Companies often express a desire to engage workers as contractors, not employees.
The economic benefits to any company in engaging contractors rather than employees can be substantial. Many companies, whether intentional or not, engage in ‘sham contracting’ or ‘disguised employment’ which is to engage a worker who is, for all intents and purposes, an employee but is treated as a contractor and paid as such so the company benefits economically. The courts, the ATO, and the Fair Work Ombudsman are alive to this type of behaviour, and it is therefore important to get it right.
This article will help companies and workers alike to think more carefully about the issue.
The ‘Control Test’
The traditional test applied by the courts is one of ‘control’ which helps to form a distinction between employee and contractor.
The distinction has been described as ‘between one party having the right to tell the other when, where and particularly how and what work is to be done, which can be the case with either an employer/employee or principal/contractor relationship’[1]. In other words, the more extensive the control over the worker, the more likely that the relationship is to be considered employer/employee.
However, in reality there are many employees that are not subject to the stringent control of their employer and are instead left to their own devices. The Courts have therefore held that the actual element of control does not need to be present, merely the right to control.[2]
Multi-Factor Test
In more recent decisions, courts have interpreted the ‘control test’ as only one of many indicia to be considered when determining whether a worker is an employee or contractor. There is no universally accepted rule of how many indicia, or what combination of indicia denotes an employee or a contractor.[3]
Some indicia which courts have looked at in the past include:
- Does the worker supply their own tools or equipment or make a capital investment to earn the remuneration?
- Is the worker free to perform similar work for other principals?
- Does the worker carry the burden of financial loss or opportunity?
- Is the worker paid according to task completion instead of receiving wages based on time worked?
- Are workers given the right to sub-contract their work?
- Are workers free to set their own hours?
- Are workers are required to carry their own workers compensation and liability insurance policies?
If the answer is ‘yes’ to the above questions, the relationship is more than likely characterised as contractor rather than employee.
A common misconception is that the absence of annual leave, sick leave, PAYE tax deductions, or superannuation paid by the principal indicates that the worker is a contractor at law. An absence of these elements should not be considered determinative of whether a worker is an employee or contractor. Further to this, how the worker is treated by the ATO, or the fact that the worker has an ABN is also not an indication of whether the worker is an employee or contractor.
Some Courts in Australia have held that a genuine contractor can be described as an entrepreneur and is ‘autonomous rather than subservient in its decision-making; financially self-reliant rather than economically dependent upon the business of another; and … chasing profit rather than simply a payment for the time, skill and effort provided’[4]. This should be accepted as another indicia rather than ultimately determinative.
It is also worth noting that the ATO may interpret the working relationship differently for the purpose of superannuation.
Below are some case examples which will help to illustrate the difference between and employee and a contractor.
Case Examples
Hollis v Vabu (2001) 207 CLR 21
- This remains one of the leading cases in Australia on this issue and uses the ‘multi-factor test’ to determine whether worker was employee or contractor.
- Hollis was hit and injured by bicycle courier in Ultimo.
- Bicycle courier rode off and was unidentified except for a jacket that said ‘Crisis Couriers’
- Crisis Couriers was owned and operated by Vabu Pty Ltd
- Hollis sued Vabu for damages on the basis of vicarious liability
- Vabu argued their couriers were independent contractors, not employees, and Vabu therefore are not vicariously liable
- Previous judgment in a lower court was Vabu Pty Ltd v Federal Commissioner of Taxation (1996) 33 ATR 537 which held that Vabu couriers were independent contractors for tax purposes
- At first instance, court relied on the 1996 tax decision and therefore determined that couriers were not employees for the purpose of vicarious liability.
- Hollis appealed to High Court. The High Court then looked to the ‘totality of the relationship.
- High Court said:
- Although couriers supplied their own bikes, and paid expenses of running bikes, they were not operating their own business.
- The couriers had no opportunity for couriers to ‘feelance’.
- The courtiers had no scope to bargain rates.
- Vabu had strict control over the couriers, dictated hours, duties, rules, couriers were unable to refuse work, and unable to delegate or sub-contract.
- The couriers were required to wear company uniform.
- The High Court held that couriers were employees and therefore Vabu Pty Ltd vicariously liable to Hollis for negligence of their employed courier.
On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366
- On Call provided interpretation and translation services.
- On Call would take a request from a client, then assigns the job to an interpreter or translator.
- Commissioner of Taxation brought proceedings against On Call for failure to pay prescribed superannuation contributions for the benefit of their employees.
- On Call argued workers were independent contractors.
- Court looked beyond contractual terms and looked to the substance of the relationship.
- Court asked; is the person performing the work as an entrepreneur who owns and operates a business?
- The Court determined that a real business pursues profits, creates goodwill, employs workers, acquires equipment and other assets, establishes and maintains procedures, accounting practices, and software.
- True independent contractors, in operating their own business, will usually be able to negotiate remuneration, will advertise, will not work exclusively for one company, have the potential to profit on activities undertaken, not be subject to much control.
- In this case, the Interpreters/Translators were unable to negotiate rates, did not advertise, carried no risk in pursuit of profits, and were unable to create goodwill.
- The fact that the Interpreters/Translators could work for rival companies, could reject work, and operated under their own ABN, held little weight.
- The Court determined that Interpreters/Translators were not operating their own business and therefore were employees for the purposes of superannuation
Written by Amelia Hatton
[1] Stewart. A, Forsyth. A, Irving. M, et.al, ‘Creighton & Stewart’s Labour Law’, Sixth Ed., The Federation Press,
Leichhardt, 2016.
[2] Zujis v Wirth (1955) 93 CLR 561.
[3] Sammartino v Mayne Nickless (2000) 98 IR 168 at 189.
[4] On Call Interpreters and Translator Agency Pty Ltd v Federal Commissioner of Taxation (No 3) (2011) 214 FCR 82 at 214.