Independent Contractor or Employee?

Independent Contractor or Employee?

It is not difficult to see the benefit of the independent contractor relationship for both businesses and contractors.

The contractor has the flexibility and control to charge an agreed price to complete a specific task in an agreed time frame. When the work is completed the contractor issues an invoice for payment. The business pays the invoice without needing to be concerned about the costs associated with having an employee such as withholding tax, payroll tax, superannuation and workers compensation.

Ideally, the relationship between the contractor and business is formalised in a written agreement that clearly sets out the terms of the relationship. However, more often than not, no agreement exists or over time, the actual relationship becomes unclear and a dispute can arise.

The general law approach to distinguishing between employees and independent contractors is to look at each case and make a decision based on the totality of the relationship between the parties. It doesn’t matter what label the relationship has been given and the parties cannot deem the relationship between themselves to be something it is not.

Why might a contractor claim an employee relationship exists?

The most common reason is seeking compensation arising from their termination including severance pay and superannuation when the relationship comes to an end.

Case Study

The question of whether a person is an employee or independent contractor was considered by the Fair Work Commission in John Rohde v Bedlam Enterprise Pty Ltd T/A Cola Solar (U2015/13986).

John Rohde (“Rohde”) had been employed by Bedlam Enterprises (“Bedlam”) until August 2014 when Rohde specifically sought to end his employment relationship with Bedlam and to become an independent contractor.

Rohde and Bedlam agreed that Rohde would invoice Bedlam for work performed. The invoices were issued in the name of the Rohde’s business, Bendigo Solar, and the payments were made to Rohde’s business.

In October 2015, Rohde attended Bedlam’s premises to pick up the necessary equipment to perform an installation job on that day. They had a conversation in which the Bedlam sought to reduce the amount of days work to be given to Rohde due to a downturn in work. Bedlam admitted that in the conversation with Rohde he said: "The work's not there, so from now on, you will be like the other contractors, like Ralphy and Brown, we'll let you know when we need you." The conversation ended with Rohde leaving the premises in his own vehicle and not undertaking the installation job allocated to him for that day. Rohde then lodged a claim for unfair dismissal.

It was Rohde’s case that whilst the relationship started as one of client/independent contractor, that relationship changed and became a relationship of employer/employee and that as at October 2015 he was an employee. He claimed the following relevant factors:

  • He did not perform work for Bedlam as an “entrepreneur” running his own business but rather worked in, for, and as a representative of, the Bedlam’s business.

  • To the extent that he did have his own business, Bendigo Solar, he conducted that business on weekends and after hours. That business was entirely separate to his work for Bedlam.

  • The only cross-over between Rohde’s private business and his work for Bedlam was the fact that Rohde’s invoiced Bedlam, and was paid for his work, via his Bendigo Solar business.

  • He appeared to customers as a representative of the Bedlam business, in that he wore a Cola Solar uniform, introduced himself as “John from Cola Solar”, erected a Cola Solar corflute on their property, handed out Cola Solar business cards, and used a Cola Solar email address;

  • His work was controlled by Bedlam, in that it assigned him jobs via a roster (which he was then obliged to perform and could not decline), and required him to work according to its policies and procedures;

  • He used Bedlam’s materials and equipment to perform the installations.

  • Although he brought his own (unbranded) vehicle to some jobs, that was simply a mode of transport. The vehicle was not used to perform the work;

  • He had a regular and systematic pattern of work, and the parties had a mutual expectation (at least until October 2015) that he would be rostered for work each and every week, save for those weeks he was on leave;

  • He worked five days a week, until his hours were reduced in September 2015.

  • He never sub-contracted to a different person the jobs assigned to him, nor could he;

  • He was trusted with the keys to the office, and could come and go as he pleased;

  • He stood to make little or no profit;

  • He carried little or no downside business risk. For example, if he had to rectify any defective work, Bedlam would pay for his time in doing so; and

  • His main “business” expense (fuel) was paid for by Bedlam.

In reply Bedlam countered that Rodhe:

  • Had established his own business and produced business cards advertising that business;

  • Invoiced for work done and included GST;

  • Submitted invoices on an irregular basis;

  • Performed work for others during the time he was engaged as an installer by Cola Solar;

  • Used his own private email address to communicate with clients and did not copy those emails to a Cola Solar email address;

  • Used his own mobile phone;

  • Used his own vehicle and tools;

  • Controlled his own hours, in that it was up to him to make himself available or not available to perform work for Cola Solar;

  • Was not required to clock in or clock out;

  • Was paid at a significantly higher hourly rate than he would have been paid if he was an employee and did not receive statutory entitlements; and

  • Could delegate work to others

The Fair Work Commission concluded that Rohde was an employee. Having then been satisfied that the relationship was one of employer/employee the Commission considered whether Rohde’s had been terminated and if that termination was harsh, unjust and unreasonable.

The Commission found that Rohde’s had been terminated by Bedlam by not offering him ongoing employment. The termination was harsh in the circumstances and Rohde was awarded $7,000 in compensation taxed at the applicable rate. In the circumstances the likely impending claim by Rohde’s for superannuation entitlements and other PAYG tax liabilities is likely to greatly exceed the amount payable in compensation in this case.

What can I do to mitigate my risk?

If the relationship with your contractors is unclear and you have no written agreement, or you are a contractor in an employment relationship, you should contact Tony Valentinetti for a confidential discussion today.

Further information is also available on the Fair Work Ombudsman website.