Independent contractor or employee?
The debate over how to differentiate between an independent contractor and an employee has raged long and hard. Gadens partner, Ian Dixon takes a closer look at the issue and outlines some common misconceptions.
One would have hoped that after all the test cases, court judgments and definitions set out by Parliament in statute, there would be a simple answer as to whether a person is an employee or an independent contractor.
The debate over ‘sham contracting’ and whether a person is, in reality, an independent contractor or an employee has continued to receive legal and political attention. This can cause confusion for working people and often results in errors which can have financial and legal consequences.
Personnel engaged by a company can be put at a disadvantage by being described as independent contractors as this enables the company to avoid paying employee entitlements such as sick leave, annual leave, superannuation and workers’ compensation insurance. Additionally, employee numbers and employment opportunities are lost when a company engages independent contractors in place of employees.
Some companies mistakenly believe that with one or two small steps they can avoid many employment obligations.
To counter this misconception, the Australian Tax Office (ATO) has issued on its website a series of tests to be considered when differentiating between the two types of engagement.
Included in its advice is a list of common myths which the ATO believes have led people to form the view that any one of the steps is sufficient to make a person a contractor. That includes, for example: a contract between the parties asserting that it is an independent contractor relationship; or that the person doing the work has an ABN; or a registered business name; or is engaged only in short-term work or extra work for busy periods (the last could also be an example of a casual employee).
The matter is further complicated by the fact that various statutes (such as tax) often deem parties to be employees for the purposes of imposing statutory obligations, or impose these obligations on personnel whether they are employees or independent contractors, such as superannuation, thereby blurring the lines further.
Common Law Test
There are a number of recent leading case law authorities one can look to for guidance in assessing a relationship. It is unfortunate that in each of the cases, the facts or criteria which appear to point to one form of relationship or the other are often given different weight within the different cases by different judges, which could lead to a conclusion other than what might be anticipated.
There is a criticism that this may be because a court instinctively forms a view of the nature of the relationship and then simply arranges its interpretation on all the different facts to support that conclusion. This is not helpful to the working person trying to decide if theirs is an employment or independent contractor relationship.
Courts over the years have tried to express or create a simple overriding test or question to be answered when undertaking the analysis of a relationship. Some examples are:
The ‘control’ test: can the company tell the other party not only what to do but how to do it?
The ‘four corners’ test: can the other party be said to be within the boundary of the company’s operation?
The ‘organisation’ test (closely allied to the four corner’s test):is the other party really a part of the organisation?
However, a leading court has cast doubt on the validity of such attempts and indicated that they are simply one part of all the matters a court has to take into account when coming to its decision (which does not assist in achieving greater certainty for the worker).
A more recent attempt has indicated that what is now important to be looked at is the ‘totality of the relationship’ (whatever that may mean). What has also been said is that the parties should look at what is the ‘real substance’ of the relationship in question.
Yet another expression which has gained some support is that the distinction between the employee and the independent contractor is ‘rooted fundamentally in the difference between a person who serves his employer in the employer’s business and a person who carries on a trade or business of his own’. Such expressions do not necessarily aid in providing a clear answer.
An assessment of all Indicators
What is universally acknowledged is that there is a considerable number of criteria which have evolved to assist in the interpretation of a relationship but none of which can ever be said to be determinative. The object of the exercise, according to one court, is to paint a picture from the accumulation of detail. However, another said it is not to be regarded as a mechanical exercise of simply considering each of these factors as a checklist to see whether they represent one classification or another, as the factors may vary in the weight or importance to be given in any situation.
No matter which overall test or question is used, it is still necessary to consider all the individual circumstances and indicators. This has been described as a multi-factorial approach.
In one recent case Justice Bromberg of the Federal Court had to consider whether 2,500 interpreters and translators were employees or independent contractors of the On Call Agency.
He found it troubling that there was an absence of a simple and clear definition which explained the distinction. He noted that it was a matter of an evaluation of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details.
Every few years a judge attempts to summarise previous tests and come up with a definitive answer.
Bromberg’s test was:
Is the person performing the work an entrepreneur who owns and operates a business?
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?
In another recent case, the Federal Court was asked to decide whether Ace Insurance agents were independent contractors. Each agent was paid commission on the premiums they collected, each used his own vehicle, did not have income tax deducted from their earnings and issued tax invoices to the insurer for the services each provided.
Conversely, the tax invoices were generated by the insurer and issued to itself, the agents accrued no goodwill in their own business, they were unable to work for any other insurer, sold only the insurer’s policies to the insurer’s customers and were trained by the insurer in the system of business devised and maintained by the insurer.
Perhaps not surprisingly, they were found to be employees and were owed annual leave and long service leave entitlements.
In the On Call Agency case, Bromberg made reference to approximately 22 criteria in two different sections to help make his decision. Those criteria ranged from: who provides the equipment, the tools and the car; what logo is on the shirt or uniform, or on the business card; who hands out the work; does the person have to do the work themself or can it be subcontracted; do they get paid for their time or only on result; who pays PAYG and workers’ compensation insurance; what advertising does the person do and who gets the profit from the work.
I add two more general questions which may give guidance:
1. What is the strength of the independent contractor’s trading?
If the contractor is no more than a company in paper and name, the engagement is more likely to be regarded as that of employer/employee. It will go against a subcontractor claim if the contractor does not have separate company accounting; OHS and HR policies; Schedule of Rates; other employees, or subcontractors engaged in the business or if the contractor does not undertake any other work for other principals.
Clearly, a well-established company engaging casual, part-time employees or other subcontractors, advertising and promoting itself in the area and undertaking other work with established accounting, invoicing and other incurrent operational systems is preferable.
2. Who has ultimate control?
Reference has been made above to the traditional test of ‘control’ (who determines not only what has to be done but how it is to be done). This remains a significant influence even if only one of many. In modern analysis, this may relate to matters of performance, compliance and discipline.
At present, many historical criteria pointing one way or the other are under legal review. For example, the ability to delegate work tends to suggest against an employment relationship but some cases note that the mere right to delegate, in the absence of a likelihood or actuality of delegation, may be of little consequence.
Further, the fact that the contractor can work for others and not exclusively for one person again usually tends against an employment relationship. Put in another way however, the absence of some provision requiring exclusive service can also be a feature of casual employment.
In the On Call Agency case, Bromberg went so far as to question the strength of the indicator as to whether the person was paid for the work done (traditionally regarded as pointing to a contractor) rather than on a time basis indicating an employee. He noted there were many examples of employees being paid on a ‘piece rate’, such as seasonal fruit pickers.
If you feel all of the above appears conflicting, contradictory or just too hard you are not alone. The ongoing debate is the reason even judges complain about the lack of a simple and clear test which would show the difference between an employee and an independent contractor.
In any case you are involved in, look at all the circumstances, weigh them all up and know that no one feature gives the answer.