What is the difference between an employee and an independent contractor?
The rise of the gig economy has led to more and more people working flexible jobs in the service or hospitality industries. The appeal of these jobs is that they can act as a supplement to a person’s primary income, and they can choose when and when not to work.Independent Contractors #knowyourrights #shamcontracting #uber #employees Click To Tweet
The Fair Work Ombudsman Investigation
The Fair Work Ombudsman (the FWO) recently concluded an investigation into Uber to determine whether the company had engaged in sham contracting by misclassifying its drivers as contractors. They determined that Uber drivers are not employees. The minimum requirement for an employment relationship, according to the FWO, is an obligation on behalf of the employee to perform work if an when it is demanded of them. Without a formal obligation to complete work requested of them, there could be no employment relationship.
While the investigation has not been released, more information can be found here.
It is important to remember that the FWO investigation is not binding decision, and cannot be followed as precedent in the same way that a decision of the Fair Work Commission (the FWC) or a Court can be. The only consequence of the investigation is that the FWO will not take compliance action in relation to uber drivers. The decision cannot be applied more broadly than that.
Decisions of the FWC
The FWO investigation outcome mirrors other recent decisions made regarding Uber (in Australia). In both 2017 and 2018, the FWC determined that the relationship between Uber and its drivers was not best characterised as employment.
The FWC examined the level of control exercised by Uber. Like the FWO, they highlighted that drivers could choose to refuse work offered to them. They also relied on the fact that drivers were able to freely choose the days and hours that work was completed. These cases also highlighted:
- Uber drivers provided their own vehicles, for which they were required to maintain registration and other costs associated with the vehicle (eg. insurance). This was said to favour a finding of an independent contractor relationship;
- Uber drivers are not able to delegate or subcontract their work. The lack of an ability to delegate or subcontract will not point toward an employment relationship;
- The ability to suspend or dismiss a worker, especially if that work has engaged in some form of misconduct when providing their service is suggestive of an employment relationship;
- Uber drivers were responsible for their own taxation under a personal ABN. There was no evidence of PAYG deductions being made by Uber on their behalf; and
- Uber Drivers were not presented as an emanation of the business.
It is important to contract these decisions with the FWC’s Foodora Decision in November 2018. The FWC was asked to rule on a similar dispute as to whether a food delivery courier for Foodora was an employee or independent contractor for the purposes of an unfair dismissal application. Foodora was formally one of a number of food delivery services that allow drivers to accept or reject jobs to collect and deliver food to customers.
The FWC heard a number of arguments about the nature of the relationship between Foodora and the couriers it engaged. The FWC rejected Foodora’s argument that the ability of workers to subcontract was indicator of a contracting relationship, and found that the service contract only permitted this when the worker was unable to perform shifts and then only with the prior consent of Foodora.
The FWC also found that (unlike uber drivers) the couriers were “emmanations” of Foodora, highlighting the requirement for Foodora’s workers to wear branded attire and use equipment sporting the Foodora logo.
So how did the FWC reach these determinations? Why are they so different? Why are the factors they have outlined and relied upon so important?
When it comes to determining if someone is an independent contractor or employee, there is no “hard and fast” rule. It will depend on the circumstances of each engagement, contract and relationship. The common law in this area is extensive, and summarised below.
The Full Bench of the Fair Work Commission in Jiang Shen Cai t/a French accent v Michael Anthony Do Rozaio found that the general law approach to distinguishing between employees and independent contractors can be summarised as follows:
- The ultimate question is whether the worker is the servant of another in that other’s business, or whether the worker carries on a trade or business of his or her behalf. Is the worker carrying on their own business? This question is concerned with the objective character of the relationship, and is answered by considering the terms of the contract and the totality of the relationship.
- Secondly, the nature of the work performed and the manner in which it is performed must always be considered.
- Thirdly, the terms and terminology of the contract are always important. However, the parties cannot alter the true nature of their relationship by putting a different label on it. In particular, an express term that the worker is an independent contractor cannot take effect according to its terms if it contradicts the effect of the terms of the contract as a whole. The parties cannot deem the relationship between themselves to be something it is not. Similarly, subsequent conduct of the parties may demonstrate that relationship has a character contrary to the terms of the contract.
- Consideration should then be given to the various indicia identified in Stevens v Brodribb Sawmilling Co Pty Ltd and the other authorities as are relevant in the particular context.
In Mr Andrew O’Farrell v Guest Tek Australia Pty Ltd, Commissioner Riordan usefully summarised the indica (referred to in paragraph 4 above). None of these are determinative in and of themselves, but must be balanced and considered as a whole.
- Whether the putative employer exercises, or has the right to exercise control over the manner in which work is performed, place of work, hours of work and the like. Control of this sort is indicative of a relationship of employment;
- Whether the worker performs work for others (or has a genuine and practical entitlement to do so). The right to the exclusive services of the person engaged is characteristic of an employment relationship; working for others suggests an independent contract;
- Whether the worker has a separate place of work and or advertises his or her services to the world at large;
- Whether the worker provides and maintains significant tools or equipment;
- Whether the work can be delegated or subcontracted. If the worker is contractually entitled to delegate the work to others – it will be a strong indicator that the worker is an independent contractor;
- Whether the putative employer has the right to suspend or dismiss the person engaged;
- Whether the putative employer presents the worker to the world at large as an emanation of the business;
- Whether income tax is deducted from remuneration paid to the worker;
- Whether the worker is remunerated by periodic wage or salary or by reference to completion of tasks. Independent contractors tend to be paid by reference to completion of tasks;
- Whether the worker is provided with paid holiday or sick leave;
- Whether the work involves a profession, trade or distinct calling on the part of the person engaged;
- Whether the worker creates goodwill or saleable assets in the course of his or her work; or
- Whether the worker spends a significant portion of their remuneration on business expenses
A consideration of these indica is not a ‘mechanical exercise of running through items on a check list’. It is to paint a picture of the relationship. The overall effect can only be appreciated by standing back from the detailed picture that has been painted, by viewing it from a distance and by making an informed, considered, qualitative decision.
The Totality Test
The critical distinction between an employee or independent contractor identified by Justice Bromberg in On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3), is “rooted fundamentally in the difference between a person who serves his employer in his, the employer’s, business, and a person who carries on a trade or business of his own.”
The Court stated that the distinction should be viewed as a practical matter:
- Is the person performing the work an entrepreneur who owns and operates a business (does the person have a business?); and
- In performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?
If the answer is yes, the person is likely to be an independent contractor. If no, then the person is likely to be an employee.
In answering the first question, the case law suggests that a Court will look to the following indica:
- Do the economic activities of the putative business involve the tasks of risk in the pursual of profits?
- Does the putative business engage in a repetitive and continuous manner with purchasers of its services?
- Does the putative business employ or engage persons other than the owner/operator to carry out its economic activities?
- Does the putative business have the basic transactional systems that are common of a business of that kind? For instance: invoicing systems, standard rates and terms and conditions of trade; insurance coverage; payment and debt collection systems; appropriate financial records; budgeting or forecasting systems; business based arrangements with a bank or other financial institution.
- Do the services provided by the putative business involve the provision of labour or sufficient skill to be suggestive of the pursuance of a profession or trade through a business?
- Are the regulatory requirements of a business (business name, registration, taxation, GST and ABN registration and compliance) being met by the putative business?
In answering the second question – ‘whose business is the economic activity being performed in and for?’ raises the following indica for consideration:
- Does the provision of the economic activity provide an opportunity for profit and involve the risk of loss? Or is the payment made to them largely consistent with the remuneration than an employee would have received for providing the activity?
- Who bears the risks associated with providing any equipment or assets required for the performance of the economic activity?
- Who will have the capacity to control and direct the manner in which the economic activity is carried out?
- Is the economic activity represented or portrayed as the activity of the putative business or that of the putative employer’s business?
- To what extent is the person providing the economic activity financially self-reliant from, as opposed to, economically dependent upon or organisationally tied to, the business receiving the activity?
- Is the person providing the services free to employ his or her own means to produce the activity or must that person personally perform the work?
- To whose business does any goodwill created by the economic activity ensure?
- In contracting to provide the economic activity has the person agreed to provide an outcome or result?
- To what extent is the person providing the economic activity doing so with his or her own tools and equipment?
The determination of whether someone is an employee or independent contractor can be a difficult and complex one. If you need assistance in this area please contact Resolution123.
Sham contracting occurs where a person working as an employee is told that they are an independent contractor when they are not. This is usually done by an employer to avoid entitlements due to employees including minimum wages, annual and long service leave, superannuation and worker’s compensation. Sham contracting is a civil remedy provision under s357 of the Fair Work Act 2009 (Cth) which means if prosecuted, a Court can fine the employer/company involved in the contravention. They can also order a company to pay any wages or entitlements due to the employee.
More information can be found from the FWO here.
If you believe that you have been a victim of sham contracting we recommend you contact Resolution123 to be given some legal advice and recommendations on how to move forward.