The Contractors Who Inadvertently Bankrupted Their Boss

So you thought contractors were a better option than employees?

A recent insolvency in Sydney makes compelling reading if you employ contractors.

A cleaning company engaged its workers via contract. (At this point it is important to understand that just having an ABN or merely saying you are a contractor does not make it so. In fact, even if a person agrees that they are a contractor this does not remove their rights if they are deemed to be an employee at some later point. This is a little complicated and worthy of another discussion in its own right, but for the purposes of this story, accept the premise for now.) The company terminated one of its contractors. The person concerned claimed he was owed superannuation and notice in lieu. The Directors of the company denied the claim and the contractor in question appealed to the ATO.

Subsequently the ATO conducted a superannuation audit (as they are obliged to do) and found that all of the workers were employees and that over $200,000 of superannuation was payable. As the company was unable to pay the superannuation debt the directors placed the company in liquidation (as they were obliged to do). The ATO issued a Directors Penalty Notice making the directors personally liable for the debt. The DPN could not be remitted as part of the liquidation process as the directors had failed to report the liabilities within three months of the appropriate reporting dates. This made the DPN a “lockdown notice” – this meant that the directors had zero recourse; they now owned the superannuation debt personally. The directors did not have the wherewithal to meet the $200K debt; bankruptcy appeared to be the only solution.

Interestingly, it is the opinion of the writer that if the Fair Work Office had been involved the liability could have gone much higher and may have been extended to include overtime, public holidays, annual leave etc. The additional issue of Workers Compensation is also a possible variable.

The nature of the relationship of an employee/contractor is defined by a “sum of the circumstances test”. In this numerous factors are evaluated and a decision is made based on all contributing factors. It is unwise to believe that one or two factors will decide the day.

In reality, it is highly likely that you can document your way to a contractual relationship in many cases. However, you need to understand that even if this is possible, it is absolutely crucial that the essence of the agreements is followed. It would be unwise to believe that a bit of upfront documentation will resolve your dilemma.

If you engage your workforce (even part of it) by contract, contact Warren Maris on 07-3483-0102 for a confidential discussion.