Employee or Independent Contractor – no simple answer

13 July 2016

The distinction between whether a worker is, at law, an independent contractor or an employee is often unclear.

However, the characterisation of the working relationship is key in determining whether a worker is protected from unfair dismissal under the provisions of the Fair Work Act 2009 (Cth). This is particularly so given that independent contractors are not entitled to the protection of unfair dismissal laws, so businesses have greater freedom to terminate the independent contractor engagement.

Relevantly, an employment relationship that is incorrectly characterised as an independent contractor relationship gives rise to a number of risks to the employer including:

  • The imposition of penalties for failing to comply with superannuation and income tax obligations;
  • Claims for wages and other entitlements that the worker would have received if they had been treated as an employee; and
  • Penalties for breaching relevant provisions of the Fair Work Act 2009 (Cth) and any applicable awards or enterprise agreements.

We compare two recent decisions of the Fair Work Commission where the employer in each case raised a jurisdictional objection to an unfair dismissal claim on the basis that the worker was not an employee, but an independent contractor. The findings of the Commission in each decision illustrate the challenges and risks faced by many Australian employers in correctly characterising the nature of the working relationship as one of employee or an independent contractor.

Michael Gardiner v Next Residential Pty Ltd T/A Next Residential [2015] FWC 8333 (16 December 2015)

Next Residential maintained that the parties intended to create an independent contractor relationship and not an employment relationship. However, in order to access the unfair dismissal regime, Mr Gardiner had to prove that he was an employee of Next Residential.

The Commission ultimately found that Mr Gardiner was in fact an employee, and therefore, protected from unfair dismissal.

Mr Gardiner was engaged by Next Residential as a Sales Agent, pursuant to a Sales Agent Agreement (SAA). Relevantly, Mr Gardiner entered into the Agreement with Next Residential as a proprietary limited company, namely, PAB Consultants Pty Ltd (PAB) and signed the Agreement for and on behalf of PAB as a Director.

The parties created a relationship that had the hallmarks of both a contract for service and a contract of service. For instance, under the SAA, Mr Gardiner was permitted to perform work for others through PAB while he was engaged by Next Residential. Mr Gardiner had a separate place of work by way of a home office and he owned and used his own laptop and mobile phone to carry out his job. Relevantly, no income tax or superannuation was paid by Next Residential in relation to Mr Gardiner, nor was Mr Gardiner provided with any paid leave or was required to produce evidence of illness for personal leave purposes. These factors would ordinarily give rise to an independent contractor relationship.

However, the Commission was satisfied that, after having viewed the relationship “as a whole“, Mr Gardiner was an employee of Next Residential. The Commission reached this conclusion taking into account the following factors which supported the existence of an employment relationship:

  • Mr Gardiner had a Next Residential business card;
  • the Next Residential office phone was redirected to Mr Gardiner’s mobile phone;
  • Mr Gardiner had a Next Residential email address;
  • Mr Gardiner was required to attend sales and training meetings; and
  • Next Residential established guidelines around ‘deals’ that could be done with potential clients.

Consequently, the Commission determined that it had jurisdiction to deal with Mr Gardiner’s application for relief from unfair dismissal.

Mr Norman Turner v Australian Postal Corporation [2016] FWC 801 (2 March 2016)

In this decision, the Fair Work Commission determined that Mr Turner, an Australia Post mail contractor, was not protected by the unfair dismissal provisions because he was never an employee of Australia Post.

Following a successful tender process, Mr Turner entered into a Mail Contractor Agreement (Agreement) with Australia Post in his capacity as a director of Coomba Park Couriers (CPC).

Relevantly, clause 4.1 of the Agreement defined CPC as “an independent contractor” that was not permitted to “hold itself out to be, acting as, or deemed to be an employee or agent of Australia Post“.

However, Mr Turner argued that he was an employee of Australia Post and that the following factors demonstrated the existence of an employment relationship with Australia Post:

  • He was directed to use a certain motor vehicle;
  • He was required to wear an Australia Post uniform as well as displaying the company’s logo;
  • He was engaged to deliver mail to a defined area;
  • He was given Australia Post’s “Our Ethics” booklet; and
  • He was given the contact details of Australia Post’s Employee Assistance Program.

The Commission ultimately found that the terms of the Agreement clearly defined the nature of Mr Turner’s relationship with Australia Post as one of an independent contractor. For the following reasons, the Commission was satisfied that Mr Turner was not employed by Australia Post:

  • CPC purchased the equipment necessary to provide such services at its cost (including a motor vehicle);
  • Although CPC usually engaged Mr Turner to drive the vehicle and undertake the work the subject of the Agreement, CPC also arranged for other (unpaid) personnel to carry out such work, or assist in its performance, when Mr Turner was unable to work or required assistance;
  • Australia Post paid CPC a fixed contract sum, regardless of the hours taken to deliver mail to the defined area, and did not make any payment to Mr Turner (CPC made payments to Mr Turner for the work he undertook);
  • Australia Post engaged CPC to deliver mail to a defined area (not Mr Turner in his personal capacity);
  • The fact that Mr Turner was required to, and did, wear an Australia Post uniform and display the company’s logo on CPC’s vehicle, attend Australia Post’s distribution centre each morning at the time determined by Australia Post and work the hours necessary to deliver mail in the defined area was justified on the basis that such duties and obligations were required of CPC by the terms of the Agreement;
  • CPC could have engaged any employee(s) or contractor(s) to undertake that work, provided such employee(s) or contractor(s) had the necessary security clearance and the other relevant terms of the Agreement were complied with. Moreover, Mr Turner could have undertaken other work outside the scope of the Agreement; and
  • The fact that Australia Post provided Mr Turner with the contact details for Australia Post’s Employee Assistance Program did not establish the existence of an employment relationship between Australia Post and Mr Turner, because managers of Australia Post had a discretion to extend the operation of its Employee Assistance Program to other persons such as contractors.

Consequently, the Commission found that it did not have jurisdiction to hear and determine the merits of Mr Turner’s claim that his dismissal was harsh, unjust or unreasonable and Mr Turner’s unfair dismissal application was dismissed.

Lessons for Employers

The distinction between an employee and an independent contractor is complex. The line between the two is often blurred and the tests put forward by courts for determining an answer are not always straightforward in their application.

Employers can look at previous decisions for good guidance about how courts are distinguishing an employee from an independent contractor and the “entrepreneur’s test“, that is, whether the person can be seen to be running their own business rather than just working in the business of their employer, still remains very relevant in this regard.

Employers should remain careful about the way they characterise their relationships with their employees and independent contractors to ensure the correct label is applied, particularly if the label is independent contractor, as the consequences of a wrong labelling can include a right to challenge a termination which is not otherwise available with disastrous consequences for the employer.

It is clear that there is no one decisive factor to determine whether a contractual relationship is one of employment or one of independent contractor. It is a distinction that will inevitably continue to be tested as new and evolving work arrangements emerge.

This article was written by Manuela Lalli, Solictor.

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