Understanding the differences between employees and independent contractors

Over the past decade, the ‘gig economy’ has fundamentally reshaped large sections of the economy, from professional services to transport, postal and warehousing. The Australian Bureau of Statistics (ABS) reported that as of August 2020, there were approximately 1.02 million independent contractors in Australia.

While for many years the construction industry has held by far the largest utilisation of independent contractors, with 30 percent of all independent contractors engaged within the sector, it experienced negative growth between 2019 and 2020.

While this was no doubt partly attributable to the COVID-19 pandemic and its impacts on that part of the economy, other sectors (predominately telecommunications and the ‘gig economy’) continued to observe year on year increases.

Understanding what separates a genuine independent contracting arrangement from that of an employment relationship is essential for any business seeking to take advantage of this trend.

What work is most suited for independent contractors?

The vast majority of independent contractors are engaged in either construction, professional, scientific and technical services, or health care and social assistance. The most common occupations within these industries are professionals or technicians and trades workers.

In other sectors like mining, accommodation and food services, and retail trade, independent contracting is far less common. However, the appropriateness of whether to engage a person as an independent contractor turns entirely on how work is performed.

What are the key distinguishing factors of an independent contracting arrangement?

The law surrounding independent contracting dates back decades. What has developed is a test that involves consideration of various ‘indicia’ that have emerged for the purposes of “painting a picture of the relationship from an accumulation of detail, rather than as a formulaic or mathematical exercise”, as it was put by the Fair Work Commission in Leffanue v Southern Cross Community Healthcare Pty Ltd T/A Southern Cross Community Healthcare [2020] FWC 3122 (Leffanue).

In simple terms, this means that the presence of one or more factors in support of an independent contracting arrangement will not necessarily be determinative if it otherwise looks like an employment relationship. As the Commission said in Leffanue, “the parties cannot create something that has every feature of a rooster and call it a duck”.

For this reason, the assessment will always turn on the individual circumstances of each case. However, we do know from cases like Leffanue the types of factors (or ‘indicia’) that are likely to be relevant when forming this view. These may include (among others):

• how much control the worker has over how and when work is performed;
• whether the worker is required to work exclusively for the business;
• whether the worker has their own business premises and advertises for their services;
• whether the work may be subcontracted or delegated to employees of the worker;
• whether the worker has to wear the business’s uniform or other display of association; and
• whether the work involves a special skill or trade.

There is no more obvious example of how nuanced this assessment can be than the cases of Klooger v Foodora Australia Pty Ltd [2018] FWC 6836 and Amita Gupta v Portier Pacific Pty Ltd; Uber Australia Pty Ltd t/a Uber Eats [2020] FWCFB 1698. Despite the apparent similarities between the business models of Deliveroo and Uber Eats, in the former the Fair Work Commission determined that the worker was in fact an employee.

What are the implications if the assessment is incorrect?

While in the abovementioned cases the finding that each worker was an ‘employee’ was significant as it related to the protections available for unfair dismissal, it is separately a contravention of Division 6 of Part 3-1 of the Fair Work Act to misrepresent an employment relationship as that of an independent contracting arrangement. In 2019-20, the Fair Work Ombudsman designated this as a ‘priority area’ and established a sham contracting unit. It was reported that this unit recovered $363,976 for employees in respect of these arrangements.

For this reason, it is critically important to ensure that these arrangements are properly entered into. For advice on the formation of an independent contracting arrangement, contact NRA Legal on 1800 572 679.

By Calum Woods and Lindsay Carroll, NRA Legal