Are Your “Contractors” Actually Employees

Independent contractors are the fastest growing class of workers in the Australian labour market, and for good reason.  It is often more cost-effective for a company to outsource non-essential functions because, if business diminishes, the contractual relationship can usually be terminated more easily than the employment relationship.

But engaging independent contractors can be false economy if your business gets it wrong.  Courts and tribunals will award all the benefits of employment, including termination payments, and severance and leave entitlements, to workers it deems employees, regardless of the label they work under.

So, how do courts and tribunals decide whether a worker is an employee or independent contractor?  And how can you make sure your exposure is minimized?

An employee by any other name?

It is not enough for a company to nominate someone’s title as “contractor” when that person performs the same work, and in the same manner, as an employee.  It is also not enough to give an employee the trappings of contractor status (such as payment of an invoice) when in reality the worker continues to act as though he or she were an employee.

Whether a worker is an employee or contractor will depend on what that person actually does and how he or she does it.  A court or tribunal will examine a range of criteria in order to answer the question.

Traditionally, the most important of these has been the issue of control.

Who’s in control?

Control by, or on behalf of, an employer can take a number of forms.  There may be control over what work should be done, as well as when, where and how that work should be done.

The first three of these will not necessarily point to an employment relationship.  There are instances where an independent contractor, e.g. a builder engaged to renovate a house, can be engaged by a principal who defines the first three criteria.  That, on its own, does not make the builder an employee.  Instead, it is the fourth element that is usually decisive under the control test.

In an employment relationship, the employer has the right to issue instructions about how the work should be performed when instructions become necessary.  For independent contractors, the level of instruction is usually more limited.

Just how much instruction is required before the relationship changes from one to the other has been a question that has intrigued courts.  For example, there may be instances where control appears to be exercised but may really amount to no more than cooperation.

In Roy Morgan Research Centre Ltd v Commissioner of State Revenue (1996) Sup Ct of Vic (Byrne J) (4508 of 1996) (13/8/96), it was even decided that it was not as much the exercise of control that mattered, as the right of the employer to exercise it.  (The decision was affirmed on appeal (1997) and recently applied in VSC 186, 2/5/05).

A Multi-factor approach

In today’s highly specialized workforce, the shortcomings of the control test are obvious.  A skilled employee, for instance a computer programmer, may have knowledge that requires him or her to operate with a high degree of autonomy.  Similarly, there may be instances where a contractor is engaged, and the nature of the work or place of business is such that the principal must provide specific instructions about the manner in which the work is to be completed.

Accordingly, in Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16, Chief Justice Mason put forward the view that, while control was the most important criterion in determining the relationship, the control test should no longer be the sole criterion for determining the relationship.

Instead, the mode of remuneration, the provision and maintenance of equipment, the obligation to work, hours of work, the provision for holidays, the deduction of income tax and whether the worker could delegate were all issues to be examined to arrive at a decision.

In the factual scenario behind that case, a logging company, Brodribb, had hired a man to cart logs from the site of its logging operations to its timber mill.  The worker was injured after logs fell from a truck and onto him, and he sued the two men responsible for driving and loading the truck, believing them to be

Independent contractors and not employees of the company.  The two men claimed they were employees and the company was therefore vicariously liable for their actions.

Chief Justice Mason examined the control test and held it was no longer the sole criterion through which to judge whether or not there was an employment relationship.

In the context of this test, the Chief Justice noted the two men provided and maintained their own equipment, asset their own hours of work, received payment according to the number of logs they felled and genuinely believed themselves to be operating independently of the company.

For these reasons, the men were held to be independent contractors and not employees, despite the fact the firm gave detailed instructions about what work to perform and whether, in the even of bad weather, it should perform at all.

The “totality of the relationship”

In Hollis v Vabu [2001] HCA 44 (9/8/01), the High court took an opportunity to review the Brodribb approach.  The court had been called on to decide whether a bicycle courier who delivered parcels for a company was an employee or independent contractor.  The courier, who wore a uniform saying “Crisis Couriers”, had struck a pedestrian as a result of his own negligence while performing his work.  The injured man sued the company alleging it was vicariously liable as the courier was an employee.

The NSW Court of Appeal had already found in favour of the company, holding that, because the couriers were taxed as contractors, they were contractors for the purposes of the decision.  However, the majority of the High Court overturned this finding.  In doing so, the majority held that, while the ruling on taxation was a guide, it covered couriers who delivered by van and motorbike also.  A bicycle was not a “very considerable expense”.

The majority of the High Court held control was no longer the most important consideration, but rather one of many.  Instead, a court or tribunal should look at the totality of the relationship.  On this occasion, there were a number of factors indicating that the bicycle couriers were employees, including:

  • they were not running their own business or enterprise and would not be able to make an independent career as freelancers;
  • they were not providing skilled labour, or labour requiring special qualifications;
  • they had little control over the manner they performed their work and were unable to refuse work;
  • they were presented to the public and to customers as emanations of Vabu (i.e. they wore uniforms and were subject to dress standards);
  • deterrence of future harm – Vabu knew its couriers presented a danger to pedestrians and were concerned with the employer being made responsible for the employee’s wrongful act;
  • the courier’s finances were overseen by Vabu – the method of payment (per delivery) was considered a natural way to remunerate employees whose sole duty was to perform deliveries;
  • the couriers were required to bear the cost of replacing or repairing Vabu’s equipment, including radios and uniforms; and
  • there was considerable scope for the exercise of control and the couriers had little latitude in the way they did their work

Vabu’s concept of the totality of relationship has been cited with approval in subsequent decisions across the country.  In Australian Air Express Pty Limited v Langford [2005] NSWCA 96. the NSW Court of Appeal held that, looking at the totality of the relationship, the owner-driver of a delivery truck was a contractor even though his principal provided him with a uniform, painted its logo on the truck and chose the hours he worked.  However, the court held the worker was required to make a significant investment in his own vehicle and that this, along with other factors, meant he bore the risk of his business and was a contractor.

Conversely, in Damevski v Giudice [2003] FCAFC 252 (13/11/03), the full court of the Federal Court used the same test to find a cleaner who was thought to be employed through a labour-hire company was really an employee of the principal.  Even though the cleaner purported to come through an intermediary, the full court noted the reality of the situation was that the principal set the terms under which the worker would provide his services, and the labour-hire firm merely conducted administrative work.

Possible legislative reform

Given the complexities involved in determining who is and who isn’t an independent contractor, the federal government is currently investigating the options for legislative reform.  One such proposal may be to replace the common law definitions of “independent contractor” and “employee” with a statutory definition.  The government is firmly of the view independent contracting arrangements should be governed by commercial and not workplace relations law.  The government however, has acknowledged there is a need to protect workers from “sham arrangements” designed to evade obligations for genuine employees.

What this means for your business

There are a number of factors your business should look at when determining whether or not a specific contractor is, in fact, an employee.

These include:

  • determining who supplies and pays for tools of the trade;
  • sorting out who determines the worker’s hours;
  • establishing whether the worker is taxed as a contractor or an employee;
  • deciding who determines the delegation of work;
  • choosing who has the right to control the worker as opposed to who controls the worker;
  • determining whether the worker is paid by result; and
  • determining whether the worker is “in business for themselves”.

Simple dos and don’ts

While these tests help define who is a worker and who is a contractor in the eyes of the courts and tribunals, there are a number of simple steps you can take to help ensure that your contractors remain just that.  While none of these steps is definitive, each is important in helping to create the overall relationship of a contractor.

  • Ensure, where possible, that contractors provide their own tools.
  • Where possible, allow the worker to subcontract and set his or her own hours.
  • Where possible, ensure payment is by result, i.e. the number of fence posts painted, rather that by way of salary or hourly rate.
  • Where appropriate, allow the worker to contract to other businesses.
  • Pay contractors only on receipt of an invoice and never remove PAYG taxation from a contractor’s pay..
  • Never include any form of paid leave arrangement in a contractor’s agreement.

Independent contractors have proven advantages for business.  But it is important to get the relationship right in order to minimize your exposure and maximize the benefits of this flexible form of labour.  If you are in any doubt about the true nature of your contractors, your should seek professional legal advice.  For more details please contact our office.

Readers should not act or rely on this information without first seeking out professional advice concerning their particular circumstances