By Kathy Li
There is a practice in the labour hire (labour hire/on hire) industry where labour hire organisations engage external payroll companies to facilitate payment to their contractors. In some circumstances, when these arrangements are put in place, a contract is entered into between the parties that purports to make the people sourced and placed by the labour hire organisation employees of the payroll company.
A payroll company signing a contract stating certain people are their employees does not make them their employees. A person cannot contract out of their legislative entitlements. This means that if a person who is clearly a worker of one organisation signs a contract to say they are the worker of another organisation, it in no way severs the employer/employee relationship with the first organisation. The true employer/employee relationship will always be revealed by the facts and/or behaviours of the parties.
A ruling by the ACT Government in 2017 outlined the factors they considered in their determination that payroll organisations are not the employers of workers sourced and placed by labour hire organisations.
Ruling by the ACT Government 2017
We have considered the entire circumstances leading to the arrangements entered into between the labour hire business and the payroll company, and do not consider the individuals to whom the payroll company are providing payroll services are for the purposes of the Act, workers of that company.
The reasons for this included:
- The payroll company has no control over how or when the work is to be performed;
- The payroll company has no control over where/with whom the employee is placed, this being the decision of the labour hire business;
- The worker personally performs the work for the host employer;
- The worker does not perform work for the payroll company but is engaged by the labour hire business;
- Hourly and daily rates of pay are determined by the labour hire business, not the payroll company;
- The payroll company pays the workers’ wages;
- Then seeks reimbursement from the labour hire company; and
- Contract wages for the worker are paid by the host employer direct to the labour hire company.
The right to suspend or dismiss the person engaged was also raised in the ruling provided by the ACT Government as an important factor in considering who the employer is.
This ruling was based around five tests relating to the employer/employee relationship that have been developed at common law. Our article on the five tests to determine if someone is an employee or contractor provides outlines these tests.
Control
The first test that is usually looked at is that of control.
In these circumstances the payroll company has no control over how or when the work is to be performed, this is determined by the labour hire and host organisations.
In addition, the payroll company has no control over where or with whom the employee is placed. This is determined by the labour hire organisation.
The hourly and daily rates of pay are determined by the labour hire organisation, not the payroll organisation. Even though the payroll company pays the worker, they are merely processing payment on behalf of the labour hire organisation. They are providing an administrative service for the labour hire organisation. They are performing the same function that an internal payroll team would perform if the labour hire organisation had one.
Additionally, the payroll company cannot terminate the worker; they have no engagement with the host employer and cannot prevent the worker from performing work for the host employer at the direction of the labour hire organisation. The decision to terminate a worker can only be made by the labour hire organisation.
Legal implications
As outlined above, the ACT government has already released a ruling specifying that a payroll company is not the employer of workers engaged by a labour hire organisation.
The ACT government has made it clear that there will be significant penalties for labour hire organisations that continue to engage in this practice.
The two main issues that labour hire organisations face if they do not rectify this practice relate to underestimation of remuneration and penalties relating to being uninsured.
This can lead to the payment of additional premium and penalties for under-declaring remuneration. Uninsured employers can face significant costs including the cost of the claim and the cost of unpaid premium, with each state slightly different approaches to uninsured employers
Even where a labour hire organisations is unaware of their obligations and has not engaged in this practice to avoid premium or liability, it will not be an excuse to the potential penalties should they under declare wages or be uninsured.
For more information about labour hire obligations, see this article here.
