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The employment status challenge: Key considerations for employers in Australia

20 April 2022

With labour supply a top priority for employers, our employment experts in Australia consider the importance of the distinction between different employment statuses. 

When engaging the workforce how does the law distinguish between different categories of employment status?

In Australia, the law distinguishes between two different characterisations of a workers' 'status', being either an employee (under a contract of service) or an independent contractor (under a contract for service). 

Generally, and according to jurisprudence, a fundamental characteristic of an employment relationship involves a high level of subservience to the employer, with the employee being reasonably required to carry out duties under the direction and control of the employer. 

The differentiation between an employee and an independent contractor is not automatically drawn by comparing the type of work performed, instead it will depend on the individual circumstances. A person may perform the same type of work as an employee of a business but could still be an independent contractor. Therefore, common indicia indicative of a person being an employee include:

  • the employer determines the hours, the work locations and how the employee is to be paid;
  • there is an ongoing expectation of work;
  • the employer provides all or most of the employee's equipment, tools and/or other assets required to complete the work;
  • the employer deducts income taxation from the employee's pay; and
  • the employee is entitled to receive superannuation contributions and paid leave (for example, personal, annual, and long service leave). 

Conversely, an independent contractor undertakes work in the performance of their own business and provides an agreed service/s under a contract for those specific services. The independent contractor bears the commercial loss or profit, is able to work according to their own hours, provides their own equipment, and payment is usually predicated on the satisfactory performance of the contract. 

What are the different rights and protections for each employment status?

Employees are afforded protection by various provisions of the Fair Work Act 2009 (Cth) (the FW Act), including the National Minimum Wage and the National Employment Standards (the NES). 

The NES set out the 11 minimum terms and conditions of employment that are required to be provided to all employees, and comprise of maximum weekly hours, notice of termination and redundancy pay, requests for flexible working arrangements and minimum leave amounts for annual, parental, personal, long service and domestic violence leave. Even where an employee is covered by an Award, Enterprise Agreement or Employment contract, a person's employment conditions cannot be less than these minimum standards. 

In addition, the FW Act provides protection for employees from unfair or unlawful termination of employment, underpayment, bullying and sexual harassment and breaches of the general protection provisions (when an employer acts, plans or threatens to take adverse action due to an employee exercising a workplace right or for another prohibited reason). Employees are also protected from 'sham contracting' arrangements under the FW Act. This refers to a situation where an employer induces a person to be engaged as an independent contractor, when they should be considered an employee. 

Employees also have superannuation and long service leave (LSL) entitlements. In some cases contractors may also have an entitlement to superannuation. The entitlement to superannuation flows from the Superannuation Guarantee (Administration) Act 1992 (Cth) whereas LSL flows from state industrial relations legislation. The precise entitlement to LSL and mechanics of depend upon the state where the worker is employed.

A claim brought by a worker claiming they are in fact an employee as opposed to a contractor may seek recovery of amounts they would otherwise receive had they been engaged as an employee. 

What are the current themes with regard to employment status?

Recently the High Court of Australia handed down two landmark decisions, refocusing the traditional "multi-factorial" orthodox approach Australian courts have previously applied to ascertain a person's employment status. 

In light of the two High Court decisions, whereby the classification of a worker was reviewed, the key legal reasoning held by the High Court consisted of the following:

  • Primacy of the contract – It is necessary to have primary regard to the terms and conditions contained within the written agreement and the rights and duties established under those terms, in determining how the working relationship is to be defined. The multi-factorial indicia will still be relevant, but assessed against the express terms of the contract and the formation of the contract. 
  • Subsequent conduct of parties irrelevant – When the legality or validity of the contract is not in dispute (i.e. there is no indication of sham contracting, or that the contract has been waived, varied or displaced by conduct of the parties), then an expansive assessment with reference to the post-contractual conduct of the parties is incorrect. 
  • Labels – It is immaterial how the parties choose to contractually 'label' their working relationship. For example, labelling a person a 'contractor' will not conclusively determine the status of the person, the whole of the contract will need to be considered. 
  • Elements of 'control' and worker performing their own business – The element of control and level of direction the worker has over the work and their daily duties remains a critical consideration. An independent contractor must be afforded the requisite degree of independence to direct their own business. The greater the principal is able to direct and control the manner in which work is performed, the less independence the independent contractor will have, and the greater the risk the individual may be performing the work as an employee. 

The impact of the High Court decisions is that they herald a more definitive approach moving forward, whereby the primacy of the contract is instead the key factor in establishing the characterisation of the relationship between parties. 

Authored by Mason Fettell and Ashleigh O'Connor

Get an insight into the current situation in other jurisdictions from our global legal team.

 

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