Is Your Overseas Contractor Actually Your Employee?

The Fair Work Commission (FWC) has determined that a Philippines based ‘independent contractor’ was an employee unfairly dismissed by her Australian employer.

Like us, you are probably curious how a foreign national living in the Philippines, who had an ‘independent contractors’ agreement with an Australian company, could be classified as an Australian employee by the FWC?

The case of Ms Joanna Pascua v Doessel Group Pty Ltd highlights the issues Australian businesses face when working with overseas contractors.

What underpinned the Fair Work decision?

Ms Pascua worked under contract as a legal assistant, investigating credit claims on clients’ behalf. She worked for a specialist credit repair legal firm based in Queensland between 21 July 2022 until 20 March 2024. She worked from home in the Philippines, using her own computer, a firm email address and a PBX phone system.

The contract described the relationship as one of an independent contractor, with the standard clauses that the firm will not be liable for any other benefits or remuneration other than what was specified, as well as for taxes, worker’s compensation, unemployment insurance, employer’s liability, social security or other entitlements. Ms Pascua was also liable if something went awry with her work.

For her work, Ms Pascua was paid $18 (AUD) per hour salary all-inclusive as a full-time employee. This was capped at 8 hours per day, 5 days per week, excluding breaks. Ms Pascua used a firm supplied pro forma invoice to bill 83 weekly invoices at the full hours allowable and 28 other invoices for lesser amounts.

For the first 12 months of her time with the legal firm she was supervised by a solicitor. Within 12 months, her work was unsupervised. In the last 7 months of the relationship, she was the only person conducting investigative work.

To determine this case, the FWC stepped through the contract clause by clause to evaluate whether it suggested an employment or independent contractor relationship. They also looked at how these clauses were brought into effect.

In this case, the FWC determined Ms Pascua was an employee. The contract indicated that she was required to perform work ‘in the business of another’, instead of for her own enterprise.

The contract suggested that:

• Despite being described as a paralegal, she did not appear to be working in a distinct profession. Her contract outlined administrative tasks and ad hoc duties.
• The contract did not enable her to assign the work to another.
• While there were daily targets in the contract, a result that she was expected to achieve, these tasks referenced weekly requirements and often could be carried over, suggesting ongoing work.
• There was a level of control exerted by the legal firm over how Ms Pascua performed her work. Factors suggests she was not running her own enterprise: the PBX phone system, the email address, the level of direction.
• Despite being invoiced by Ms Pascua, the hourly rate described in the contract was that of a full-time employee. The invoices were to be forwarded weekly for the previous week’s work. The FWC also noted that the most likely rate for Ms Pascua as an employee would be $30.95 per hour. The FWC noted that genuine independent contractors would normally specify a fee that was greater than the minimum wage.

The FWC found that describing the arrangement as an independent contractor relationship did not reflect the true nature of the relationship.

When it came to the clauses excluding employee related matters such as the payment of income tax & workers compensation, the FWC noted that the statements in the contract about meeting obligations have little weight in determining the true nature of the relationship.

The new definition of employee and employer:

Since 26 August 2024, constitutionally covered businesses generally use the ‘whole of relationship’ test to determine whether a worker is an employee or independent contractor under the Fair Work Act, determined by ‘ascertaining the real substance, practical reality and true nature of the relationship between the individual and the person.’

This change helps to ensure that clever drafting of a contract alone can not be used to define an independent contractor arrangement.

Relevant factors can include the level of control over how work is performed, whether the worker can delegate their work, how they are paid, who provides the tools and equipment and whether the worker is operating their own business.

There are some exceptions. For example, certain workers earning above the contractor high income threshold can choose to opt out of the whole of relationship test, in which case a different test applies.

What does this decision mean for employers?

The FWC’s decision in this case highlights how cautious employers should be about the nature of employment relationships. Just because you label an arrangement as an independent contractor, does not mean it is. Getting the classification wrong can expose a business to significant consequences, including potential liability for employee entitlements and other employment obligations.

This is particularly important when engaging workers overseas. Working from another country does not automatically prevent a worker from being considered an employee under Australian workplace laws. Whether Australian employment laws apply will depend on the circumstances of the relationship.

Tax obligations and international workers:

Let’s say you want to engage the services of a non-resident individual.

Contactor or employee?

The first step is to ensure that the arrangement is correctly classified.

Whether someone is an employee or independent contractor depends on the circumstances and the applicable test, so the label used in the contract alone is not enough.

It is also important to remember that the tests used for employment law, tax and superannuation purposes are not necessarily the same.

Implications of an employment relationship:

If the worker is classified as an employee and is a foreign resident for Australian tax purposes, whether their employment income is taxable in Australia will depend on factors including the source of the income and any applicable Double Tax Agreement (DTA).

Pay as you go (PAYG) withholding should not generally apply if:

• The worker is a non-resident employee, and
• Is only deriving foreign sourced income.

PAYG withholding obligations will depend on whether the income is assessable in Australia and the circumstances of the employment. As tax treaties and individual circumstances can affect the outcome, businesses engaging employees overseas should seek advice from their Aintree Group adviser about their specific arrangement.

Superannuation obligations:

Superannuation guarantee generally does not apply to a non-resident employee where the work is performed entirely outside Australia. Different rules can apply where an Australian employee is temporarily working overseas, so the individual circumstances should be considered.

It will be important to get specialist advice in the employee’s country of residency to determine whether there are any obligations.

Tax implications of independent contractors:

If the worker is a genuine independent contractor and a foreign resident for Australian tax purposes, the Australian tax and withholding implications will depend on factors including whether they derive Australian-sourced income, the nature and location of the services performed and whether an applicable DTA affects the outcome.

PAYG withholding should not apply as long as:

• The contractor provides an ABN; or
• A DTA prevents the income from being taxed in Australia; or
• The contractor does not carry on an enterprise in Australia. If the contractor performs all their work overseas, they don’t have any physical presence or employees in Australia, then it might be possible to argue that they don’t carry on an enterprise in Australia.

Taxable Payments Annual Report (TPAR)

Depending on the services your business provides, payments to contractors may also need to be reported to the ATO through a Taxable Payments Annual Report (TPAR). Businesses should check whether the TPAR rules apply to their industry and the payments they make to contractors.

Will a foreign worker mean your business is carrying on a business overseas?

By having foreign workers, there is a risk that the business will be considered to be carrying on a business through a permanent establishment in the relevant foreign country. This could potentially expose an Australian business to tax in the foreign country on some of its business profits.

A permanent establishment is usually a fixed place of business where the enterprise operates, either fully or partially. The definition of a permanent establishment and the applicable tax treatment can vary between countries and under different DTAs, so advice should be sought for the relevant jurisdiction.

Engaging overseas workers can create employment, tax and superannuation obligations both in Australia and overseas. Getting the classification and structure right from the outset can help businesses understand their obligations and reduce the risk of unexpected liabilities.

If you engage overseas employees or contractors and are unsure of your obligations, contact our team for greater certainty and expert advice.

Want individual advice from one of our business advisers? Contact our team today!

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your business adviser.