The controversial question of whether a worker is an employee or independent contractor has once again come before the Australian courts. The recent decision of Balemian v Mobilia Manufacturing Pty Ltd & Anor [2017] FCCA 743 (Balemian) provides a reminder to employers of the potential financial ramifications of getting this wrong, as well as the potential reputational damage where "shamcontracting" arises.

Case Facts

The applicant in the case was engaged in a continuous working relationship with the first respondent (the "Company") and its predecessor for over 21 years. The parties never entered into a written agreement and the applicant received no leave entitlements of any kind. After leaving the Company's service, the applicant claimed that he was an employee covered by the relevant modern award and entitled to receive accrued leave and superannuation contributions. The Company disputed this claim on the basis that he was engaged as an independent contractor.

The Federal Circuit Court considered evidence that the applicant had an ABN, submitted fortnightly "as quoted" invoices for his hours worked (at the Company's request) and had repeatedly described himself as self-employed in taxation returns. Despite this, the Court found there had been an absence of agreement or discussion about the nature of the employment relationship and accepted the applicant's evidence that he was "very nave" and too "embarrassed" to discuss his working arrangements in greater detail with the Company.

The Decision

The Court considered that the Company had control over important aspects of the working arrangement, including the work the applicant performed and the manner in which he carried out his duties. On the whole, the Court found the applicant for the most part was not free to use his own discretion and the manner in which he performed the work was "clearly demonstrative of a contract of employment".

In reaching this decision the Court also took into account the following details:

  • The Company's sole director generally supervised and authorised the applicant's work daily
  • The applicant was paid an hourly rate and used a Company car
  • The Company required the applicant to submit timesheets of his hours worked
  • The applicant consistently worked for the Company at least 45 hours per week and was provided with a factory key and an office which he used as his primary place of work
  • The applicant informed the Company if he was unable to attend work due to illness or was leaving before close of business and sought approval in advance of planning holidays
  • The applicant had no capacity to delegate the performance of his work and did not hold himself out as operating his own business but as a person working for the Company
  • Employees were used to the applicant's daily presence in the workplace for over 20 years
  • Over time, the applicant's role developed and he was responsible for training new employees in some aspects of the business

The Court found the arrangement set up by the Company and its sole director "at the very least recklessly disguised the true legal nature of the relationship", in contravention of the sham contracting provisions in the Fair Work Act 2009 (Cth) (FW Act). The failure by the Company (and its predecessor) to pay the applicant the correct rate, accrued leave payments and superannuation contributions amounted to breaches of FW Act provisions, the relevant modern award and superannuation legislation, resulting in a financial loss to the employee of approximately AU$230,000 (not all of which was recoverable from the Company under the claim). The decision has been re-listed to determine civil penalties and costs, along with the sum of compensation, in the event the parties are unable to agree upon the compensation payable.

An Unclear Distinction But An Important One to Get Right

Varying decisions on this issue in recent years show that the distinction between an employee and independent contractor can be complex and often unclear. This is particularly so given there is no definitive definition of an independent contractor. The courts to date have pointed to identifying and evaluating relevant factors arising from the evidence and weighing those factors (with some having greater importance than others) against established principles to see where the balance lies. A court will look behind the wording of a contract and/or the use of an interposed entity to look at the true nature of the relationship; therefore these are not sufficient on their own to establish an independent contracting relationship.

Liabilities for getting it wrong can include compensation and penalties, not only from non-compliance of employment legislation but also tax and superannuation legislation. In the recent case of Fair Work Ombudsman v Grouped Property Services Pty Ltd [2016] FCA 1034, the Federal Court directed that the court registrar forward a copy of the judgment to ASIC and the ATO. This may result in further investigations, prosecution and liabilities.

Lessons for Employers

With the evolution of a growing number of non-traditional working arrangements over time, we expect to see even more cases litigating this issue. It is important to ensure a worker's status and the character of the relationship is clarified and well documented with the worker from the outset and reviewed over time.

Employers should exercise caution in characterising working relationships as a contracting arrangement when it is not abundantly clear. In such circumstances, it is important to take legal advice to determine whether a genuine independent contractor arrangement exists (or will exist).

In addition, a misrepresentation of the relationship, or dismissing an employee to engage them as a contractor to avoid employment obligations, will enliven the sham-contracting provisions of the FW Act.