For years, courts have been called upon to assess whether an individual worker is, at law, truly an employee or an independent contractor. The characterisation is relevant for tax, superannuation, underpayment claims and other claims made under the Fair Work Act 2009 (Cth) (FW Act), for example, unfair dismissal, adverse action claims or allegations under the “sham contracting” provisions.

In this context, the courts have colourfully observed that “the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody call it a duck.”[1]However, with the shift away from traditional working arrangements, there is legitimate uncertainty about whether a given working arrangement is a rooster or a duck – that is, the distinction between whether an individual is an independent contractor or an employee is increasingly blurred.

Traditional working arrangements are being challenged by disruptive services providers like Uber, Airbnb, Airtasker and Service Central. This new “sharing economy” or “collaborative consumption” model is also transforming how employers – here and around the globe – want to engage with labour and service providers, with flexibility a key element to these business models.[2] While these working arrangements have benefits for both companies and individuals, principally through the flexibility they can offer, they do not sit comfortably with Australia’s strong employment protections, nor with the “employee / independent contractor” paradigm.

Two conflicting decisions of the Full Federal Court illustrate the difficulty faced by many enterprises in correctly charactering an individual as an employee or an independent contractor. It is a distinction that will increasingly be tested, and come under scrutiny, with new and evolving work arrangements.

Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [3]

In the first decision, Quest South Perth Holdings (Quest) engaged another company, Contracting Solutions (CS), to convert a number of Quest’s employees to independent contractors. Quest told the employees that they would continue to work for Quest, but that they would now be engaged as independent contractors through Contracting Solutions.

The Fair Work Ombudsman (FWO) commenced proceedings against Quest alleging that its conduct contravened the sham contracting provisions of the FW Act, in particular s 357. At first instance, a single judge of the Federal Court found that Quest had not breached that provision (which prohibits an employer from misrepresenting an employment relationship as a contract for services). The FWO appealed against this finding.

In the appeal decision, the Full Federal Court applied a “business test” to determine whether someone is an independent contractor or an employee. That is, the Full Court focused on whether the person in question is engaged in the conduct of their own business which generally requires the pursuit of profit or whether they are simply working in the business of the principal. Under the business test a person is more likely to be an employee rather than a contractor where there is no “entrepreneurial endeavour” on the part of the individual.

Applying that test, the Full Federal Court held that the individuals were employees of Quest because there was no evidence that they were operating their own business. The evidence suggested that neither of the employees had any real understanding that being an independent contractor entailed the running of a business or that they had any genuine desire to run a business,. To the contrary, all that the employees wanted was to continue to work at Quest as they had done previously. However, the Court ultimately dismissed the FWO’s claim that Quest had contravened the sham contracting provisions – because Quest had made representations about the nature of working arrangements, not between the workers and Quest, but between the workers and CS (which were not covered by the s 357 prohibition).

The FWO has been granted special leave to appeal this decision to the High Court.

Tattsbet Limited v Morrow [4]

In this second decision, handed down only two months after the Quest South Perth decision, a differently composed Full Federal Court stepped away from, and expressly disavowed, the earlier Full Court’s approach.

The facts in Tattsbet were that Ms Morrow was engaged to conduct a shopfront for Tattsbet, selling its wagering and betting products to the public. Ms Morrow was engaged under an agency agreement which stated she was engaged as an independent contractor, not an employee. Tattsbet terminated Ms Morrow’s engagement and she brought an adverse action claim under the FW Act alleging that she was terminated due to the exercise of a workplace right - the right to make an enquiry about whether she was entitled to superannuation.

In order to determine Ms Morrow’s adverse action claim, the Federal Circuit Court was required to determine whether Ms Morrow was an employee or an independent contractor of Tattsbet. Applying the business test, the primary judge found that Ms Morrow was an employee because she was working in Tattsbet’s business rather than her own.

The Full Federal Court disagreed with this finding. The Full Court said the question is not whether the person was an entrepreneur; it is whether he or she is an employee. If the individual's endeavour exhibits the characteristics of a business, that will undoubtedly be something to be taken into account. However, one must examine the various aspects of the relationship between Ms Morrow and Tattsbet.

The Full Federal Court confirmed that the correct test to be applied in determining whether an individual is an employee or an independent contractor is the, rather unhelpfully described but well-established, “multi-factor test”.[5] It involves examining a number of different aspects of the relationship between a principal and an individual who has been contracted to supply his or her labour including:

  • exclusivity;
  • whether there is a right to delegate;
  • the way in which the individual is remunerated (i.e. based on output or time);
  • insurance arrangements;
  • who provides the equipment and materials required to perform the work; and
  • whether the contractor is incorporated.

The court will look at the totality of the relationship, and labelling someone as an independent contractor rather than an employee is not conclusive. However, the very nature of the multi-factor test makes it difficult to tell the difference between a so called duck and a rooster.

Applying the multi-factor test, the Full Federal Court concluded that Ms Morrow was an independent contractor. This was based on a number of aspects of the relationship including that Ms Morrow:

  • employed staff and undertook the conventional obligations of an employer; and
  • was not engaged or paid for her work alone. Rather, she was engaged to operate the agency, and was paid by reference to the value of the business transacted there.  

The importance of getting it right

It is important to determine from the outset whether a working relationship is one of employment, or that of independent contractor and principal because the characterisation of the relationship determines the rights and obligations of the parties and their respective obligations towards third parties.

In the case of an employee, an employer is bound to withhold and remit income tax, make superannuation contributions on behalf of the employee and pay payroll tax. On the other hand, an independent contractor will generally need to take responsibility for insurance, income tax arrangements, the lodging of appropriate tax returns and in many cases there will be no obligation on the principal to make superannuation contributions on behalf of the contractor.

The risks that arise for the “employer” where an employment relationship is wrongly characterised as an independent contractor relationship include:

  • the imposition of penalties for failing to comply with income tax withholding requirements and superannuation obligations;
  • claims for wages and other entitlements that the individual would have received if they had been treated as an employee;
  • penalties for breaching relevant provisions of the FW Act and any applicable awards or enterprise agreements.

On a practical level, a company whose business model is based on the engagement of independent contractors rather than employees needs to ensure it gets it right at the outset. The nature of the business model may make it untenable for the business to be viable if the flexibilities associated with a contractor are replaced by the employment model which, amongst other things, may impose minimum entitlements such as pay rates, penalty rates, allowances and casual minimum engagement periods.

What does the current legal landscape mean for businesses and the growing “sharing economy”?

The Tattsbet decision makes it clear that in making an assessment as to whether an individual is an employee or an independent contractor, the multi factor-test should be applied.

Practically it can be very difficult to ascertain whether an individual is truly an employee or an independent contractor because the application of the multi factor-test rarely yields clear results. The distinction can be particularly unclear when assessing non-traditional working arrangements and roles, for example, where an individual is engaged by a company to provide their services through a “collaborative consumption model.” It is often the case that a number of aspects of the relationship will point towards an employment relationship, while other aspects point towards an independent contractor relationship and reasonable minds may differ as to the correct characterisation of the worker.

This is an issue facing Uber, Lyft, Homejoy, Postemates and Caviar in America – all of which are reported to be facing lawsuits on the basis that they engage “independent contractors” who should be categorised, at law, as employees[6]. Significantly, the California Labor Commissioner’s Office recently found held that an Uber driver in California was an employee, not an independent contractor and ordered Uber to reimburse the driver for expenses and other costs she incurred whilst driving for Uber. The car-riding service is appealing the decision. However, the decision is significant because it may encourage other Uber drivers in America and elsewhere to file similar claims.[7]

To limit the risk of getting the characterisation of a working relationship wrong, businesses need to:

  • be clear from the outset as to the character of the relationship;
  • give careful consideration to the engagement terms for independent contractors and compare the proposed terms against the indicia applied in the multi-factor test, to ensure that the arrangement is a genuine independent contractor arrangement. This may include terms such as requiring the contractor to provide their own insurance, requiring the contractor to be incorporated and paying the contractor by reference to results rather than time; and
  • consider seeking legal advice where the true character of the relationship is unclear.

Where to from here?

With the growing trend towards non-traditional working relationships, we expect to see more decisions in this area and legislative reform may be required to ensure that employment laws are appropriate for current working practices. Any legislative reform will raise important policy questions such as:

  • Should parties have the freedom to determine the character of their relationship?
  • How do we balance Australia’s tradition of strong employment protections and the jobs being created by the so called “sharing economy?”