by John Wojtowicz (Director - Law Central Legal)

People are increasingly opting for more flexible working arrangements. Flexible working arrangements can be beneficial for business owners and can grant employees a more suitable work/life balance. The ever evolving form of flexible working arrangements can make it difficult to determine if an individual is an employee or an independent contractor. It is an important question that all people who provide labour should be asking themselves. The reason why this question is so important, is because it can have a major impact on your entitlements. It is not uncommon for businesses to hire someone as an ‘independent contractor’ when under law they are actually an employee. These ‘independent contractors’ are often missing out on their employee entitlements such as superannuation and holiday pay because the business has incorrectly classified the arrangement.  

Are you an Employee or Independent Contractor: The Control Test

Historically, when the Courts were required to determine whether an individual was an employee or independent contractor, they would apply the Control Test. The law required the Courts to consider the level of control the principal had over the individual. If the principal was able to exercise a high level of control then the individual was generally be considered to be an employee. There would be a high level of control when the individual is told what jobs to complete, the order to complete them and how to complete them. If the principal has a minimal amount of control over the individual then the individual would likely be considered an independent contractor. This might occur when you hire a tradesman to do maintenance to your property. They can generally decide when to start work; in what order they will address the issues; and the method used to complete the task. 

With the control test, the focus is not on the control which is actually exercised but rather the potential to control. A principal may choose not to control or supervise the individual but this does not mean the individual is an independent contractor. If the principal has the potential to control the individual, this will be enough to deem it an employer/employee relationship under the control test.

Are you an Employee or Independent Contractor: The Multifactorial Test    

In the case of Stevens v Brodribb Sawmilling Company Pty Ltd (1986), Mason J confirmed that control was no longer the only consideration for determining if an individual was an employee or independent contractor. He stated “the existence of control, whilst significant, is not the sole criterion by which to gauge whether a relationship is one of employment. The approach of this Court has been to regard it merely as one of a number of indicia which must be considered in the determination of that question.” As such, the Court now took into account a much wider range of considerations when deciding if an individual was an employee. Some judges have referred to this new test as the multifactorial test.

A non-exhaustive list of factors which may be taken into account was set out in the Federal Court case of Fair Work Ombudsman v Grouped Property Services Pty Ltd [2016], the factors include:

• whether tax is deducted from the income of the individual;
• whether the individual is permitted to sub-contract their obligations;
• whether the individual is required to wear a uniform;
• whether tools are supplied;
• whether holidays are permitted;
• whether wages are paid;
• what is disclosed in the tax returns;
• whether one party ‘represents’ the other party;
• for the benefit of whom does the goodwill in the business invest; and
• how ‘business like’ is the business of the individual  – are there systems, manuals, and invoices in place?

Once all the factors have been considered, a value judgement must then be made by looking at the whole of the factors together. In The Worker and the Law, Lord Wedderburn referred to the use by courts of the multi-factorial test of looking at the whole picture as the “elephant-test” – an animal too difficult to define but easy to recognise when you see it.

Despite the difficulty in defining the process,  there have been attempts by the Courts to legally formulate the multifactorial test. When he was faced with the issue of whether someone was an employee in On Call Interpreters and Translators Agency Pty Ltd v Federal Commissioner of Taxation (No 3) (2011), Bromberg J quoted Mummery J in Hall (Inspector of Taxes) v Lorimer [1992]. Mummery J had stated:

“The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole. It is a matter of evaluation of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another.”

The Australia Tax Office will apply the multifactorial test when determining if someone is an employee or independent contractor for the purpose of taxation. See their summary of the multifactorial test:

https://www.ato.gov.au/Business/Employee-or-contractor/Difference-between-employees-and-contractors/

Are you an Employee or Independent Contractor: Under Legislation

The multifactorial approach is the current common law approach for determining if someone is an employee or an independent contractor. However in some circumstances, statute may modify the distinction between employee and independent contractor.

One example of this is the Superannuation Guarantee (Administration) Act 1992 (Cth) (“the Act”). The Act places a requirement on employers to pay superannuation for their employees. However, the Act does not rely on the common law distinction between employee and contractor but instead creates its own set of requirements. As stated in section 12(3) of the Act “If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.” This means that even if a person is not an employee under the common law, for the purposes of superannuation, they may be considered an employee. The Act makes it clear in section 12(1)(a) that the purpose of the alternative definitions is to “expand the meaning of those terms.”

It is therefore important that legislation relating to specific entitlements is consulted in addition to the multifactorial test when attempting to determine whether someone is an employee or an independent contractor.

Gold and Platinum members read on for information on whether company directors are considered employees or independent contractors.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related documents:

• Employment Contract
• Independent Contractor Agreement

Related webinars:

• Webinar Recording - Employee V Contractor