Distinguishing Employees from Independent Contractors

Aaron MagnerLegal Counsel, UNSW

INTRODUCTION

The distinction between employees and independent contractors is surprisingly elusive, but a concept which it is increasingly important to understand as each has different rights and obligations. For instance, unless expressly provided for in the contract, there is no obligation to provide a true independent contractor long service leave, annual leave, sick leave, bereavement or carer’s leave, all of which are rights enshrined within the employment relationship by either federal or state legislation or registered industrial instruments. Nor will a principal ordinarily be obliged to contribute to a contractor’s superannuation fund. Despite this engaging someone as a contractor does not absolve an organisation of all responsibility. Contractors and sub-contractors have significant rights.

This paper examines the means by which courts, and lay people, can distinguish between an employment relationship and that of principal and contractor. This paper also examines some of the legal pitfalls for organisations that attempt to increase flexibility and reduce costs by manipulating the distinction between employees and independent contractors.

The difficulty of distinguishing between the two relationships is encapsulated in the following passage:

“It is often easy to recognise a contract of service [employment contract] when you see it, but difficult to say wherein the difference lies. A ship’s master, a chauffeur and a reporter on the staff of a newspaper are all employed under a contract of service; but a ship’s pilot, a taxi-man and a newspaper contributor are employed under a contract for services [independent contractors].”1

The table below is derived from the two authoritative decisions of the High Court of Australia in Stevens v Brodribb Sawmilling Co (1986) 63 ALR 583and Hollis v Vabu Pty Limited (2001) 207 CLR 21. It is intended as a practical guide and summary to aid in the determination of whether a particular worker is engaged as a contractor or as an employee.

1 Stevenson Jordan and Harrison Pty Ltd v MacDonald and Evans [1952] 1 TLR 101 (CA) at 110-111.

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Employee v Contractor Summary of the Multiple Indicia Test

Indicia Employee Contractor

Control A greater degree of control is exercised (or able to be exercised) not only as to the work that is to be performed, but the manner in which it is to be performed. For instance, an employer will typically have the ultimate say over the days and hours worked by its employees. The regularity of instructions and guidance given to a worker may be relevant in this regard.

A principal has a lesser degree of control over the manner in which work is to be performed by its contractors. Typically, and as the term logically suggests, an independent contractor has more independence and autonomy over his or her hours of work and work method.

Exclusivity/Enterprise

An employee will often be restricted in his or her ability to work for someone other than his or her employer. Often, an employee will be precluded from working for the employer’s competitors, or from engaging in work that is inconsistent with or detrimental to the employee’s obligations to the primary employer.

By way of contrast, independent contractors are in a sense running their own enterprise. They may be able to generate goodwill and, subject to the terms of the contract, are at liberty to perform work for whomever they wish, whenever they wish.

Mode of remuneration

An employee is typically paid in the form of fixed salary or wages. Remuneration by way of commission, piece rates and other incentive payments represent an obvious exception, however, as with all of the factors which are taken into consideration, none is determinative in and of itself.

An independent contractor will usually be paid by reference to the volume of work performed and will submit invoices to the principal in respect of work performed.

Administrationof finances

An employer will typically make arrangements for the deduction of income tax, contribution to its employees’ superannuation funds and so on.

Independent contractors would ordinarily tend to their own financial affairs, including calculating their own PAYE tax liabilities and contributing to their own super funds. In this regard, an independent contractor would often have its own corporate identity and provide the principal with its own ABN.

Outward appearances

An employee will sometimes be required to wear a uniform, by which the employer may be deemed to be holding the employee out to the rest of the world as the employer’s “servant” or agent.

To the extent that an independent contractor might wear a uniform, it would usually be his or her own for the generation of goodwill.

Provision of equipment

An employer would generally provide the tools and capital necessary to perform the tasks it requires of its employees, or at least pay an allowance where the employee is required to provide his or her own equipment, tools or uniform.

The High Court stated in Hollis v Vabu that the performance of work which requires significant capital investment on the part of the worker might be indicative of a principal / independent contractor relationship.

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Delegation and dismissal

An employer has the right to direct a particular person to perform the relevant work and, where appropriate, the right to suspend or dismiss the person employed to do that work.*

An independent contractor is at liberty, subject to the terms of the contract for services, to delegate the work to another. That is, to engage a sub-contractor to perform the work.

* There is a degree of circularity in this and other aspects of the test used to determine whether a worker is an employee or an independent contractor. To use the right to direct a particular person to perform the work and the right of dismissal for failure to do so as indicative of the existence of an employment relationship is to put the rights (and obligations) attendant upon that relationship before the fact of the existence of the relationship.

None of the factors in the above table is individually determinative of the relationship in question. Often, some factors will point towards the conclusion that the relationship is one of employment, whilst others will point in the other direction. The distinction is necessarily impressionistic and reliant on value judgments. To quote from Dennis Denuto, the lawyer in film, The Castle: “it’s the vibe.”

Case Note: Roy Morgan Research Centre Pty Ltd v Commissioner for State Taxation2

This case involved a determination of whether interviewers at the Roy Morgan Research Centre were correctly classified as employees or independent contractors. At stake was approximately $130,000 worth of payroll tax, said by the Commissioner of State Taxation to be payable by Roy Morgan Research (“RMR”) under the Payroll Tax Act in the event that the interviewers were found to be employees.

As is often the case in litigation of this nature, some of the terms and conditions under which the interviewers were engaged pointed towards their being employees, whilst others pointed towards their being independent contractors. In favour of the interviewers being found to be employees were the following factors:

RMR had been making superannuation contributions under relevant legislation.

A Work Cover Levy was paid pursuant to relevant legislation. There was little or no scope for the workers to create an enterprise of their

own or to generate goodwill. A comprehensive set of instructions issued by RMR in respect of each

interview to be conducted exhibited a high degree of control over the manner in which the interviewers carried out their work.

However, the factors which tended towards the conclusion that the interviewers were independent contractors were as follows:

There was no guarantee that the interviewers would be provided with work. The interviewers were entitled to refuse to undertake work.

2 unreported: Supreme Court of South Australia, Justice Perry, 3 October 2003.3

The interviewers were not paid unless they completed eight full interviews over the weekend. In this regard, it has been stated that “undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor.”3

The interviewers were required to provide their own motor vehicle and telephone.

Income tax was not deducted and no annual leave or sick leave entitlements were received by the interviewers.

Finally, the parties had contracted on the footing that the interviewers were independent contractors. In this regard, Justice Perry noted that where - looking at the relationship in its totality - there are competing and equivocal indicators, a contractual agreement that the worker is an independent contractor is not to be dismissed lightly.

His Honour ultimately concluded that the interviewers were independent contractors, and that as such the $130,000 payroll tax was not payable by RMR. His Honour reached this conclusion despite the finding of Justice Byrne, of the Victorian Supreme Court, that RMR interviewers employed in virtually identical conditions in Victoria ought to be classified as employees.

It is important to bear in mind that the previous discussion relating to distinguishing between employees and contractors is in the context of the common law. Various State or Federal legislation, may define an employee in broader or narrower terms than the traditional common law definition discussed in this paper. Any statutory redefinition of the employment relationship may affect the various payments and deductions to be made in respect of workers.

For instance, in this case, independent legal advice provided to RMR to the effect that Workers Compensation levies and superannuation were payable to the interviewers, was not inconsistent with the interviewers being classified at common law as independent contractors. This was a result of the definition of “worker” and “employee” in the relevant legislation arguably differing from the common law definition.

STATUTORY DEEMING PROVISIONS

Further complicating matters there are a few provisions, embodied in legislation that highlight that Parliamentary prerogative is capable of deeming certain parties to be employees in spite of the fact that they fall well outside of the traditional common law definition of the employment relationship.

Payroll Tax Act 1971 (NSW) section 3CSection 3C of the Payroll Tax Act 1971 (NSW) pertains to that of the “labour-hire” agency, or “employment agent” as it is referred to in the legislation.

On the one hand, ordinarily there may be no employment contract, in the traditional common law sense, between the employment agency and the worker whose services are provided to the client of the employment agency (the “contract worker”). That is, there is a contract between the employment agency and the contract worker, but many of the indicia which are indicative of an employment

3 World Book (Australia) Pty Ltd v Commissioner of Taxation per Sheller JA.4

relationship are absent as between the two. Arguably, the most notable of these is the lack of any effective control over, or capacity to control the worker. On the other hand, whilst the employment agency’s client maintains effective control over the contract worker, there is no employment contract in the traditional sense, if indeed there is any contract at all, with the contract worker.

Notwithstanding the lack of the usual characteristics of an employment relationship, section 3C deems an employment agent to be the employer of a contract worker, such that any fees received by the employment agent from its client and payable in respect of the provision of services by the contract worker, are deemed to be wages upon which payroll tax is payable. Section 3C is therefore an example of a legislative broadening of the concept of the employment relationship, albeit a broadening which is limited to the context of payroll tax payments.

Workplace Injury Management and Workers Compensation Act 1998 (NSW)A conceptually similar statutory broadening of the employment relationship is common in relation to workers’ compensation legislation throughout the States and Territories. Clause 1 of Schedule 1 of the Workplace Injury Management and Workers Compensation Act 1998 (NSW) (“WIM”) provides that:

“If the services of a worker are temporarily lent or let on hire to another person by the person with whom the worker has entered into a contract of service or apprenticeship, the latter is for the purposes of this Act, taken to continue to be the employer of the worker while the worker is working for that other person.”

It is important to note that the common law indicia are still relevant in relation to this provision, as its operation is predicated upon the existence of an employment contract (“contract of service”) between the worker and the original employer who is lending or letting on hire its employee to another. The manner in which this provision broadens the traditional definition of the employment relationship, beyond that established at common law, is by ensuring that the original employer is deemed to remain so notwithstanding an arguable giving up of control over the employee.

Clause 2 of Schedule 1 of WIM also deems certain workers to be employees notwithstanding that they might otherwise fall outside of the common law embodiment of that term. For example, it deems “outworkers” to be employees even though they provide their services from premises which are beyond the control of the deemed employer. The same section also deems certain contractors to be employees for the purposes of WIM.

CONTRACTORS AND SUB-CONTRACTORS

Having applied the “multiple indicia” test and determined that the nature of the relevant relationship is that of principal and independent contractor, parties to a commercial transaction should be aware of the obligations imposed upon it as a matter of law. It is equally important that you are not only able to distinguish

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between employees and contractors, but are also aware of the legal consequences of the distinction. While it is beyond the scope of this paper to elucidate all the relevant legal obligations of a principal to a contractor, the following represent a broad guide.

Occupational Health and SafetyOccupational health and safety is not a matter for employers alone. Section 10 of the Occupational Health and Safety Act 2000 (NSW) imposes an obligation upon any person having control of premises used by people as a place of work, to ensure that the premises are safe and without risk to health. By virtue of section 22(1) of the Acts Interpretation Act 1901 (Cth) the obligation under section 10 extends to a “body politic or corporate” and so applies to local government and its instrumentalities, whether or not they are incorporated.

Section 11 of the Occupational Health and Safety Act 2000 (NSW) provides that a person that supplies any plant or substance for use by people at work must ensure that the plant or substance is without risk to health when properly used and either provide or arrange for the provision of information in order to ensure its safe use.

Liability of a principal for the remuneration payable to employees of a subcontractor

It is a fact of commercial life that parties to commercial arrangements occasionally default as to the terms of the arrangement. Bills are not always paid. Accordingly, the Contractors Debt Act 1997 (NSW) serves to assist in sub-contractors’ in securing payment of outstanding debts. The provisions of the Act apply when a principal engages a contractor to carry out work or supply materials and that contractor then engages a sub-contractor to perform some or all of that work.

Should the contractor default in its payments to the sub-contractor, then the unpaid sub-contractor has redress under the Act to the principal. That is, the money that the principal owes to the primary contractor may be used instead to satisfy the debt owed by the primary contractor to the sub-contractor. The Act achieves this more equitable outcome by way of a two-step process, the effect of which is to assign the obligation of payment of the outstanding debt to the principal.

The overall effect of the Act, as well as its object and justification, was stated as follows:

“By way of an overview, the provisions of this Bill should be seen as providing persons who are undertaking work or supplying materials with a dedicated mechanism for recovering money for the cost of that work or material from the party who will ultimately benefit from that work – although that party is protected from having to pay the cost more than once.”

It should be noted that a similar result may be achieved via section 127 of the Industrial Relations Act 1996 (NSW), however, possibly due to the rather circuitous route involved in obtaining payment under that section, the Contractors Debt Act appears to be the more often utilised method of redress.

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CONCLUSION

Educated minds often differ on the issue of whether particular facts disclose an employment relationship or that of a principal / independent contractor. However, many circumstances will tend overwhelmingly towards a particular conclusion, one way or the other. The principles discussed in this paper should serve as a reliable guide in distinguishing between contractors and employees in the majority of cases.

Aaron MagnerLegal Counsela.magner@unsw.edu.au

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