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Employees and Independent Contractors

An employee is someone who performs work under a contract of employment.

Non-employees may be 'independent contractors' or 'sub-contractors' and are engaged under a contract for services or even as agents representing a client business.

The legal consequences of being an independent contractor are significantly different to those for employees. Only an 'employee' can be covered by an award, make a workplace agreement or be entitled to the protections of the Fair Work Act 2009 (Cth) or the Fair Work Act 1994 (SA). The rights and obligations of employees are very different to those who are self-employed.

There are, however, some cleaners, outworkers and some drivers of public passenger vehicles who might ordinarily be considered independent contractors are deemed to be employees under the Fair Work Act 1994 (SA) [ss 4, 5, see also, for example, ss 30F, 47 - 48].

On 9 February 2022 the High Court of Australia delivered two important judgments which clarified, and changed, the approach to determining whether a person is, or was, an employee or an independent contractor [Construction, Forestry, Maritime, Mining and Energy Union & Anor v. Personnel Contracting Pty Ltd [2022] HCA 1 (‘Personnel Contracting’) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (‘Jamsek’)]. While the Justices were not unanimous in their approach, Personnel Contracting (supported by Jamsek) set out the following principles:

  • Where there is a comprehensive written contract and the validity of the contract is not in dispute, the rights and obligations of the parties under the contract will determine whether the relationship is one of employment or independent contractor. There is no need to consider a wide-ranging review of the entire history of the parties' dealings. [Per Kiefel CJ, Keane and Edelman JJ at [59], see also [40]-[62], per Gordan J at [172]-[178] and per Steward J at [203].]
  • The previous multifactorial approach (where all of the circumstances of an engagement are to be considered, including any written contract) is no longer appropriate, except as it may be relevant:
    • to the rights and duties established by the contract between the parties, including where a contract is partly written and partly oral, or where there is no written contract;
    • to ascertain the existence of variations to any contractual terms;
    • where there are allegations of invalid (sham) contracts;
    • in circumstances where a party is relying on another legal remedy such as rectification, estoppel or a statutory right or remedy.

[Per Kiefel CJ, Keane and Edelman JJ at [44]-[46], [59]-[61], per Gordan J at [177]-[178], [188]-[190], per Steward J at [203]].

  • The critical issue is to determine whether the person was working ‘in’ the business of the putative employer (where the work was so subordinate to the employer’s business as to be seen to be performed by an employee) or as part of the person’s own business [per Kiefel CJ, Keane and Edelman JJ at [39], per Gordan J at [180]-[186], per Steward J at [203]].
  • The existence of a contractual right to control the activities of the worker (including how, where and when the work is done) provides a strong indication of an employee relationship [per Kiefel CJ, Keane and Edelman JJ at [73]-[74], per Gageler and Gleeson JJ at [113]-[114], [121]].
  • The name, label or characterisation of a position as employee or independent contractor in a contract is not determinative or even, in some cases, relevant [per Kiefel CJ, Keane and Edelman JJ at [58], [63]-[66], [79], per Gageler and Gleeson JJ at [127], per Gordan J at [184], per Steward J at [203]].

Given the complex area of law, we provide the following recent case examples:

Personnel Contracting

Background

An international backpacker (‘McCourt’) was engaged by a labour hire company (‘Construct’) to provide physical labour in the building industry. McCourt signed a contract which described his role as an independent contractor. Construct required McCourt to work on building sites operated by a separate builder (‘Hanssen’).

Decision

Despite the labels used in the contract, the High Court held that McCourt was an employee of Construct based, amongst other things, on the following factors which arose from the terms of the written contract:

  • Construct could determine where and when McCourt would work, and McCourt was entitled to be paid by Construct
  • McCourt had promised Construct that he would co-operate in all respects in relation to the performance of his labour to the client, Hanssen
  • Construct’s control over work location and the ability to provide a compliant worker were assets to Construct’s business as a labour hire agency

Jamsek

Background

Two truckdrivers initially engaged as employees were, in 1986, advised that their employment could no longer be guaranteed. They were offered independent contractor positions provided that they purchased and maintained trucks to provide transport/delivery services. The truckdrivers agreed, formed partnerships with their respective wives and entered in a series of contracts with the company over the years which identified the relationship as contractor.

Decision

The High Court held that the respondents were independent contractors and not employees, taking into account, amongst other things:

  • The comprehensive nature of the written contracts between the parties (which contracts were not challenged)
  • The contracts were for the provision both of the drivers (personal service) and the vehicles owned by the partnerships
  • The contracts were with the partnerships, not with individuals
  • The company did not control the vehicles utilised by the partnerships or the method of transport/delivery chosen by the truckdrivers

Deliveroo Australia Pty Ltd v Franco [2022] FWCFB 156

In an unfair dismissal appeal before the Full Bench of the Fair Work Commission, a Deliveroo food delivery driver engaged pursuant to a series of contracts was found to be an independent contractor. It was acknowledged that the decision would have been different before the High Court cases of Personnel Contracting and Jamsek, as the Commission was now limited to considering the rights and duties created by the contract in force at the time of the termination. The Commission held:

  • The requirements for the driver to pay tax and insurance, and to acquire and maintain an Australian Business Number (‘ABN’) “merely reflects the view in the agreement that he is in business on his own account” and is therefore irrelevant as a label.
  • Consistent with the decision in Personnel Contracting, the right to accept or reject work, and the ability to work for other parties including competitors, is not inconsistent with casual employment and is therefore not determinative.
  • The following factors supported an independent contractor arrangement:
    • The driver was able to select when and where he was available to work
    • Even once the driver agreed to collect and deliver an order, he could ‘unassign’ himself from the collection
    • Deliveroo had no control over the way in which an order was delivered – the driver could select his own route and could even deliver items for competitors enroute, as well as having the right to select the vehicle used
    • The driver was required to provide and maintain his own vehicle
    • The contract allowed the driver to subcontract deliveries and therefore did not require personal service
    • The driver was required to pay an administrative fee of 4% to access Deliveroo’s software
  • The factors required to be ignored in the circumstances (which previously would have been relevant) included:
    • Pursuant to an earlier version of the contact, drivers were required to confirm their availability in advance, providing operational control to Deliveroo over the drivers
    • The value of the motorbikes used by the driver in this case were minimal and therefore it was of less significance that the driver was required to provide his own vehicle
    • Deliveroo strongly encouraged and provided branded insulation bags and clothing to be worn by drivers, thereby presenting the drivers as part of their business
    • One of contracts provided an expectation that the appointed driver personally provide the services, reducing the possibility and impact of any potential to subcontract the services
    • The various contracts were prepared by Deliveroo unilaterally with no right to negotiate or consult with drivers

Written contracts are especially important in the employee/independent contractor distinction. Legal advice should be sought if there is doubt about the nature of a position being offered, or currently held.

The Australian Tax Office has an online decision tool to help businesses to understand whether individual workers are employees or contractors for the purposes of tax and superannuation [as at 8 September 2022, the decision tool had not been updated as a result of the Personnel Contracting and Jamsek decisions; see also the ATO Decision impact statement].

Multifactorial approach

The factors previously considered in the multifactorial approach, and now relevant in limited circumstances, included, in addition to any contract:

  • Control over work - generally an employee works as directed by the employer whereas a contractor has a greater say in how the work is to be done.
  • Payment - employees are usually paid on the basis of an hourly rate or a salary. Contractors are more often paid for a required result, with less regard for time. Contractors send invoices for their services.
  • Work injury - contractors are responsible to insure themselves against injury but employees are not.
  • Risk — employees generally do not bear in an immediate or direct way the risk of financial loss incurred by the business for which they work. Contractors have a chance of profit, and also the risk of loss.
  • Sub-contracting - an employee cannot can assign or delegate (sub-contract) the work to others whereas a contractor is typically permitted to do so.
  • Tools and equipment - contractors may supply special equipment or tools to do the job and generally supply their own rather than using others. They also do not usually wear the uniform of another organisation.
  • Income tax and superannuation - employers usually pay these for their employees whereas contractors make their own arrangements.

Sham contracting

Sometimes an employer may attempt to incorrectly describe the true nature of a relationship so as to avoid responsibilities under various statutes and awards, but the Parliament and courts are wise to this. The Independent Contractors Act 2006 (Cth) and the Workplace Relations Amendment (Independent Contractors) Act 2006 (Cth) came into effect on 1 March 2007 and apply to all independent contractor arrangements which involve a constitutional corporation (that is a foreign, financial or trading corporation), the Commonwealth or a Territory. These Acts impose penalties on businesses that use ‘sham arrangements’ to either disguise employees as independent contractors or coerce employees into independent contracting arrangements.

Under the Fair Work Act 2009 (Cth) an employer must not misrepresent an employment relationship as an independent contract (sham contracting) [s 357], must not dismiss an employee to engage them as an independent contractor [s 358] and must not make a false statement to encourage someone to be engaged as an independent contractor [s 359].

See also the Fair Work Ombudsman's website on sham contracting.

Employees and Independent Contractors  :  Last Revised: Thu Sep 8th 2022
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.