There is no statutory definition of "employee" or "independent contractor", therefore Australian courts have used the common law test – that is, a test which goes through a series of indicia, to try to ascertain whether a particular relationship is one of employment or an independent contract for services.
By way of example, the factors considered in the common law test include whether the putative employer exercises control over the manner in which the work in question is performed, whether the worker pays for their own tools, the description the parties have given to the relationship, whether the worker advertises to the world at large and whether income tax is deducted from payments made to the worker.
The multi-factor common law test has been criticised as the many factors are not relevant for every set of circumstances and the use of this test can lead to inconsistent findings. However, supporters of the test say that flexibility is required and the common law test ensures the substance of arrangements, rather than merely the form, is reflected in the parties rights and obligations.
More Weight to the Parties' Intentions
The Federal Magistrates Court has now handed down a decision which moves away from the common law test and towards giving more weight to what the parties intended. In Vella v Integral Energy  FMCA 6 ("Vella") Federal Magistrate Driver said "the assessment of whether the applicant has a prima facie case of an employment relationship is not, in my view, to be answered by a mathematical assessment of the various indicia, or a weighing of the detail of the available evidence."
This matter involved a partnership (being the applicant and his wife) that provided excavator services to the respondent for over 37 years, but was then unsuccessful in a tender process undertaken by the respondent for all independent contractors in December 2010. The applicant filed a claim against the respondent, and as an interlocutory issue Federal Magistrate Driver was asked to decide whether the applicant had a prima facie case that he was an employee.
The applicant raised the following facts amongst others, in support of his employment claim:
- The applicant provided very long service to the respondent and worked closely with other employees, during the same hours and in the same place as the employees;
- There was no evidence that the applicant advertised; and
- The applicant worked regular hours and received overtime.
In support of the submission that the applicant was an independent contractor the following facts were raised by the respondent:
- The applicant did not receive paid holidays, sick leave, annual leave, superannuation or public holiday pay;
- He was not taxed as an employee;
- The partnership negotiated rates of pay and collected GST and was responsible for superannuation and workers compensation insurance for the applicant; and
- The partnership held itself out as an independent contractor and was paid on the basis of invoices submitted.
Although acknowledging that there were some indicia that might support the contention that the relationship was one of employment, in finding that the applicant had failed to establish a prima facie case of employment, Driver FM said the correct approach "is to look at the form and substance of the relationship between the parties and the general weight of the available evidence."
In addition to the factors pointed to by each party, Driver FM took into account "that working arrangements have been significantly liberalized in recent years and, in the more flexible working environment that now exists, it ought to be open to the parties to determine whether the relationship is one of employment or independent contractor."
Driver FM noted however that there are several qualifications to this finding, being parties cannot enter a sham arrangement where an employment relationship is turned into an independent contracting one (for example to defraud the revenue); and an employer cannot manipulate a gross inequality of bargaining power and deprive a vulnerable employee of employment entitlements.
Common Law Test Still Relevant
Notwithstanding the above, the common law test is clearly still relevant and all the traditional indicia should be kept in mind by employers, as only days after Vella, Fair Work Australia handed down the decision in Gregory v Cape Byron Imports and Wholesale Pty Limited t/a Cape Byron Imports and Wholesale (CBI)  FWA 750, where the Deputy President went through a list of the common law factors, considering each individually before coming to the conclusion that the applicant was in a contractual, not employee, relationship with the respondent.
As many relationships will not be clearly defined, the best ways to make sure your independent contractors are not deemed to be your employees are:
- Make your contracts clear. The contract itself won't be determinative but clarity will help.
- Make sure both parties act in accordance with an independent contractor relationship at all times. No one factor alone will decide a case, but allowing some aspects of the relationship to support a claim of an employee relationship will make a claim harder to defend.
- Do not request that your independent contractor work is performed by one particular person. Contract with incorporated bodies (wherever possible) and allow the work to be performed by a number of employees of that company.
For further information please contact Lisa Berton, Ben Urry or Carly Corbett-Burns.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.