The Fair Work Commission recently ruled that a Philippines-based “independent contractor” was actually an employee unfairly dismissed by her Australian employer. The case of Ms. Joanna Pascua v Doessel Group highlights the complexities Australian businesses face when engaging overseas contractors, challenging traditional classifications of employment.

 

What underpinned the Fair Work decision?

Ms. Pascua worked remotely as a legal assistant for a Queensland-based credit repair firm from 21 July 2022 to 20 March 2024, performing credit claim investigations from the Philippines. 

Despite being classified as an independent contractor, her contract excluded benefits such as taxes, workers’ compensation, and social security. She was paid AUD $18 per hour, with a cap of 8 hours a day, 5 days a week, and submitted 83 weekly invoices for full hours and 28 additional invoices for partial weeks.

Initially supervised by a solicitor, Ms. Pascua’s work became unsupervised after 12 months, and for the final 7 months, she was the sole investigator. The Fair Work Commission (FWC) reviewed her contract and identified a lack of independent business characteristics, such as control over her work. The firm’s control over work methods, the pay structure resembling an employee’s wage, and the continuous weekly work requirements led the FWC to classify her as an employee, not an independent contractor.

The contract prohibited Ms. Pascua from delegating tasks, a typical feature of independent contractors, and required ongoing work rather than discrete projects, signaling an employee relationship. Additionally, the firm provided her with a PBX phone system, firm-issued email address, and daily instructions, further integrating her into the firm’s operations.

The firm’s attempt to classify her as a contractor based on clauses excluding tax, workers’ compensation, and leave was rejected. The FWC emphasized that contractual labels cannot override the actual nature of the working arrangement, which was employee-like due to the firm’s control, integration, and conditions of work.

As a result, the Fair Work Commission concluded that Ms. Pascua was an employee, and not an independent contractor, highlighting the importance of considering the substance of a relationship over its formal classification.

 

The new definition of employee and employer

In August 2024, a new definition of “employee” and “employer” under the Fair Work Act came into effect, building on the High Court’s decisions in CFMMEU v. Personnel Contracting and Jamsek. The change ensures that contract terms alone do not define an independent contractor relationship. 

Instead, the Fair Work Act mandates that the true nature of the relationship be determined by examining the substance and practical reality of how the contract is performed, considering all aspects of the relationship, not just its written terms.

 

What does this decision mean for employers?

The Fair Work Commission’s decision in Ms Joanna Pascua v Doessel Group Pty Ltd highlights the importance of correctly classifying employment relationships. Mislabeling a worker as an independent contractor can lead to liabilities for tax, payroll tax, and workers’ compensation. This case is significant for how international arrangements may fall under Australia’s workplace laws. If an employer is bound by the Fair Work Act, an overseas worker deemed an employee may have the same rights as Australian-based employees. From 1 January 2025, wage theft will be a criminal offence, so correct classification is crucial to avoid legal risks for international employees.

 

Tax obligations and international workers

We’re frequently asked about the implications of engaging non-resident workers for an Australian company.

 

Contractor or employee?

The first step is to correctly classify the arrangement, as the Ms Joanna Pascua v Doessel Group Pty Ltd case demonstrates that this depends on the specific circumstances; while the ATO provides general guidance on employee vs. independent contractor, you may need tailored advice if unsure.

 

Implications of an employment relationship

Non-resident workers are only taxed in Australia on income sourced from Australia. Double tax agreements (DTAs), like the one with the Philippines, may exempt Australian tax on foreign-sourced income unless the work is performed in Australia. 

PAYG withholding generally doesn’t apply to non-resident employees earning foreign income, and superannuation obligations typically don’t apply if the worker is based overseas. It’s important to seek specialist advice in the worker’s country of residence to ensure compliance with local tax and superannuation obligations.

 

Tax implications of independent contractors

If a non-resident worker is a genuine independent contractor (or working through a trust or company), they are only taxed in Australia on income sourced from Australia. For example, under the DTA between Australia and the Philippines, Article 7 generally prevents Australia from taxing the contractor’s business profits unless they have a permanent establishment in Australia.

PAYG withholding typically doesn’t apply if:

• The contractor provides an ABN,
• A DTA exempts the income from Australian tax, or
• The contractor doesn’t carry on an enterprise in Australia. If the contractor works entirely overseas without a physical presence or employees in Australia, they may not be considered to be carrying on an enterprise in Australia. In this case, the company could ask the contractor to complete a statement by supplier.

Payments to foreign contractors in certain industries (e.g., building, IT, security) may need to be reported to the ATO via the taxable payments annual report (TPAR).

 

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

Employing foreign workers may risk the business being considered to have a permanent establishment in the foreign country, potentially exposing it to tax on some profits there. A permanent establishment is typically defined in Australia’s DTAs as a fixed place of business through which the enterprise operates. 

However, the definition varies by country, as each DTA is unique. Given the complexity of this issue, it’s advisable to seek expert advice to clarify your obligations and ensure compliance.

For any questions you may have that are related to employment tax, payroll or small business structure, please do not hesitate to send an inquiry to Bates Cosgrave.