Employee or independent contractor?

(If it looks like a duck, swims like a duck, and quacks like a duck.…)

In recent years, the issue of whether an individual is considered an employee or independent contractor has increasingly come to the attention of courts and tribunals.

In each case, it is clear that the courts will look beyond the terms of any contractual agreement to the actual substance of the relationship between the parties in order to determine whether an individual is an employee or a contractor. However, the test of whether an individual is an employee works both ways. This is reflected in the Victorian Court of Appeal decision in Elazac Pty Ltd v Shirreff (2) (Elazac), which overturned a ruling where $900,000 was awarded to an injured electrician after finding that he was, in fact, an independent contractor.

The Court held that the “most significant feature” of the case was the electrician’s employment of his own workers. Further, the electrician considered himself to be self-employed and everything he did in the course of his work suggested that this was so. For example, he could determine who he employed and where they worked; he provided services for more than one company; and the companies for whom he performed work did not deduct taxation from his pay, nor provide him with any form of leave. By contrast, in another recent case,(3) Justice Perram of the Federal Court found that five former sales agents of the US-incorporated Combined Insurance Company of Australia (Combined) were employees, despite the fact that the agents operated under written contracts which stated specifically that they were independent contractors.

The agents worked for commissions and issued Combined with tax invoices for services provided. However, they were solely contracted to and trained by Combined, and were under the company’s “practical control”.

Combined claimed that the agents were not employees because they had signed contracts stating that they were independent contractors. In finding that all five agents were employees, not independent contractors, Justice Perram emphasised that the issue of whether to characterise a person as an employee or independent contractor is fundamentally rooted in the difference between a person who serves his employer in the employer’s business and a person who carries on a trade or business of his own. That difference is determined, not just by the terms of any contractual agreement, but also by considering the true nature of the relationship that exists between the two parties.

A number of non-exhaustive factors (called “indicia”) have been developed over time to shed light on the nature of that relationship, including:

    • whether tax is deducted and holiday pay or long service leave or superannuation paid;
    • whether sub-contracting is permitted;
    • whether the person engaged employs employees and/or conducts his business in

partnership;

  • whether tools are supplied;
  • the extent of control or the right to control the individual; and
  • whether the contractor has goodwill in the business.

Bottom line for employers

As shown by the On Call and Combined decisions, the task of distinguishing between employees and independent contractors is far from being an exact science. Yet making the correct distinction is critical in light of the liabilities an employer can potentially face as a result.

These liabilities include:

      a) vicarious liability for negligence;
      b) liability for breaches of duty of care; and
    c) back-payment of wages and leave entitlements.

The crux of the distinction lies in a holistic analysis of the true nature of the relationship. While contractual descriptions and control are still critical, it is important to be aware that these are not the only relevant factors to consider when seeking to engage in a contractor relationship, and that substance will prevail over form.

In other words, the court will always look at the true nature of the relationship, rather than the terms of any contract, in deciding whether a person is an employee or contractor. As Justice Gray eloquently stated in determining whether truck drivers who supplied their own vehicles were contractors or employees:(4) “The parties cannot create something which has every feature of a rooster but call it a duck and insist that everybody else recognise it as a duck.”

As the case of Elazac shows, the test can work both ways. In situations where the contractor

  • employs employees;
  • ensures his tax and financial documentation discloses the operation of a business;
  • is able to determine who to employ;
  • works for other organisations; and
  • controls how the relevant work is performed,(5)

this will strongly point to the existence of a contractor relationship.

(1) [2011] FCA 366. See our Winter 2011 Workplace elations and Safety Bulletin at 1-2 for an overview.
(2) [2011] VSCA 405.
(3) [2011] FCA 1204.
(4) Re Porter: ex parte TWU (1989), 34 IR 179 at 184.
(5) Ibid at [36].

This article was reproduced with permission from Lander & Rogers.
For further information, please contact Daniel Proietto | Partner, Workplace Relations & Safety ( dproietto@landers.com.au) or Amie Frydenberg | Senior Associate, Workplace Relations & Safety ( afrydenberg@landers.com.au).