The Federal Court confirms that workers will not be seen as contractors unless they “work as entrepreneurs owning and operating a separate business”. How do your contracting arrangements measure up or do you deal with sham contractors?
Entrepreneurs or Employees?
Most employers know that they need to undertake a ‘multifactorial assessment’ in order to determine whether or not a worker is an employee or an independent contractor. There is no fixed ‘test’ to decide whether a worker is properly classifiable as an employee or a contractor. We have set out some of the factors which are relevant to that assessment below:
- Control of performance of work – employees are subject to the ‘ultimate authority’ of their employers about how they perform their work, whereas contractors get to make their own decisions about how they do the work to achieve the relevant outcome.
- Control of working conditions – employees have to perform the work when and where the employer requires, whereas contractors have much greater flexibility (i.e. working from home, working outside of business hours, etc).
- Risk – employees bear no risk for any defect in their work (because the risk lies with the employer), whereas contractors will generally bear the risk of their work (and should generally take out professional insurances as a result).
- Separate business – employees perform work in the course of and as part of their employer’s business, whereas contractors are running their own independent business (with their own accounts and expenses) and can accrue ‘goodwill’ towards their own business name and branding.
- Contract for a fixed project – employees are employed on an ongoing basis, whereas contractors are often engaged to achieve a particular result or work on a particular project.
- Delegation of work – employees may delegate work to colleagues in certain instances but are not responsible for payment of those colleagues for the delegated work, whereas contractors who delegate or sub-contract work will have to attend to payment of the third-party who undertook the work.
- Provision of equipment to perform work – employees will be provided with the tools and equipment necessary to perform their work (or receive an allowance to pay for them), whereas contractors will have to provide their own equipment at their own cost.
- Exclusivity of service – employees are usually required (at common law) to exclusively serve their employer, whereas contractors have no obligation of exclusivity and can market their services to the public.
- Invoicing and payment for services – employees are usually paid regularly on an ongoing basis, whereas contractors must invoice for work performed (often including timesheets or evidence of work undertaken). Contractors should therefore have their own ABN and may need to charge GST if their turnover exceeds the threshold.
- Requirement to wear a uniform – employees are commonly required to wear uniforms branded with their employer’s name or logo, whereas contractors cannot be made to wear a uniform of another business because it is inconsistent with the contractor running their own business.
Control is the Most Significant Factor
However, as Bromwich J reminded employers in Putland v Royans Wagga Pty Ltd [2017] FCA 910 (‘Putland’) not all of those factors will have the same weight.
Bromwich J explained that, although it is important to undertake a multifactorial assessment, the control exercised by the employer over the worker will often be a “dominant consideration”, even if less weighty considerations point in the opposite direction.
Some of the factors which indicated that the employer in Putland exercised a significant degree of control over its workers are set out below.
- The workers asked for increases in fees in a manner which was more akin to a request by an employee for an approval of a pay rise, rather than ‘in the manner of a variation of an independent contractor’s terms and conditions of contract’.
- The employer sent emails directing workers to do things which were more akin to ‘directives to an employee’ than ‘the enforcement or negotiation of a term of a contract with an independent contractor’.
- The employer reviewed and signed off on documents prepared by the workers in the course of their provision of services to the employer.
- The employer directed that the workers provide services at a particular location.
Bromwich J explained that other considerations, such as the fact that the workers in Putland provided services to the employer from their home and that the workers were not required to wear uniforms, were of limited significance.
Lessons for employers
Putland is a reminder that courts will look closely at the substance of the relationship between a worker and an employer when determining whether the worker is an employee or independent contractor. It will not conduct a simplistic box ticking exercise.
The bottom line is that an employer cannot attempt to pass off an employee as an independent contractor by doing minor things that will tend in their favour in the multifactorial analysis. It is not enough to call the workers contractors, remove the requirement that they wear uniforms, and allow them to work from home.
As Bromwich J explained, the question in every case is whether, as a matter of substance rather than form, the workers perform “work as entrepreneurs owning and operating a separate business” from that of the employer. If they do, they will likely be independent contractors. If they do not, they will likely be employees. The practical degree of control that the employer can and does exercise over the worker is likely to be particularly important in this context.
How can we help you?
Would you like us to review your contracts to see that they comply? Can we advise you or one of your clients on how best to structure their business in a way that mitigates legal risks? Get in touch by using the contact box below to have a conversation about how we can help you.