Key Points:

Digital disruption means it may well be time for a clear statutory definition of independent contractor ‒ or for the courts to develop a new common law definition.

The rise of the digital disrupters is changing the face of the global economy. It's also giving rise to new legal claims, particularly in the context of employment law. Traditional methods of engaging workers are unable to keep up with the flexibility being demanded by both worker and employer.

The ride-sharing phenomenon Uber is a case in point. Uber's business model is based on having a network of independent "taxi" drivers: anyone who owns or has access to a car and meets Uber's safety requirements can become an Uber driver, offering their services to consumers, wherever and whenever. It's taking on the highly regulated taxi industry by offering consumers a lower-cost independent choice.

In a case that is being watched around the world, a class action has been mounted in the District Court of California on behalf of 160,000 or so Uber drivers. One of the central issues is whether, in the eyes of the law, Uber drivers are employees or independent contractors. The Uber drivers say it's the former and the District Court, on a preliminary basis, agrees.

The distinction is an important one.

If Uber drivers are considered, legally, to be employees, Uber has an obligation as their employer to provide them with minimum employment entitlements. Further, Uber would be responsible for meeting all their operating expenses such as driver's licence fees, petrol and car servicing costs, and insurance.

This case may provide guidance on the engagement process for other sharing economy companies ‒where companies, usually via an electronic platform such as an app, link consumers with providers of goods and services. Think Airbnb, Lyft, Task Rabbit.

At home, it is unclear which category Uber drivers legally sit in. The Productivity Commission's Draft Report on Australia's Workplace Relations Framework released earlier this month considered the current test for determining whether a worker is an employee or independent contractor.

There is no statutory definition of an independent contractor. The courts have developed a complex "multifactor" test for determining a worker's legal status, including the way work is performed, how it is paid for, whether the worker is free to work for anyone, the provision of tools of trade and the worker's reporting obligations.

One of the hot trends in employee engagement is offering employees flexibility in how and where they perform their work. However, the lack of an employment relationship when work is being performed by one person for another can lead to problems. What it usually means is that the worker does not have the benefit of the protection of minimum conditions of employment contained within the National Employment Standards and Awards.

This becomes a bigger problem when there is a mismatch in the bargaining power between the parties.

As proposed by the Productivity Commission, it may well be time for a clear statutory definition of independent contractor to be established ‒ or for the courts to develop a new common law definition.

Ultimately, it will benefit both companies and workers to know where their relationship stands and how to keep it on the right track.

For Uber and similar companies, the outcome will either give a green light to drive ‒ or put a brake on ‒ how they conduct their business.

This article was first published in the Australian Financial Review, 18 September 2015