Determining whether a worker is an employee rather than an independent contractor can be difficult! The Australian Federal Court was recently required to determine this issue in Fair Work Ombudsman v Ecosway Pty Ltd [2016].1 While the worker in question had been engaged as an independent contractor by a company in the direct selling sector, the Fair Work Ombudsman argued that the worker was really an employee.

The Federal Court held, after considering numerous factors relevant to the nature of the relationship between Ecosway Pty Ltd (Ecosway) and the worker, that the worker was engaged as an independent contractor.

On balance, the Court concluded that when the relationship as a whole was considered, the strong impression was that there was no employment relationship. The worker was required to take on a number of risks in the business and the agreement contained numerous provisions which would not have been required had the worker been an employee. Indeed, in the context of direct selling, the Court considered that while many of the indicators of an employment relationship where present, they were required for the operation of Ecosway’s multi-level marketing system.2 The presence of these indicators however, did not make the worker an employee.

In this Focus Paper, we look at the factors the Court considered in concluding that a worker in the direct selling sector was an independent contractor rather than an employee.

Background

Ecosway’s business model was a multi-level network marketing (MLM) system. Ecosway engaged independent contractors (Business Owners) to sell

healthcare, nutrition and beauty products to consumers and to enrol other independent contractors into their own “downline” who would also sell Ecosway products to consumers and recruit others into their own networks or downlines. There were three types of Business Owners:

  • Business Owners, who received Ecosway products on consignment, sold the products to consumers and received commission in return for sales. From the outset, the parties accepted that these Business Owners were not employees of Ecosway.3
  • Business Owners, who operated in premises which were not shops provided by Ecosway (for example a room in their own house), sold products on consignment and received commission on sales.
  • Business Owners, who were store operators who sold Ecosway products on consignment from retail stores that were made available to them by Ecosway (Store Operators).

The Agreement

The case concerned a Store Operator, Ms Wardell. The agreement between Ms Wardell and Ecosway:

  • included an express statement that the Store Operator would be an “independent contracting party” and not an “employee, agent, servant or franchise” of Ecosway;4
  • referred to various benefits which the Store Operator would be entitled to as well as contained detailed requirements concerning the way in which stock was to be provided, delivered and stored;
  • included a requirement that the Store Operator comply with Ecosway’s instructions and specific requirements for the documentation and payments to be provided to Ecosway when products were sold; ·    contained provisions in respect of services required to be provided including that the shop be open during approved business hours as well as specific requirements regarding training, credit card usage, ethics and IT equipment; and
  • permitted the Store Operator to engage third parties to assist in providing services at the store.

Ecosway was liable for the costs of maintaining and servicing the store including the payment of rent, electricity, air conditioning, lighting, furnishings, fittings and IT equipment as well as, for example, postal, delivery, stationery and other various costs.

Ms Wardell’s engagement by Ecosway ended acrimoniously and ultimately resulted in the Fair Work Ombudsman’s claim in the Federal Court that Ms Wardell was an employee.

As Ecosway considered Ms Wardell to be an independent contractor, she had not been paid as an employee: she had not received the minimum wage (if a relevant award applied), no penalty rates or payments for overtime were paid to her and she did not receive any personal/carer’s leave or annual leave.

Employee or independent contractor – what factors are to be considered?

The Court acknowledged that there is no one single test that can be applied to determine whether a relationship is one of employment or for the provision of services.5 Rather, all aspects of the parties’ relationship should be taken into account including the following:

  • the labels which the parties use in their relationship, for example, “independent contractor”, which are relevant but not conclusive;6 and
  • the power to control the manner in which the work is done, however, that is not a sufficient or necessary element of a contract of service.7

Employee indicators

Indicators pointing to Ms Wardell being an employee included:

  • Ms Wardell was closely supervised and controlled by Ecosway and had to comply with all policies, procedures, directives etc that Ecosway issued.
  • Ecosway’s instructions were detailed - Ecosway provided manuals setting out procedures with which Ms Wardell was required to comply.
  • Ms Wardell had only limited discretion in respect of the way in which the store was operated. Ecosway determined the opening hours. At the end of each day, Ms Wardell reported to Ecosway various matters including the amount of credit card and cash payments for the day.
  • However, the Court noted that this type of close control and supervision is apparent in other contexts (not just consistent with employment relationships), for example, where products are distributed to franchisees and there are common marketing and promotional materials.
  • Further, because of the MLM system, common systems were required to determine commission payments.8
  • Ms Wardell risked very little of her own capital with her main contribution being labour. There was no requirement to supply plant, tools or equipment (which would usually point towards an independent contractor relationship).9
  • Ecosway remained the owner of the product in the stores until purchased by the end consumer. However, had Ms Wardell bought her own stock and ran the risk of selling the stock, it would have been more aligned with an independent contractor relationship.10
  • Ecosway also placed restrictions on the types of advertising that Ms Wardell could utilise. However, the Court noted that Ecosway’s rationale for these restrictions was obvious as it sought “to avoid its name and reputation being put in jeopardy by statements in advertising over which it had no control”.11 Again the Court accepted that control over advertising is consistent with relationships that are not just employment relationships. 12

Independent Contractor Indicators

Factors pointing to Ms Wardell being an independent contractor included Ms Wardell being:

  • able to engage others to assist in the operation of the store;
  • responsible for obtaining public liability insurance and being liable for lost and damaged stock in some circumstances, as well as for any stocktake discrepancies;13 and
  • required to indemnify Ecosway in respect of any loss, for example, which resulted from a breach of the agreement.

Importantly, the Court considered that there were a number of provisions in the agreement which would not have been required had Ms Wardell been an employee. For example, under the terms of the agreement, Ms Wardell:

  • gave irrevocable consent to Ecosway representatives entering the store for inspection purposes;
  • was prevented from using the premises for any competing business; and
  • could sell products (other than Ecosway’s) in the store provided the products did not compete with Ecosway’s products. Given Ms Wardell’s discretion about the types of products and the terms on which they could be sold in the store, this discretion did not align with the relationship being one of employment. 14

The Court noted that becoming a Store Operator could potentially assist Ms Wardell with the recruitment of other Business Owners and customers for her MLM network.15 Indeed, Ms Wardell rewarded a woman who provided assistance in the store by giving the sales assistant the opportunity to recruit every second customer as a downline in the sales assistant’s own network. 16

What about Goodwill?

Although the Court did not reach a firm decision as to whether Ms Wardell could sell the goodwill she had established, Ms Wardell’s ability to continue to receive commission from purchases of customers she had recruited into her downline after she had ceased operating the store was noted. The Court considered that this ability was not a usual feature of retail employee remuneration. 17

Take Home Points

This decision further illustrates the importance of ensuring that contracts reflect clearly the nature of the intended relationship between contracting parties.

Looking at the relationship as a whole, on balance the strong impression was that this was not an employment relationship. As a Store Operator, Ms Wardell was required to undertake a number of risks in the business and the agreement contained numerous provisions which would not have been required had she been an employee. Further, many of the indicators which might ordinarily be associated with an employment relationship were, in the context of the direct selling arrangements in this particular case, necessary for the operation of Ecosway’s MLM system and are not evidence of an employment relationship.