ASSOCIATE A CONTRACTOR OR AN EMPLOYEE? - THE NEW LEGAL TEST

The legal test applied to determine if a person is an employee or contractor has recently changed, following a decision from the High Court of Australia. This article summarises the changes, and reiterates the importance of having a clearly written contract in place, that identifies the relationship.

ClinLegal

Background

In a recent decision, a contractor was terminated based on his slow performance. The contractor lodged an unfair dismissal claim with Fair Work, arguing that the dismissal was harsh and unreasonable, and he was an employee.

clinlegal.com.au

The commission carefully considered the contractor’s control over his own work and applied a multifactorial test to determine his status. After weighing up multiple indicia, it was decided that the worker was considered an employee and therefore protected from unfair dismissal under the Fair Work Act.

New Criteria

The employer appealed the decision, arguing that in light of recent legal decisions, the legal test for determining whether the worker is an employee or contractor is determined by considering the ‘terms of the contract between the parties.’ Consistent with the contract, the employer relied upon several indicia to support that the worker was an independent contractor, not an employee. This includes:

1. The worker conducted his own business in providing services

2. The worker was not personally required to perform services, in that they could be provided by a company or another person

3. Under the contract, the employer did not have the right to control the worker’s performance of services

4. The worker was able to work for competitors, which indicates an independent contractor relationship

5. The worker was required to supply their own vehicle to be used for work

6. The worker was required to pay tax, have an ABN, and obtain third-party liability insurance.

On appeal, the commission decided that the worker was an independent contractor, not an employee. The commission agreed that the employer lacked control over the worker. This was supported by clause 2.5.1 of the contract, which stipulated that when the worker drives in the course of work, it is up to him to use any route he determines safe and efficient. In addition, the commission considered it important that the resources used by the worker for the performance of services, was at the discretion of the worker.

The commission emphasised that the worker has control over how the work is performed, thus discharging further control from the employer.

This, in combination with the inability of the employer to require the worker to perform any particular task, further limited the employer’s control over the work, indicating a contractor relationship.

What to consider when documenting the relationship

It is paramount for an employer to outline the role of the employee or contractor clearly. As an employer, if you decide to hire an independent contractor, you must clearly state that the worker will have control over when, where and how they conduct their work. This may be supplying their own tools and materials, raising their own invoices for services provided to the public, handling their own accounting obligations, maintaining their own insurance, being permitted to allocate work to others, and not being restrained for working for others during and after the engagement.

However, if you intend to engage a worker as an employee, it is paramount that you stipulate that you will have the discretion to decide how, when and where the duties will be performed. It is important as an employer that your contractual agreements clearly outline the employee’s role and how their work is to be conducted.

Documenting the expectations of your worker’s engagement will also protect you as an employer from a sham contract claim. It is illegal under the Fair Work Act to knowingly represent a worker as a contractor, when he/is actually an employee. This article is produced by an external third party (not the ASO) for guidance purpose only and is not a substitute for legal advice. Legal advice should be sought for individual circumstances. For tailored advice for your Practice, please email info@clinlegal.com.au.