Was he an independent contractor or an employee?

One Minute Summary

Independent contractors cannot access unfair dismissal rights under the Fair Work Act 2009.
To get around this they are claiming that they were not really an independent contractor but were actually an employee. This claim effectively states the contractor they signed was a sham and they were in reality an employee.
The Commission will firstly examine the nature of the contract as to whether it resembles a contract for services rather than a contract of service (an employment contract).
Thereafter the Commission will look at the day-to-day practicalities of the relationship between the parties. These factors will then determine the true nature of the legal relationship.
Key factors will include invoicing and payment, control, whether another person can be substituted to complete the tasks in place of the independent contractor, and whether the person is integrated into the business – which is effectively what an employee is.

At Hunter Employee relations we are often requested by clients to draft employment contracts for all levels and types of employees. The clients also seek advice as to whether a person can be employed as a contractor and not an employee.

Following the changes to the Fair Work Act in August 2024, concerning the distinction between employee and contractor, there have been a number of interesting decisions where the Commission has provided a useful analysis of when someone is a contractor or an employee. Many of these decisions have related to a termination. The person was originally engaged as an independent contractor but then claimed to be an employee to access the unfair dismissal provisions under the Fair Work Act – to which they do not have access as contractors.

Mr Roberts, a fitness instructor, was one such independent contractor. He made an application under s.365 of the act claiming he was an employee and was unfairly dismissed. The employer stated he was in fact a contractor and therefore the Commission did not have the jurisdiction to deal with this claim. Commission Connolly decided to hear the jurisdictional claim first. Thereafter, if Mr Roberts was an employee, his unfair dismissal application could be addressed.

Mr Roberts has contended that parts of the contract were subject to change which he stated was unfair and unbalanced. He also claimed he had no ability to subcontract his work. Secondly, he stated the employer reserved the right to change his duties without notice at its discretion which he claimed had happened to him.

Mr Roberts stated he had to perform extra duties which included preparing classes, passing on membership enquiries from class participants and attend meetings. He also claimed the employer had control over when and where he worked.

The employer’s CEO provided sworn oral evidence at the jurisdiction proceedings which was uncontested by Mr Roberts. He provided a copy of the signed independent contractor agreement together with invoices Mr Roberts had submitted which had been paid by the employer. The CEO further provided documentation where Mr Roberts had made requests for classes to be covered by another person in his absence and his proposal for starting new classes.

The Fair Work Act – Independent Contractors

Section 15AA is headed ‘determining the ordinary meanings of employee and employer’. It states that the true nature of employee or employer is to be determined by ‘ascertaining the real substance, practical reality and true nature of the relationship’ between the person and business entity/organisation.

To do this the totality of the relationship will be closely considered. This involves:

The terms of the contract governing the relationship; and
A range of other factors relating to the totality of the relationship – based on how the contract is enacted day to day.

It is important to outline the long-established key distinction between an employee and a contractor at common law.

An employment relationship exists where an individual provides their personal service under a ‘contract of service’ which is carried out by the individual themselves (only).

An independent contracting relationship is a ‘contract for services’ where an individual is conducting their own independent business with a degree of control over how their services are provided.

Numerous prior decisions have indicated which factors are to be considered in ascertaining the true nature of the relationship. These include:

The degree of discretion and control over how and when work is to be performed.
The degree of freedom to perform work for others.
The requirement to provide and maintain tools and equipment.
The mode of remuneration, including the payment of taxation.
The provision of clothing and livery and the extent of presentation within the business.
The provisions of leave and other entitlements associated with relationships of employment.
The opportunity for profit and loss.

The weight to be given to any of the above individual factors will vary with the facts of each case.

Commissioner Connolly reviewed all the facts surrounding the relationship between Mr Roberts and the employer beginning with the contract agreed to and signed by both parties. Previous decisions have made it clear there is no simple check the box process and that careful analysis was required.

The contract clearly stated Mr Roberts was an independent contractor. This on its own is insufficient as there have been numerous case examples of such a contract but the facts in practice have shown a legal employment relationship.

The contract outlined the services to be delivered, performance standards, invoicing, payments, non-exclusivity (meaning another person could step in and deliver the services if Mr Roberts arranged it). While Mr Roberts claimed the contract seemed unfair and unbalanced the Commission did not agree stating ‘My assessment is there is nothing particularly onerous or unusual about these terms for them to be to be considered by a contracting party to freely enter’

In further reviewing the evidence provided by the employer the Commission noted the following had been occurring in accordance with the contract:

Invoicing terms by which Mr Roberts was paid for services rendered.
The freedom of Mr Roberts to determine when and at which facility he conducted classes.
The freedom of Mr Roberts to perform other work (for other businesses) and to organise substitute instructors for work he had arranged.
Mr Roberts was not paid superannuation or leave entitlements and was responsible for his own insurances and ABN.

An important point highlighted by the Commissioner was whether Mr Roberts was integrated into the business stating: ‘I do not think this is the case, as opposed to carrying out a business on his own behalf’ He further added ‘Mr Roberts had considerable control and independence… the applicant (Mr Roberts) was not an employee of the Respondent’ (the employer).

Given the Commission’s decision that Mr Roberts was not an employee he was unable to continue with his unfair dismissal as the Commission had no jurisdiction to hear it.

Commentary

The decision provides useful guidance on what differentiates an independent contractor from an employee. The starting point is whether there is an effective contract in place. This will show the intention of the parties at the time the contract is made.

Thereafter a multitude of factors are examined that concern what the relationship is in practice day to day.

The interesting distinction noted above is the contact of service versus the contract for (providing) services. Each of these carries quite a different mindset about them.

It is still feasible for employers to engage a person as an independent contractor. Such arrangements are more suited to some tasks, occupations or industries.

Such arrangement will require careful drafting of the independent contractor contract.

Getting it wrong for an employer can be quite costly particularly if the person is found to be an employee and the employer is then responsible to pay PAYG taxation and superannuation.

If the employer drafts the independent contractor contract it is imperative that they ask the other person (the contractor) to have their own solicitor sign off that they have reviewed the contract for their client. A common theme among applicants is that they did not understand what they were signing. Guess who is then held responsible?

Please contact Hunter Employee Relations if you require assistance with drafting and implementing comprehensive employment contracts or to discuss the potential engagement of a person as an independent contractor.

Kind Regards
Michael Schmidt
M 0438 129 728
[email protected]
www.hunteremployeerelations.com.au

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