Defining the Employment Relationship – Independent Contractor v Employee

5 February 2018

A recent case involving a husband and wife who were working from home were deemed to be employees rather than contractors has shed further light on the composition of the employment relationship.

Truck repair company Royans Wagga Pty Ltd (the Company) were ordered to compensate Linda and Shane Putland (together, the couple) for unpaid superannuation, wages and leave entitlements, after the Federal Court found the company had “authority to control” the working relationship. This authority was a clear indication that the couple were employees rather than contractors, and Justice Bromwich found that the company had engaged in sham contracting.

Background

The relationship between the parties began in 2005, when Mrs Putland commenced in-house clerical work for the Company. By 2008 the role had developed to the extent that the couple worked between home and a shed on the Company’s premises. The agreement between the parties was partly written and partly oral.

The Company became dissatisfied with the service being provided by the couple around 2012, at which point the couple increasingly worked from home. In May 2015, the Company engaged an external call centre company, and the agreement between the parties was terminated..

Issues

The key issue was whether the relationship between the Parties replicated that of independent contractors or employees. This requires looking at the totality of the relationship and examining key indicia, the most significant in this case being the high degree of control that the Company could exercise over the couple.

In finding that the couple were employees, Justice Bromwich reasoned that “they were not truly performing work as entrepreneurs owning and operating a separate business… They were not truly working in and for their own business and as representatives of that business but, rather, were performing work as representatives of Royans Wagga.

The key features, even for the weekend and after hours work from home, are the undoubted control that Royans Wagga, through [its managing director], had the authority to exercise and did exercise from time to time, and the fact that the work was only done for Royans Wagga“.

Key Indicia

Justice Bromwich listed the following as being indicative of the independent contractor relationship:

  • Possession of ABNs
  • Issuing of tax invoices in lump sum amounts, with no tax deducted
  • Income splitting
  • Not working from a central office
  • No uniforms

Conversely, the relevant indicia suggesting an employment relationship included:

  • The exclusive nature of the service provided
  • The Company’s payment of phone lines and bills
  • The use of Company emails
  • Supply of office equipment including scanners and phone systems
  • The couple’s lack of true autonomy

Control

As the relationship between the parties involved a number of factors which could have suggested either that of an independent contractor or an employer/employee relationship, Justice Bromwich emphasised the significance of the Company’s ability to exercise control over the couple.

What is much more important in this case than any of those 10 indicators is authority to control… I was left in no doubt that each of them was subordinate to [the managing director’s] wishes, even if he did not always get his own way. He had authority to control and, when needed, he exercised it…
Viewed in combination, while the taxation and ABN aspects indicate, however weakly, an independent contractor relationship, almost everything else, most particularly Royans Wagga’s undoubted authority to control, points to an employment relationship having no more than the appearance, in some limited respects, of an independent contractor relationship
.”

Falling under the ambit of the Clerks Award in their call centre roles, Justice Bromwich ruled that the Company breached sections 45 (contravening a modern award), 357 (sham contracting, misrepresenting employment as independent contracting arrangement), and 536 (employer obligations in relation to pay slips) of the Fair Work Act 2009 (Cth).
The Court is yet to determine the compensation and penalty amounts to be paid by the Company.

Lessons Moving Forward

For employers, it is important to approach any alteration of an employee/employer relationship, for all levels of employee, with great caution. Employee rights are enshrined in a multiplicity of ways, whether that be through national employment legislation, occupational health and safety standards, modern awards, the minimum standards set by the National Employment Standards, or other legal sources.

Hentys Lawyers are experts in Employment law and have been assisting employers in ensuring compliance, risk management, strategy and prevention. Please contact Hentys immediately should you have any concerns.