Determining if a contractor is an employee is an ongoing concern for businesses that engage contractors to deliver key aspects of its business.    

Today’s modern workplace is dynamic.  Employees looking for flexibility and freedom are electing to be self-employed providing their personal services as a contractor.  Businesses often engage contractors to focus on core activities, achieve cost efficiencies and to overcome hiring freezes.  Both parties presumably operate with the intention to be business partners.

Invariably, the distinction between employee and contractor becomes blurred.  A dispute may ensue and a claim for employment benefits made.  Two decisions of the Full Federal Court of Australia illustrate the challenges for businesses in controlling the status of the worker.  The decisions (two months apart) highlight divergent approaches.

A brief history of the approaches to determining worker status

Over the years the courts have developed various 'tests' to determine if a worker is an employee.  There has been the control test:  is a worker subject to supervised control and direction like an employment relationship?  There is the multi-factorial approach:  regard must be had to the totality of the relationship.  And, there is the enterprise test: is the worker operating a business?  Does the worker take the risk of profit or loss?  Does the worker own business infrastructure or assets?  Does the worker promote a business?  Does the worker generate their own goodwill?  Is the worker an entrepreneur?

As the Full Federal Court said in ACE Insurance Ltd v Trifunovski [2013] FCAFC 3 there is “no single or unifying test to determine whether an employment relationship exists.”

A Full Federal fight

The Full Federal Court, in two separate decisions, have created further uncertainty as to the approach in determining whether a worker is an employee or contractor.

Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] FCAFC 37

From 2007, Ms Best and Ms Roden were housekeepers employed by Quest, an operator of serviced apartments.  In November 2009 a proposal was implemented where the housekeepers became contractors to a new business (Contracting Solutions) that then supplied the housekeepers back to Quest.  In all other respects, the work of Ms Best and Ms Roden did not change.  The Fair Work Ombudsman alleged the housekeepers were really employees of Quest.

The Court appeared to adopt a two-tier analysis to the question of the status of Ms Best and Ms Roden.  Firstly, the Court considered whether the worker had the hallmarks of a business, some of which are identified above under the enterprise test.  Secondly, if the hallmarks of a business exist, then the Court said it is necessary to examine whether the work is being performed in and for the contractors own business or that of the end-user, the principal.

Not surprisingly, Ms Best and Ms Roden were found to be employees.  As housekeepers they were not running their own business.  The fact they paid their own insurance was not determinative.  In Trifunovski, the fact the worker had his own company, motor vehicle, structured his tax affairs as a business and employed his wife did not prevent him being found to be an employee!

As such, the Court implied an employment contract between Quest and the housekeepers.  Not an unexpected result but the controversy lies in the two-tier approach to reaching the answer. Analysing the status of a worker by asking whether the worker is a business enterprise invariably means that a lot of self-employed workers and indeed other ‘contractors’ that deliver personal services may only be employees.  A contractor may not have, nor want, the usual hallmarks of a business.  They may be content with seeking remuneration rather than pursue the risk of a return.  Unfortunately, intention and labels as to the nature of the relationship are not determinative.

Tattsbet Limited v Morrow [2015] FCAFC 62

Ms Morrow operated a Tattsbet shopfront betting agency.  Under the agency agreement, Tattsbet provided the premises rent-free and provided all equipment for the agency.  Tattsbet paid all rates and outgoings.  Ms Morrow was to operate the agency.  In return, Ms Morrow was paid an amount based on turnover.  Ms Morrow could employ, and did employ, some staff to assist her operate the agency.

The Court did not agree with the approach in Quest.  The Court did not agree with the approach of simply examining if the worker was conducting their own business as an entrepreneur.  Jessup J said:

To view the matter through a prism of this kind is, however, to deflect attention from the central question, whether the person concerned is an employee or not; or, perhaps, … to “shift the focus of attention” to a no less problematic question.  As Buchanan J put it …, “[w]orking in the business of another is not inconsistent with working in a business of one’s own” ….  On the other hand, if the putative employee’s circumstances exhibit the characteristics of a business, that will undoubtedly be a matter proper to be taken into account in determining the question at hand, so long as sight is not lost of the question itself.  The question is not whether the person is an entrepreneur: it is whether he or she is an employee.

In asking whether Ms Morrow was an employee, a few significant factors were identified by the Court:

  • Firstly, the parties agreed, in successive agreements, that the relationship was one of agency and Ms Morrow was a contractor;
  • Secondly, Ms Morrow was paid based on business transacted and not for her work alone;
  • Thirdly, she could (and did) employ staff and was responsible for their wages;
  • Fourthly, Ms Morrow’s personal net income was only a third of the remuneration received for operating the agency;  and
  • Fifthly, she structured her tax affairs as a business – the Court said ‘it is impossible to ignore, and difficult to depreciate, the taxation implications of the mode of operation which the parties … have voluntarily adopted’.

The Court found Ms Morrow was not an employee.  The fact Ms Morrow had no responsibility for the expense of business premises and equipment was a significant factor but did not outweigh the above considerations. 

Conclusion

The vexed issue of determining the status of a worker will remain a focal point as disgruntled workers seek to deconstruct their contractor arrangements. 

The decision in Tattsbet is better law but the approach in Quest cannot be ignored, at least from the perspective of providing a rigorous analysis through which one can test the status of the worker.

Each facet of the relationship needs to be carefully managed to reflect a principal/contractor relationship.  The parties interactions need to be business like rather than an employer dealing with an employee.  This may mean more than just having the contractor issue invoices for payment.