce during business hours – cleaning up spillages etc!

That’s what I mean by “fact sensitive inquiries”. That’s the level of “hair-splitting” that will be required to make sense and apply these laws.

As a lawyer, I can look forward, with professional interest, to the type of arguments that will be had; but I don’t envy the businesses or the workers, who are going to have them and will now have to carry the burden of a legislative scheme that shows the signs of having been rushed and poorly thought through in the detail of its application.

Man with Magnifying Glass (2)

 

Andrew C. Wood

 

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