ANDREW: Over the past few days, I’ve been invited to provide further commentary on my recent post about Employer of Record (EoR) arrangements and on-hire contracts with incorporated workers. Some of the questions raised by readers have been very insightful. So, I’ve asked James to compile them and pass them through to me in this podcast.
OK. James, what’s our first question?
JAMES: In your post Employer of Record Arrangements: Not the panacea you were hoping for? you spoke about contracting with Incorporated Worker Entities (IWEs). Could you clarify what you mean by an Incorporated Worker Entity?
ANDREW: Sure. An Incorporated Worker Entity, or IWE, is typically a proprietary limited company through which a worker conducts a small business. So, for example, a person might incorporate a company to supply, say, ITC or project management services, with the person performing the actual ITC or project management work on behalf of the IWE – the Incorporated Worker Entity.
JAMES: So, are the individual workers the employees of the Incorporated Worker Entity?
ANDREW: Not always. They can be the employees of their IWEs. But they can work in other capacities as well. For example, they could be engaged as independent contractor consultants to their IWE. Or they might be a working director and be remunerated via directors’ fees. Or they could even be a shareholder in a family run business and be remunerated through dividends on their shareholdings. There are probably other methods as well, involving various types of trusts and partnerships.
JAMES: So, the Worker Entity supplies the services and the individual worker performs the work, right?
JAMES: How does that work in an on-hire situation where the on-hire firm and its client might be a bit fussy about who is actually going to do the work?
ANDREW: It’s common in that setting for the contract between the Worker Entity and the on-hire firm to include a nominated worker clause. It’s a bit like the sort of nominated sub-contractor provision you might find in some commercial and works contracts.
JAMES: Could you include the nominated worker as a party to the contract between the Worker Entity and the on-hire firm?
ANDREW: You could do that. In fact, I used to draft on-hire IWE contracts that way back in the 1990s. The thinking back then was that it was a good way to tie up loose ends and keep control of the worker and of the IWE’s right of delegation.
But I stopped doing it around 2010, around the time of the commencement of the Fair Work Act, when I was asked to design an on-hire IWE template that framed the relationship as a genuine commercial relationship.
It seemed (well, it seemed to me at least) that it would be important to leave the engagement of the worker to the IWE – because the worker might have been remunerated by the Worker Enterprise as a working director, an independent contractor, employee, or a dividend receiving share holder.
Most on-hire IWE contracts of that period, which included the individual as a nominated party, ignored those distinctions and imposed obligations on the individual that could easily have been construed as the type of obligations typically owed by employees. I suspect that many still do.
JAMES: Would that be a problem?
ANDREW: Yes. I think so. The problem, of course, is that, where those obligations are owed to the on-hire firm, the arrangement is susceptible of being construed as one by which the on-hire provider, regardless of its arrangement with the Worker Entity, may have become the employer the nominated worker.
And since the High Court’s decision this year in Personnel Contracting, an on-hire IWE contract that includes the nominated worker might be even more susceptible to that construction if the obligations owed by the individual to the on-hire provider are treated as a “core asset” of the on-hire provider’s business that’s necessary to enable it to supply “compliant labour”to its clients.
So, my take on this is that it might be better, now, to leave the individual workers out of it.
It would still be possible to exercise proper control over the right to delegate. It’d simply be a matter of ensuring that the IWE could only delegate to approved workers, and establishing rigorous procedures for giving or withholding approval.
JAMES: OK. So, there could be some problems there. In your posts, you’ve spoken about “Employers of Record”. Could you clarify what you mean by an Employer of Record?
ANDREW: Of course. Well, an employer-of-record is simply someone who appears “on the record” as the employer of your workers, though they’re not the true employer. That’s to say, they don’t control the employment relationship in the same way that the true employer does; and the work which the employee performs is not dependent upon or subservient to them in the same way in which it is to the true employer. In this situation, the employee’s obligation to perform work will most likely be a core asset of the true employer rather than of the employer-of-record.
JAMES: So, what does an employer of record actually do?
ANDREW: Typically, it will handle payroll and will probably be the named employer in the employment contract. It will issue pay slips and pay summaries and remit tax and super. It might arrange for insurance and handle a range of administrative tasks for the true employer. It might, for example, perform those tasks as an agent for the true employer or employers in a group of related entities trading as a corporate group. That would be quite a common arrangement.
JAMES: But you say it’s not the true employer?
ANDREW: That’s right. In Australia, we don’t have a concept of joint employment or co-employment. There’s only one employer in any employment relationship. So, we can understand the employer-of-record as being just the nominee “on the record” for the true employer.
JAMES: How do you tell the difference between the employer of record and the true employer?
ANDREW: You look at the totality of the legal rights and obligations that exist between the parties. Whilst your contract (if you’ve got one) will usually be the primary focus of your inquiry, the New South Wales Supreme Court recently said, in March this year, that you don’t necessarily confine yourself to a consideration of the terms of the contract – even if it’s wholly in writing. The case was Spitfire Corporation v Aspirio. It seems to be a different approach from the way the High Court has said you go about determining whether a work relationship is one of employment or whether it’s one of independent contracting.
JAMES: You mentioned “payroll arrangements”. I wonder if we could now turn to the situation where a labour hire firm is appointing a payroll services provider…
What could go wrong when a labour hire provider engages a payroll services provider to pay its employee on the condition that the payroll services provider “must employ the individual,”
ANDREW: The first and obvious problem is that a contract that only says, “You must employ worker X” is not a contract that actually employs worker X. It’s only an agreement for you to do something. If you do employ worker X, then presumably there must be a contract somewhere that does that. And it would be that contract that’d be the chief guide in answering both the worker status question and the employer identity question.
JAMES: …and the labour hire provider’s worker is required to sign the agreement acknowledging that they are to be employee of the payroll provider?
ANDREW: If the worker is included merely to get signed up to various acknowledgements (such as of employment status or employer identity) then there’s the obvious problem that those acknowledgments might be nothing more than “labelling”. They may have little weight … except to the extent that they could evidence an attempt to avoid or to disguise aspects of the true work relationship.
And then because the worker’s obligations under such a contract (which we’ve already identified as not being the actual employment contract) are likely to be owed to the party that appoints the payroll services provider, rather than to the payroll provider itself, there’s a further risk that the obligations may be interpreted as signalling control by the appointing party (such as a labour-hire provider) that would be consistent with an employment relationship between the worker and the labour hire firm.
JAMES: Wow! Well, in the same situation what could go wrong if the worker was operating through their own Incorporated Worker Entity as a nominated person?
ANDREW: OK. So that type of contract contemplates that there would be four parties.
- the on-hire firm that appoints the payroll provider;
- the payroll provider itself;
- the Worker Entity; and
- the individual worker
Now what can go wrong … horribly wrong … is that a contract gets confused about who is doing what.
I’ve actually seen examples of contracts that confuse the payroll provider with the Worker Entity. The payroll provider supplies payroll and administration services, The Worker Entity provides the services that the on-hire firm’s client actually wants: like ITC services, project management services, engineering services, design services. That sort of thing.
The result can be an absurd arrangement by which the payroll provider apparently assumes the obligation to supply the services that the Worker Entity or the worker should provide.
Once you’ve got those sorts of problems, you can no longer rely on the contract as any sort of reliable guide to questions about who is the employer, or whether the work relationship is one of employment or independent contracting. And serious questions then arise about its enforceability.
JAMES: Well, that’s all the questions we have so far.
ANDREW: James, thank you for fielding those questions for us. I hope the answers have helped to clear up some of the confusion around this topic. If they have, be sure to drop us a line, and don’t forget to head across to the Australian & New Zealand Labour Hire Licensing & Regulation LinkedIn Group, where we can continue the conversation.
I’m Andrew Wood
Let’s talk again soon!