This recent decision considers the vexed question of when a worker may be classified as an independent contractor.

Implications for employers

This decision confirms that employers should be cautious about engaging independent contractors, particularly where the contractor is an individual. Care needs to be taken in structuring and implementing such arrangements, given the risk of breaching the Fair Work Act 2009 (Cth) (FW Act).

Background: law

Sections 44 and 45 of the FW Act prohibit an employer failing to provide employees with benefits to which they are entitled under the National Employment Standards (which contain, among other things, entitlements to annual leave) and any applicable industrial award.

Section 357 of the FW Act renders it unlawful for an employer to represent to a worker that the worker's contract of employment is an independent contracting arrangement.

Civil penalties of up to $51,000 for a corporation, or $10,200 for an involved individual, apply for breaches of these provisions.

At common law, the question of whether a worker is most appropriately classified as an employee or an independent contractor is determined by considering a range of indicia to establish the totality of the relationship between the parties. This is not a straightforward exercise and has been the subject of consideration in a number of cases. Relevant factors include (among others) whether the worker is conducting a business on his or her own account; whether the worker has control over the way in which work is performed; whether the worker has a genuine capacity to perform work for others; and whether the worker presents as an emanation of the business for whom work is performed.

Background: facts

Kitchenware products company Metro Northern Enterprises (Metro) engaged sales workers as independent contractors. Such workers responded to advertisements which were apparently for employees. The work was selling kitchenware door to door or by approaching members of the public at public venues, such as shopping centres. The workers could elect to be paid under "Plan A", which provided for a commission payment per sale, or "Plan B", which provided for payment per demonstration. Metro classified the former as independent contractors and the latter as employees. All workers undertook initial compulsory unpaid training with Metro, used promotional material provided by Metro, continued to attend meetings and training during the course of their engagement by Metro and followed Metro's detailed guidance. The highly prescriptive Metro training manual used terms consistent with an employment relationship. Payment arrangements suggested an employment relationship. The workers did not invoice Metro for work they performed and did not engage other persons to perform work for Metro.

After ceasing work with Metro, four of the "Plan A" workers complained to the Fair Work Ombudsman (FWO), alleging that they had been underpaid.

The FWO brought proceedings on behalf of the workers.

Decision

Judge Barnes found that the Metro workers were employees. He noted that:

  • in choosing between Plan A and Plan B, the workers were choosing a label. However, the truth of the relationship could not be altered by labelling it as an independent contracting one;
  • on assessment of the totality of the relationship supported a finding that the relationship was an independent contracting one. In reality, the workers operated as part of Metro's business and were subject to Metro's control;
  • Metro had failed to clearly distinguish between employee and independent contractor arrangements at Metro's interviews with sales representatives and to clarify that the workers would be treated as independent contractors. The workers did not have sufficient explanation (or sufficient knowledge) to understand the difference between a contract for services and a contract of employment;
  • Metro's employment structure was an attempt to avoid financial liability to the workers by characterising them as independent contractors;
  • Metro breached section 357 of the FW Act by misrepresenting the arrangement to the workers as an independent contracting one. Mr Bisimovki, Metro's director, was reckless as to whether the contracts where truly employment contracts or contracts for services; and
  • by misclassifying the workers, Metro breached the FW Act by failing to comply with the Commercial Sales Award 2010 and the NES. Metro underpaid wages, failed to pay the value of accrued untaken annual leave on termination and failed to pay vehicle allowance for one of the employees.

The parties were directed to prepare short minutes of orders as to the compensation to be paid to each employee and the matter will be listed for further hearing on the question of penalties.

Fair Work Ombudsman v Metro Northern Enterprises Pty Ltd [2013] FCCA 216