The Federal Court has awarded a contractor $130,000 compensation (plus $29,000 penalty) after it decided he was an employee.

One Minute Summary

• The person was initially engaged in 2005 as an independent contractor – with specialist IT skills.
• Over time, through actions by the business, he became an employee.
• The person continued to invoice the business for his services but they paid him through the payroll – including deductions for tax and payment of superannuation.
• When he was terminated as a contractor in 2020 he began legal proceedings claiming he was an employee and entitled to accrued leave entitlements, public holidays not paid and ‘reasonable’ termination notice of 12 months.
• The Court closely examined the working relationship and found he had become an employee.

The IT contractor, Mr Cropper, was engaged as an independent contractor by the employer, Energy Action, in 2005. He was terminated in 2020 and commenced legal proceedings seeking compensation on the basis that he was actually an employee. This included payments for various leave entitlements and reasonable notice.

The following are the key findings from a complex Federal Court decision. It’s a warning for employers to clearly define the nature of any independent contractors’ engagement.

Mr Cropper was engaged in 2005 as an IT specialist with particular database development skills the employer needed. He was working for several company clients at the time. While there was no written independent contractor contract it was clear from the arrangement that Mr Cropper was not an employee.

From January 2006 the nature of the relationship began to slowly change -

• As his hours increased Mr Cropper raised the question of becoming an employee and was told they would look at his suggestion. No response was ever provided by the employer.
• Mr Cropper did not have fixed working hours, and his total hours varied between 25 hours and 38 hours per week.
• Mr Cropper continued issuing monthly invoices. While this was occurring the employer, in 2006, began issuing Mr Cropper with monthly pay advices which recorded income tax deductions and superannuation contributions – based on Mr Cropper’s invoices.
• From mid 2006 Mr Cropper ceased sending monthly invoices but provided the employer with monthly summaries of hours worked.
• Mr Cropper sent correspondence to the employer using words to the effect of ‘reviewed our commercial arrangements’ which appear to indicate an independent contractor arrangement.
• In 2008 Mr Cropper was given responsibility for all the employer’s information technology functions.  He was given the title of ‘Data Management and IT Manager’.
• Annual performance reviews commenced in 2009.  
• Various communications between the parties submitted during the Court proceedings indicated that he was both an independent contractor and an employee.
• During this time Mr Cropper was still paid on an hourly basis. In 2015 he stopped sending time sheets and logged his time in the employer work log system.
• Mr Cropper would notify when he needed time off but was not paid for those periods.
• On occasions he took personal leave but was not paid.  The amount was quite low.
• He did not submit hours for public holidays.  They were unpaid. 

In February 2020 discussions commenced with Mr Cropper that his specialist database IT skills were no longer required as the company transitioned to a different platform. He was initially offered 5 weeks’ notice and the payment of accrued long service leave.

After rejecting the above offer he was then also offered an additional 12 weeks redundancy payment, ‘to assist you in this difficult period, and as a gesture of good faith for your years of dedication as a contractor to the Company’. And then terminated immediately.

Federal Court Proceedings

The employer argued that Mr Cropper was never employed under a contract of employment and therefore remained a contractor.

The Court agreed that in the first instance a contract would determine the relationship but added that the Court can also infer the nature of the contractual relationship (independent contractor or employee) from the actions of the parties.

The Court then closely examined the nature of how work was undertaken, how payment was sought and made and a variety of other surrounding factors to determine that Mr Cropper was an employee – from 20 January 2006.

‘The terms of that contract, as it stood in and from January 2006, are made evident from the nature of the parties’ conduct thereafter.  As might already be apparent, I consider that the most significant of those terms concern the manner in which the parties envisaged that Mr Cropper would be paid.’

The employer argued that if the Court found Mr Cropper was a employee then it should find that he was a casual. This means that Mr Cropper would not be entitled to the leave he is claiming. After the Court determined he was an employee it closely examined whether he was a casual employee and rejected this argument.  

The employer argued that the hourly rate paid to Mr Cropper throughout his ‘employment’ was sufficient to cover his unpaid leave entitlements. The Court rejected this argument stating that if it was the intention for an hourly rate to be ‘all in’ and cover other statutory entitlements the terms of the contract must clearly articulate what those individual ‘all in’ payments are. There was no such contract / term.

The statute of limitations on claiming public holidays placed a limit on how far back they could be claimed. This was not the case with annual leave which is cumulative.

Mr Cropper was awarded approximately $130,000 for leave entitlements, public holidays and reasonable notice of 3 months’ pay.

In addition to the compensation, the Court also ordered a fine of $29,000 be paid by the employer which was at the low end. The maximum fine available to the Court was $63,000 per contravention. Total cost to the employer was approximately $160,000.

Commentary

Given there was no written employment contract which stipulated what period of notice was to be paid on termination, the Court determined that Mr Cropper was entitled to 3 months as reasonable notice. This is a contract (law) of employment decision – which is greater than the minimum 5 weeks payable to him under the National Employment Standards. Employers should be conscious this applies to all employment contracts. Contracts should include a notice clause with the NES standard being the minimum.

What became very clear in this case was that Mr Cropper was taking a very assertive position and was well equipped with years of correspondence to support his position. The employer was on the back foot with few records to defend and support its position.

Another interesting legal fact highlighted in the decision is that S.117 of Fair Work Act indicates what notice should be paid to an employee on termination. The Court says the Act does not confer the actual right to terminate. It is recommended that such a right exists in an employee’s employment contract.

The employee in this case received a large compensation payment for leave, public holidays and three months reasonable notice. Consider what the total financial impact could have been if taxation and superannuation had not been paid by the employer and the ATO had become involved.

Reading the decision, it raised the question of why the employer decided to fight this case in the Federal Court. There was minimal prospect of winning. Some of the arguments advanced by the defence lawyers could as best be described as curious. It is quite possible the total cost of the legal fees (including Counsel) would match or exceed the payments made by the employer as a result of this decision.

It is possible to engage independent contractors in certain circumstances. Employers must seek advice in determining if and how this can be achieved. Getting it wrong can become very expensive.

If you have an independent contractor ‘arrangement’ you wish to review please contact Hunter Employee Relations.

Kind Regards

Michael Schmidt

M 0438 129 728

[email protected]

www.hunteremployeerelations.com.au

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