If it walks like a duck…independent contracting versus employment

Contractor or employee? Such a question is prevalent in the workplace as Australia moves towards flexibility, e-commerce and creative recruitment strategies. There is also an increasing number of instances where an

employee is approaching their employer about becoming contractors for taxation reasons or for the freedom to pursue other interests and work.

Many businesses would be inclined to be of the view if an employee approached their employer advising they were establishing their own business and would therefore like to convert to become an independent contractor that the nature of their business relationship would be clear – upon acceptance of their offer, it is one of a contracting relationship. However, it is not always so clear, there are many pitfalls when businesses accept or pursue contracting arrangements.

In a recent case before the Fair Work Commission (FWC), Commissioner Ryan considered whether the Applicant was an employee or an independent contractor. In John Rohde v Bedlam Enterprise Pty Ltd t/a Cola Solary [2016] FWC 2357 (Rohde Decision), the Applicant alleged that the Respondent had unfairly dismissed them. The Respondent put forward two (2) jurisdictional objections as follows:

  1. The Applicant was an independent contractor; and
  2. The Applicant was not dismissed.

The facts of the Rohde Decision were interesting:

  1. It was an agreed fact that the Applicant had been employed by the Respondent until on or around August 2014 when the Applicant sought to end his employment relationship in order to become an independent contractor providing contracted installation services;
  2. It was disputed between the Applicant and Respondent whether at all times after the employment relationship ended on or around August 2014 an independent contracting relationship existed or whether an employment relationship resumed up to and including 12 October 2015;
  3. The Applicant argued that while the relationship from on or around August 2014 commenced as an independent contracting relationship this changed over time to reflect an employment relationship;
  4. The Respondent argued that the Applicant became an independent contractor by providing services to the Respondent due to the Applicant making a deliberate decision to resign in his employment to run his own business. Since this time the Respondent argued they treated the Applicant as an independent contractor.

In determining whether the Applicant was an independent contractor or an employee Commissioner Ryan considered the following:

  • The work of the Applicant was subject to significant control by the Respondent (including providing any additional labour required by the Applicant to complete a job and setting the time frame for completion of the work);
  • The Applicant was only able to work for others by giving specific notice to the Respondent that the Applicant would not be performing work for them, while performing services for the Respondent the Applicant was restricted in performing work for any other business;
  • The Applicant operated out of the Respondent’s premises and at all times was identified with the Respondent’s business and unable to advertise his own business whilst performing services as an installer;
  • The Applicant was required to use the tools and vehicle of the Respondent and not permitted to use his own;
  • The Applicant was engaged to perform the services for the Respondent and he was unable to delegate or subcontract this work;
  • No income tax was deducted from remuneration paid to the Applicant;
  • The Applicant was remunerated by reference to jobs undertaken but the method of calculating remuneration was based on an agreed hourly rate (evidence showed the Applicant was paid for the hours of work performed rather than a fixed fee for a task); and
  • The Applicant was not paid holidays or sick leave.

On balance Commissioner Ryan found in favour of the employee and decided that the Applicant was an employee rather than an independent contractor.

Lessons to be learnt

It is important as business owners, directors and board members, particularly when being approached by current employees wishing to become independent contractors to the business, that the true nature of the relationship is considered.

As in the Rohde Decision, it is not enough to merely have an agreement entitled “Contractor Agreement” or a tax invoice being provided for ‘work performed’ for a true independent contracting relationship to be in place.

If a business is found to be disguising an employment relationship as one of independent contracting this is considered to be ‘sham contracting’ and is a breach of the Fair Work Act 2009 (Cth) (FW Act). A breach of the FW Act attracts a possible pecuniary penalty of up to $54,000 for companies or up to $10,800 for individuals (including directors).

In addition, if a business is found to be engaged in ‘sham contracting’ the worker may bring a general protections claim against the business, the remedy for which is uncapped compensation.

If you wish to engage independent contractors it is imperative to seek legal advice prior to doing so and to have a well drafted Contractor Agreement in place. In general, a true independent contracting relationship will include but is not limited to the following:

  • There is little control over the independent contractor;
  • The independent contractor is paid according to results achieved and invoiced for their services performed;
  • The independent contractor will use their own tools in performing their services;
  • The independent contractor are free to offer their services to other businesses;
  • The independent contractor may refuse work; and
  • There is no income tax deducted from any monies paid to the independent contractor.

Should you require assistance with understanding your obligations or whether you are involved in a true independent contracting relationship, NB Lawyers are available to help you.

NB Lawyers are offering a legal consultation to all business owners, directors and board members. For further information please contact NB Lawyers on (07) 3876 5111.

Written by
NB Lawyers – the Lawyers for Employers