February 2013

So, what are my workers: employees or contractors?

To determine if a worker is an employee or independent contractor should be a simple task.  The answer is important for determining the existence of significant employment, insurance and taxation obligations. 

Unfortunately, the law does not provide a simple satisfactory test to determine the issue; it can be quite difficult.  The status of a worker is dependent on a range of factors and the vibe of the situation.  

The recent Full Federal Court decision in ACE Insurance Limited v Trifunovski [2013] FCAFC 3 (25 January 2013) usefully highlights the various approaches over the years in determining the critical issue of worker status.  In this bulletin, we examine those approaches to determining if a worker is an employee or contractor, as reviewed in the judgment of Buchanan J of the Full Federal Court.

Personal service

An employment relationship requires an employee to give personal service to the employer.  An employee cannot get another person to do their job.  An employee is paid for performing their role, whereas a contractor is paid for a defined result (regardless of who performs the work or the time worked).

The control test

In the early years, central to determining the status of a worker, was the control test.  If a worker was subject to the supervised control and direction of a principal as to what to do and how to do it, then there was an employment relationship.

However, given the existence of highly qualified and specialised roles requiring little or no supervision, the test of requiring direct supervision was obviously inadequate.  In 1955, the High Court held that what matters is the existence of the right to command the manner of the performance of work (rather than the actual exercise of it).

Delegation

It has often been said if a worker can delegate the performance of their work, then this fact is incompatible with employment. In 1978, the Privy Council found delegation to be determinative of a worker being a contractor.

The integration test

Courts then considered the extent to which a worker’s activities formed an integral part of the principal’s business and operations.  Was the worker carrying on business for himself or herself or the principal?

However, in certain circumstances, this test was unsatisfactory.  If a worker can choose to work as they please, that suggests a degree of independence not consistent with employment.

The indicia of employment / totality test

In 1986, the High Court said that control over a worker is no longer the sole factor to determining if an employment relationship exists.  

Regard must be had to the totality of the relationship.  Control is one of a number of indicia of employment that must be considered, including the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work and provision for holidays, and the deduction of income tax and delegation of work.

The common sense test

In 2001, the High Court, after examining various indicia of employment, said:

Viewed as a practical matter, the [workers] were not running their own business or enterprise, nor did they have independence in the conduct of their operations.

In that case, the High Court held that bicycle couriers wearing the principal’s uniform and working in accordance with the principal’s commands, were employees.  The fact they spent a couple of hundred dollars on a bike and had an ABN, was not sufficient to make them contractors.

The enterprise test

A decision not mentioned (or endorsed) in the ACE Insurance case, is the Federal Court judgment in On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366.  In that case, Bromberg J looked at the indicia of a business to determine if the worker was an employee or contractor.

Is the worker operating a business?  Does the worker take the risk of profit or loss?  Does the worker own business infrastructure or assets?  Does the worker advertise or promote a business?  Does the worker generate their own goodwill?

The upshot of the ACE Insurance decision

The decision did not create new law, but it has demonstrated that:

It is trite to say that the foregoing survey yields no single or unifying test to determine whether an employment relationship exists.

The approach to resolve the status issue appears to be an adoption of all the above considerations and tests, followed by a judgment call based on persuasion and feel.

What can businesses do?

To a significant degree, businesses can control the levers that determine whether a worker is, at law, an employee or contractor.

A carefully drafted contract is important in determining the status of a worker.  Contractual descriptions of the relationship are relevant, but contractual terms dealing with, delegation, the obligation to work, provision of tools, and payment and result, are more decisive.

Equally important is the reality of the relationship and how it operates in practice.  Day to day dealings must reflect the contract.  The principal must treat the workers as contractors and the workers must act as contractors in all aspects.  Having workers set up companies, submit invoices or use an ABN does not guarantee they will not be found to be employees.

However the issue of status is but one part of the problem businesses face seeking to draw a fine line between contractors and employees.  The next issue is avoiding deeming provisions under insurance and taxation legislation that capture "dependent" contractors.

Is it time for a review of your arrangements with your "contractors"?

Author: James Mattson