Australian employers are increasingly engaging workers based overseas to perform a range of duties, including most commonly administrative, IT and professional services.
These engagements are often structured as independent contracting arrangements on the assumption that Australian workplace laws do not apply the engagement. However, recent decisions in the Fair Work Commission (FWC), demonstrate that these types of engagements now carry heightened legal risk.
In particular, the FWC has recently found that overseas contractors may, in certain circumstances, be considered as Australian employees and be entitled to the benefits and protections under Fair Work Act 2009 (Cth) (FW Act) despite never setting foot in Australia to perform their duties.
Key Legal Risks When Engaging Overseas Contractors
Whilst businesses may engage independent contractors with the intention of setting up a principal-contractor relationship, the relationship may, in substance, be found to be one of employment under the FW Act (or at common law). Should this occur, naturally, liability for employment-related entitlements flow from the engagement (i.e. backpay, leave entitlements and potential sham contracting risks).
Further, even where the work is performed overseas, the FW Act may still apply if the worker is considered an “Australian-based employee” under section 35 of the FW Act. This depends on where the worker is engaged and where their contractual duties are performed.
These issues often overlap where a worker, although ‘labelled’ as a contractor, performs regular, ongoing work under the control and direction of an Australian business.
Employee or Contractor?
The FW Act now contains a definition of “employer” and “employee” in section 15AA. Specifically, under the FW Act, the ordinary meanings of “employee” and “employer” is determined by identifying the real substance and practical reality of the relationship.
Importantly, the test requires consideration of both the contractual terms and how the work is performed in practice, reinstating a multi-factor approach. Greater weight is now placed on control, delegation, exclusivity, the structure of remuneration and whether the worker can genuinely be said to operate their own business.
For overseas workers, usually the first step is assessing whether worker is an employee or a genuine contractor. If they are an employee, the question becomes whether they are an ‘Australian-based employee’ under section 35 of the FW Act.
When the FW Act Applies to Overseas Workers
Under section 35 FW Act, an Australian-based employee is defined as an employee:
- whose primary place of work is in Australia;
- who is employed by an Australian employer (whether the employee is located in Australia or elsewhere); or
- who is prescribed by the Fair Work Regulations 2009 (Cth).
Neither 1) nor 3) above usually apply to any of the contractors based overseas. However, in relation to 2), if the principal is an Australian employer as defined in the FW Act, there is an additional caveat in that the FW Act does not apply to an employee who is engaged outside of Australia to perform duties outside of Australia.
In other words, in this situation, the FW Act will not apply if it is determined that the employee is:
- engaged outside of Australia; and
- to perform duties outside of Australia.
The first element, 1), is resolved by the place where the employment contract is made. The second element, 2), is resolved by the place where the employee is obliged to perform work (and for whom they principally perform work) under the employment contract.
This principle was applied in Gautam Parimoo v Lake Resources N.L [2023] FWC 2543, where a US citizen engaged by an Australian company to work in Argentina was held to be an Australian-based employee because his signed contract was returned and received at the employer’s Australian office.
A Philippines-Based Worker Found to Be an Employee
In another FWC decision, a Philippines-based worker was found to be an Australian employee.
In that case, Ms Joanna Pascua lived in the Philippines and worked remotely as a paralegal for an Australian law firm. Although engaged under an agreement titled “Independent Contractor’s Agreement”, her remuneration was described as “salary all-inclusive as a full-time employee”, and she was paid $18 per hour via weekly invoices. She used the firm’s Australian email and phone systems, performed legal and administrative tasks under daily supervision, and was subject to KPIs. Ms Pascua’s engagement was terminated and she brought an unfair dismissal application.
The law firm objected to the application on the basis that she was a contractor based overseas. The FWC rejected this. It held that Ms Pascua performed work personally, had no right to delegate, was integrated into the firm’s business, and was paid at a rate below relevant award minimums. Although the agreement described her as a contractor, the FWC found that the arrangement “belied the actual nature of the contract” and was properly characterised as employment. The law firm appealed the decision, however, the Full Bench dismissed the appeal.
Takeaways for Employers
The recent FWC decisions indicate a clear trend toward closer scrutiny of contracting arrangements, including those involving workers based entirely overseas. The label ‘independent contractor’ or the terms of the contract on its own, will not prevent a finding of employment where the substance of the relationship leans towards an employer/employee relationship. It is further important to be mindful that overseas contracting arrangements, which may be commercially beneficial, may in actuality be employment relationships governed by the FW Act. It is therefore essential to obtain advice on these arrangements and pay close attention in setting up your contracting relationships.
HR Legal can assist employers and principals to review offshore contracting arrangements, assess risk under the FW Act, and advise on effective contracting agreements and arrangements tailored to the principal’s or businesses’ operations and risk profile. Please contact us today.
