An issue which raises its head time and time again is the distinction between an employee and an independent contractor. The line between the two is often blurred and the tests put forward by the courts for determining an answer are not always straightforward in their application.

Background

In 2005, Sharyn Morrow was engaged by Tattsbet Limited, a TAB agency in Queensland, to operate a ‘UNiTAB’ agency on Tattsbet’s behalf in Logan Central. Ms Morrow entered into a series of agency agreements with Tattsbet, signing a new one each time the previous one expired. This occurred on four instances from 2005 until the termination of her agency agreement by Tattsbet on 10 November 2011. Each agency agreement stated Ms Morrow was engaged as an independent contractor.

During her time operating the UNiTAB agency, Ms Morrow employed staff to work there and used lump sum payments she received from Tattsbet to pay the employees and the relevant workers compensation premiums for her employees. Ms Morrow did not take any paid annual leave or personal/carer’s leave and was an active member of the Queensland UNiTAB Agents Association, an employer association. Ms Morrow took responsibility for negotiating agreements with the employees and arranged her taxation affairs so that she would be taxed as a contractor which included submitting Business Activity Statements for GST purposes.

Ms Morrow’s initial claim

Following the summary termination of her agency agreement by Tattsbet on 10 November 2011, Ms Morrow commenced proceedings in the Federal Circuit Court claiming, among other things, that she was in fact an employee of Tattsbet (as opposed to being an independent contractor) and should have been treated as such.1  Ms Morrow claimed damages for, amongst other things, adverse action arising from the termination of her engagement, a failure to provide notice of termination and damages arising from “sham contracting” under the Fair Work Act 2009 (Cth) (FW Act).

The Court considered the factors which indicated whether Ms Morrow was an employee or an independent contractor, noting that the following factors suggested Ms Morrow might be an employee:

  • Tattsbet provided and paid the rent for the premises in which Ms Morrow worked and equipment which Ms Morrow used;
  • Tattsbet had final veto power over the people Ms Morrow was able to employ;
  • Tattsbet was responsible for approving Ms Morrow’s unpaid leave from time to time; and
  • Tattsbet did not permit the sale of any products other than its own, and directed all training of the employees at the UNiTAB agency to be on the operation of the Tattsbet business.

The Court found these factors to be more compelling than those which suggested that Ms Morrow was an independent contractor, which included her history of employing her own staff and determining their wages, hours and conditions of employment.

The Court also applied the ‘entrepreneur test’ which had been outlined by Justice Bromberg in On Call Interpreters2  in finding that Ms Morrow:

  1. was not performing her work as an entrepreneur who owned and operated the relevant business; and
  2. was not working in and for her own business, but for Tattsbet’s business.

On this basis, the Court concluded that Ms Morrow was an employee of Tattsbet for the purposes of the FW Act.

Tattsbet’s appeal

Tattsbet appealed Judge Jarrett’s decision to the Full Court of the Federal Court of Australia3 , which overturned Judge Jarrett’s decision, declaring that Ms Morrow was in fact an independent contractor.

The Full Court found that Judge Jarrett had placed too much reliance on the ‘entrepreneur test’ established in On Call Interpreters and should have instead focussed only on the relationship between Ms Morrow and Tattsbet. In other words, the focus should have been on whether Ms Morrow and Tattsbet were operating in an employment relationship or in an independent contractor relationship.

The Full Court found the following aspects of the relationship between Ms Morrow and Tattsbet compelling in supporting a conclusion that Ms Morrow was an independent contractor:

  • the real intentions of the parties appeared to be that they viewed Ms Morrow as being an independent contractor. Each of the four agency agreements they entered into expressly stated this;
  • Ms Morrow was not engaged or remunerated purely for the work she carried out. She was instead engaged to operate the agency as a whole, and earnings were was dependent upon the value of the business which the agency conducted;
  • Ms Morrow employed the employees in the agency, not on behalf of Tattsbet, but for her own operation, therefore she had taken on the obligations of an employer;
  • Ms Morrow’s personal income was only about one third of the gross remuneration she received for operating the agency. This suggested that a significant portion of the remuneration went towards expenses which was not indicative of an employment relationship; and
  • Ms Morrow’s deliberate structuring of her taxation affairs as an independent contractor indicated that she viewed herself as being an independent contractor.

The Full Court also endorsed a comment from an earlier judgment of the Full Court that ‘working in the business of another is not inconsistent with working in a business of one’s own’. 4 For these reasons, the Full Court held that Ms Morrow was in fact an independent contractor engaged by Tattsbet, and not an employee.

Lessons for employers

The decision suggests a move away from the ‘entrepreneur test’ suggested by other Federal Court decisions5  towards the more traditional “multi-factor” approach set out by the High Court in earlier decisions6.

This is a welcome development providing more consistency and certainty about which test should be applied in deciding whether a worker is an independent contractor or an employee. This is particularly helpful for employers given the heavy penalties possible under sham contracting legislation.

Employers should remain careful about the way they characterise their relationships with their employees and contractors, to ensure that the label applied to a relationship is in line with its function.