When is a Contractor not a Contractor

17th November 2020

Highlights

Michelle Cowan, Senior Associate, Active Law explores the differences between independent contractors versus employees, and what you need to know as an emerging professional.

When is a contractor not a contractor?

The question of when someone is legitimately an independent contractor is a matter of ongoing dispute. Cases involving employment claims against organisations, across arrange of industries, has demonstrated that confusion still exists about the nature of independent contractors.

Contractor not a contractor; unfairly dismissed

In 2018, Foodora was found to engage in sham contracting, when a delivery rider challenged the termination of his contract through an unfair dismissal claim. The FWC found that the rider was an employee rather than a contractor and ordered Foodora to pay the delivery rider $15,559 as compensation for the unfair dismissal.^{^[1]}

The Fair Work Ombudsman (FWO) then commenced legal action in the Federal Court, alleging Foodora engaged in sham contracting activity that resulted in three other workers being underpaid $1621 during 2015 and 2016, but that legal action was abandoned one year later when it became clear that, after the company ceased operations in Australia in August 2018, there was no likelihood of being able to recover funds from the defunct operation.

However, the case escalated FWO interest in the practice of engaging workers as contractors, so they were paid below the minimum rates set out in the relevant modern awards.

What is an independent contractor?

Very simply, independent contractors run their own business. They usually negotiate their own fees and working arrangements and can work for more than one client at a time. The arrangement is legitimately used across a range of industries but even then, problems have arisen.

There have been cases of doctors being paid substantial amounts of back payment for unpaid leave entitlements and superannuation because they had not been contracted properly or their work was controlled in a way that they appeared to be employees.

If you are going to use independent contractors, it is critical that you understand how they operate and how you contract them, so you will not later be found liable for further payments.

Employees	Independent contractors
Work is directed and controlled by their employer.	Control their own work and can hire assistants.
They have no liability to third parties for their work – they are covered by their employer’s insurance,	Risk making a profit or a loss and are responsible for their poor work or injury; have their own insurance
work set or standard hours (casual employee’s hours can vary from week to week).	Agree to hours required to complete a job.
Have an ongoing expectation of work.	Usually engaged for a specific task or time.
Are provided with tools or a tool allowance by their employer.	Use their own tools and equipment.
Have income tax deducted by their employer.	Pay their own tax and GST.
Are regularly paid wages or a salary.	Have an ABN and submits invoices.
Are entitled to paid leave.	Do not receive paid leave.
Engagement is terminated under the service agreement.	Engagement is terminated under the service agreement.
Performance can be managed.	Performance is addressed through their professional governing body or terms specifically established in the service agreement.
Dismissal is covered under the Fair Work Act 2009.	Engagement is terminated under the service agreementon

Whether a worker is a contractor or an employee is not based on what the arrangement is called, but on the nature of the relationship. There is not one attribute that on its own decides whether someone is an employee or an independent contractor. Simply having an ABN or issuing invoices does not make someone an independent contractor. The Courts and FWC will look to all the attributes to determine the real nature of the working relationship.

Getting your service agreements wrong can be very expensive. Incorrectly making an employee a contractor can be even more expensive with the business facing back payments and penalties.

If you are unsure whether your service agreements or working arrangements comply with the requirements for independent contractors, or you would like to contract workers under a service agreement, Active Law can assist you with advice and document drafting. You can reach us at 07 3160 0000 or at reception@activelaw.com.au.

[1] Joshua Klooger v Foodora Australia Pty Ltd [2018] FWC 6836.

Need a 30-minute phone consultation on employment law concerns? Active Law is offering ACS members a half-price consult for just $106 plus GST. Contact michelle.cowan@activelaw.com.au to arrange.