Are your workers employees or contractors?
One of the great grey areas in workplace relations law relates to the distinction between an independent contractor and an employee. Many businesses engage independent contractors instead of employees as a means of reducing wages and costs because of the perception that as an independent contractor, the worker is not entitled to many of the benefits that an employee enjoys, such as:
- the right to bring unfair dismissal and unlawful termination claims
- entitlements to minimum wages and leave entitlements
- the protection of their employer’s workers compensation insurance
This practice is, however, fraught with risk.
There is no clear test to determine whether a person is an independent contractor or an employee. Rather, the courts current approach is to make a balanced evaluation of all of the incidents of the relationship to determine whether there is a sufficient quality and quantity of control over the person to indicate the existence of an employment relationship. Factors which have been considered relevant in performing this analysis include the following:
- how is the person remunerated
- whether taxes are deducted from the remuneration
- whether the person has the right to delegate the work to another person
- whether the person has control over which hours they work
- whether the person is recognised as having their own business
To complicate matters further, an independent contractor will be entitled to receive superannuation in circumstances where:
- the contractor is an individual
- the contractor is engaged primarily for their personal labour and skills
- the contractor is required to perform the work personally
- the contractor has been paid to achieve a particular result
The following recent examples highlight the importance of accurately determining whether a worker is an independent contractor or an employee.
Freestone v Morris & Partners Pty Ltd – Unfair dismissal
Ms Freestone had been engaged by Morris as a book-keeper. Importantly, Ms Freestone:
- chose her own working hours
- issued invoices to Morris in which she determined her own hourly rate
- operated several unrelated businesses during the time that she worked for Morris
- declined a position with Morris as an employee on two separate occasions
Despite these factors it was held that Ms Freestone was an employee of Morris. The AIRC was swayed by the fact that the Ms Freeman was under the direction and control of Morris, and that she was remunerated for hours worked rather than tasks completed. Accordingly, Ms Freestone was entitled to pursue a claim against Morris for unfair dismissal.
Griffiths v Commissioner of Taxation – Superannuation
Mr Griffiths engaged Mr Gronow as a printer. Mr Gronow had signed a contract with Mr Griffiths which specified that he would not be entitled to superannuation payments. The Commissioner of Taxation issued an assessment requiring Mr Griffiths to make superannuation payments on behalf of Mr Gronow, plus the appropriate penalties. Mr Griffiths challenged the assessment in the Administrative Appeals Tribunal.
The AAT upheld the assessment on the basis that Mr Gronow was in fact an employee of Mr Griffiths. The AAT also held that even if Mr Gronow was an independent contractor of Mr Griffiths, he would have been entitled to the superannuation payment on the basis that he was engaged to provide labour and he was not engaged to produce a specific result. The AAT considered the fact that Mr Goronow has signed a contract specifying that he was not entitled to receive superannuation to be irrelevant.
Land Choice Pty Ltd – Minimum entitlements and penalties
Land Choice (a NSW real estate company) engaged a salesperson pursuant to a contract entitled ‘independent contractor agreement’. This contract provided that the salesperson would be paid commission only. The salesperson worked an average of 40 hours per week from March to September 2007, but was only paid a total of $1,414 for this approximately 6 month period of work.
The Fair Work Ombudsman has chosen to issue proceedings against Land Choice on behalf of the salesperson alleging that the salesperson was an employee of Land Choice and seeking wages and various entitlements amounting to approximately $22,000.
These decisions show the need for agreements to accurately reflect the nature of the relationship between the parties. Our Workplace Relations Team is able to advise whether your current or prospective workers are independent contractors or employees, and on the legal implications of this assessment.
Author: Laughlin Nicholls