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Distinguishing Employees from Independent

Contractors

Aaron Magner
Legal 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;

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but a ship’s pilot, a taxi-man and a newspaper contributor are
employed under a contract for services [independent
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contractors].”

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.

Stevenson Jordan and Harrison Pty Ltd v MacDonald and Evans [1952] 1 TLR 101 (CA) at
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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 A principal has a lesser degree of control


exercised (or able to be exercised) over the manner in which work is to be
not only as to the work that is to be performed by its contractors. Typically,
performed, but the manner in which and as the term logically suggests, an
it is to be performed. For instance, independent contractor has more
an employer will typically have the independence and autonomy over his or
ultimate say over the days and her hours of work and work method.
hours worked by its employees. The
regularity of instructions and
guidance given to a worker may be
relevant in this regard.
Exclusivity/ An employee will often be restricted By way of contrast, independent
in his or her ability to work for contractors are in a sense running their
Enterprise
someone other than his or her own enterprise. They may be able to
employer. Often, an employee will generate goodwill and, subject to the
be precluded from working for the terms of the contract, are at liberty to
employer’s competitors, or from perform work for whomever they wish,
engaging in work that is whenever they wish.
inconsistent with or detrimental to
the employee’s obligations to the
primary employer.
Mode of An employee is typically paid in the An independent contractor will usually be
remunerati form of fixed salary or wages. paid by reference to the volume of work
on Remuneration by way of performed and will submit invoices to the
commission, piece rates and other principal in respect of work performed.
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.
Administrat An employer will typically make Independent contractors would ordinarily
ion arrangements for the deduction of tend to their own financial affairs,
income tax, contribution to its including calculating their own PAYE tax
of finances
employees’ superannuation funds liabilities and contributing to their own
and so on. super funds. In this regard, an
independent contractor would often have
its own corporate identity and provide the
principal with its own ABN.
Outward An employee will sometimes be To the extent that an independent
appearance required to wear a uniform, by contractor might wear a uniform, it would
s which the employer may be usually be his or her own for the
deemed to be holding the generation of goodwill.
employee out to the rest of the
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world as the employer’s “servant”
or agent.
Provision of An employer would generally The High Court stated in Hollis v Vabu that
equipment provide the tools and capital the performance of work which requires
necessary to perform the tasks it significant capital investment on the part
requires of its employees, or at of the worker might be indicative of a
least pay an allowance where the principal / independent contractor
employee is required to provide his relationship.
or her own equipment, tools or
uniform.
Delegation An employer has the right to direct An independent contractor is at liberty,
and a particular person to perform the subject to the terms of the contract for
dismissal relevant work and, where services, to delegate the work to another.
appropriate, the right to suspend or That is, to engage a sub-contractor to
dismiss the person employed to do perform the work.
that 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.
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unreported: Supreme Court of South Australia, Justice Perry, 3 October 2003.
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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.

• 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.

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

Section 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
relationship are absent as between the two. Arguably, the most notable of these is
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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.

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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
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 Safety

Occupational 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

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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.

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.

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Aaron Magner

Legal Counsel

a.magner@unsw.edu.au

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