The way businesses operate has changed significantly since the days of having all employees in-house, to the point where it’s no longer unusual for companies to hire a range of external contractors for myriad of tasks, on short term, long term, or even indefinite contracts.
While the flexibility is advantageous for both businesses and contractors, it’s important that companies ensure the line between employee and contractor is well defined, to ensure any external audit obligations are satisfied.
Currently, large proprietary companies must lodge a financial report and director’s report annually, and accounts must be audited as per Chapter 2M of the Corporations Act 2001.
A company is defined as ‘large’ if it meets at least two of the following criteria;
- Consolidated revenue for the company and any entities it controls is $50 million or more for the financial year
- Consolidated gross assets for the company and any entities it controls are valued at $25 million or more for the financial year
- The company and any entities it controls has 100 or more employees at the end of the financial year
While the Corporations Act 2001 offers clear employee criteria, it falls short of offering a definition on who is considered an employee and/or contractor, which means it’s up to companies to ensure they’re familiar with the common law definition.
While the difference between employee and contractor may seem obvious to some, it’s vital that companies frequently re-visit the definition in the context of their own staff, especially if they’re already meeting one of the other two ‘large company’ criteria.
Potential gray areas can emerge for a number of reasons including length of employment, tasks and responsibilities of a position, or failing to have a clear contract in place.
In 2022, the Australian High Court heard two appealswith both cases looking at whether workers were employees or independent contractors.
In the case of ZG Operations Australia Pty Ltd v Jamsek The High Court ruled two truck drivers were not employees despite hearing details of an ongoing regular relationship with a company over 40 years, based on the written terms of the contracts signed by the drivers.
However, in the case of Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltdthe High Court ruled a British backpacker was an employee of a labor-hire company, and not a ‘self-employed contractor’ as his contract stated the company was entitled to control who the man worked for, and that he must follow the instructions of a client he was assigned to.
It’s a timely reminder of the need for companies to ensure both employees and contractors agreements are clearly defined, to ensure there is no doubt on how many employees are working for the business at any one time.
As mentioned, as soon as a company meets at least two of the three criteria for a ‘large company’ definition, the company will have to lodge annual audited financial statements with the Australian Securities and Investments Commission.
Failing to lodge required audited accounts can result in penalties, with ASIC prosecuting 15 companies in the six months to 31 December 2022, for failing to lodge financial reports.
Simply not being aware of the total number of employees is not a valid excuse for non-compliance, and could potentially result in significant fines for your company.