The Fair Work Commission has ruled that a Philippines-based “independent contractor” was, in fact, an employee who was unfairly dismissed by her Australian employer.
You might wonder how a foreign national residing in the Philippines, who had an “independent contractor” agreement with an Australian company, could be considered an Australian employee by the Fair Work Commission. The recent case of Ms Joanna Pascua v Doessel Group Pty Ltd sheds light on some of the complexities Australian businesses face when engaging overseas contractors and employees.
What underpinned the Fair Work decision?
Ms. Pascua worked as a legal assistant under contract for a Queensland-based credit repair firm from July 21, 2022, to March 20, 2024. She was based in the Philippines, using her own equipment and a firm-provided PBX system. The contract classified her as an independent contractor, specifying that the firm was not responsible for additional benefits, taxes, or liabilities related to her work. Ms. Pascua also assumed responsibility for any issues arising from her tasks.
She was paid AUD$18 per hour as a full-time employee, capped at 8 hours per day, 5 days per week, not including breaks. She used a firm-supplied pro forma invoice to bill 83 weekly invoices at the full hours allowable and 28 other invoices for lesser amounts when she worked less than 40 hours in the week.
In the first 12 months at the legal firm, she was under supervision by a solicitor. After that, she worked unsupervised, and for the final 7 months, she was the sole person handling investigative work.
The Fair Work Commission’s decision was influenced by recent High Court rulings, such as CFMMEU v Personnel Contracting and ZG Operations v Jamsek. Previously, courts considered the overall nature of the working relationship—essentially, if it “looks like” employment, it was treated as such. Now, the focus is on the actual contract, with attention to the rights and duties it creates.
In this case, the FWC carefully examined each clause of the contract to determine whether it indicated an employment relationship or an independent contractor arrangement. In this case, the FWC determined Ms Pascua was an employee because the contract demonstrated that she had to perform work “in the business of another”, instead of for her own firm. The contract suggested that:
- Her contract outlines administrative tasks and ad hoc duties.
- She was not allowed to assign tasks to another.
- She was expected to achieve daily targets – these tasks referenced weekly requirements and could be carried over, recommending ongoing work.
- A level of control was applied by the legal firm on how she performed her tasks that suggested she was not running her own company – the email address, the PBX phone system, and the level of direction in the tasks to be performed according to the daily instruction she received.
- The hourly rate outlined in the contract was that of a full-time employee, and the invoices were to be forwarded weekly for the previous week’s task.
The Fair Work Commission (FWC) found that calling the arrangement an independent contractor agreement didn’t reflect its true nature.
The legal firm relied on clauses in the contract, like excluding income tax and workers’ compensation, to argue the person was an independent contractor. However, the FWC pointed to previous cases (such as Deliveroo Australia Pty Ltd v Diego Franco) and concluded that the terms in the contract about being an independent contractor don’t hold much weight in deciding the actual relationship.
The new definition of employee and employer
In August 2024, a new definition of “employee” and “employer” came into effect under the Fair Work Act. This change builds on previous High Court cases and says that the true nature of the relationship depends on how the contract is actually carried out, not just what it says. The law now requires that the real substance of the relationship be considered, looking at how the contract works in practice, not just the wording of the contract itself.
What does this decision mean for employers?
The FWC’s decision in Ms Joanna Pascua v Doessel Group Pty Ltd shows how careful employers must be about the nature of employment relationships. Just because you label an arrangement as that of an independent contractor, does not mean it is. In case you get it wrong, you could be subject to the tax, payroll tax and workers’ compensation payments that should have been made.
Irrespective of the geographic location of an employee, if your business is considered an Australian national system employer, the individual is considered to be an employee, the same obligations may apply to that employee as to other employees located in Australia. Starting from January 1, 2025, wage theft will be classified as a criminal offence. This applies when an employer intentionally underpays an employee, despite being obligated to pay a certain amount. For international employees, whose pay rates may differ significantly from Australian standards, it is crucial to clearly define the employment relationship.
Tax obligations and international workers
For instance, you want to engage the service of a non-resident individual.
Contractor or employee?
Make sure the arrangement is classified correctly. From a tax perspective, the ATO has provided its guidance in Employee or independent contractor, but you may need advice if you are uncertain.
Implications of an employment relationship
If the worker is considered an employee and they are a non-resident for Australian tax purposes, then they will be only taxed on income that has an Australian source. However, you must check whether a double tax agreement (DTA) could affect the outcome. PAYG withholding doesn’t apply if the worker is a non-resident employee and is only receiving foreign-sourced income. SG shouldn’t apply if all the work is performed overseas, and a worker is considered a non-resident.
Tax implications of independent contractors
If a worker is classified as a genuine independent contractor and is a non-resident, they will only be taxed on Australian sourced income in Australia. If the contractor is based in the Philippines, Article 7 of the Double Tax Agreement (DTA) generally prevents Australia from taxing their business profits unless those profits are linked to a permanent establishment the contractor has in Australia. PAYG withholding will not apply in the following cases:
- The contractor provides an Australian Business Number (ABN).
- The DTA may exempt the contractor’s income from Australian tax.
- The contractor is not conducting an enterprise in Australia (for example, if they are working entirely overseas with no presence in Australia).
In such situations, the company can request a “statement by supplier” from the contractor. Additionally, payments to foreign contractors may need to be reported to the Australian Taxation Office (ATO) on the Taxable Payments Annual Report (TPAR) if the business engages in specific services such as construction, cleaning, courier, IT, or security.
Will a foreign worker mean your business is carrying on a business overseas?
Hiring foreign workers could make it seem like your business is operating in another country, which might lead to that country taxing some of your profits. This is because having a “permanent establishment”—such as a fixed place of business—could trigger tax obligations.
The definition of “permanent establishment” varies depending on the country, as each tax agreement is different. This can be a complicated issue, so it’s wise to seek advice to understand your specific obligations.
Are student loans too big?
Australian voters oppose the US model of education, preferring equitable systems where access doesn’t depend on income. In the US, the average student debt is USD $37,693, and it takes about 20 years to repay, though many students face gaps not covered by loans. In Australia, the cost of a bachelor’s degree ranges from $20,000 to $45,000, with HECS-HELP loans covering up to $121,844 for most degrees, and up to $174,998 for high-value courses like medicine.
The average student debt is approximately $27,000, which takes just over 8 years to repay. Around 3 million Australians hold student debt, totalling over $81 billion, with 7 million owing more than $100,000. Repayments start when an individual’s income hits $54,435, with rates ranging from 0% to 10% depending on income, which peaks at $159,664.