ARE YOU AN INDEPENDENT CONTRACTOR OR AN EMPLOYEE?  SOMETIMES EVEN THE COURTS SEEM TO STRUGGLE TO ANSWER THIS QUESTION.

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ARE YOU AN INDEPENDENT CONTRACTOR OR AN EMPLOYEE?  SOMETIMES EVEN THE COURTS SEEM TO STRUGGLE TO ANSWER THIS QUESTION.

Fair Work Ombudsman ‘FWO’ v Quest South Perth Holdings Pty Ltd, ‘Quest[1]

AS COMPARED WITH

Tattsbet Limited v Morrow, ‘Tattsbet[2]

Introduction

This case note examines the cases of Quest and Tattsbet which were resolved by the Full Court of the Federal Court a few months apart pertaining to controversies about the question of whether a person was an employee or an independent contractor, the outcome of which caused some confusion regarding the legal principles involved.

 

This analysis seeks to clarify the legal principles and approach the Courts will take in the wake of these two cases, by examining the facts and issues in each case, analyzing the reasoning in reaching the decisions, the goal is to assist in answering the question who is an employee at common law?

Quest Case Background

The case involved Quest South Perth Holdings Ptd Ltd, who carried on a business of 40 serviced apartments and employed housekeepers as casuals to clean them.  Management of Quest contacted a company called Contracting Solutions ‘CS’ who were a “contract labor hire business”.  Quest engaged CS to implement its contracting system providing Quest a fixed hourly rate for its housekeepers and receptionists to eliminate obligations that would normally be found under an Employee-Employer relationship.

Facts

As part of the agreement CS would “convert all the current staff[3], (into independent contractors), and the benefit to Quest would be that they “are not bound by industrial relations legislation[4], with a “key difference” that Quest would not need to pay penalty rates to its employees”.[5]

 

The conversion would take place by CS under licence of “The ODCO System”,  which was developed by Odco P/L who promoted itself from successes with “workers engaged as  ODCO independent contractors operating outside state and federal industrial relations systems and [would] gain validity through the Independent Contractors Act 2007 and Federal and High Court decisions.[6]”  This strong marketing statement cited the High Court judgement Accident Compensation Commission v Odco Pty Ltd F.C. 90/040 of 22nd October 1990 and Odco P/L v Building Workers Union of Australia (1989) No VG 151 of 1988).

With CS concluding that “these judgments have been challenged on occasion, however, when administered correctly have always been found to be a legal method of contractor engagement.  CS has a 100% success rate in this area.”[7]
Having been reassured by such bold promises, Quest engaged CS who then proceeded to “convert” two Quest housekeepers into Independent Contractors, for the two employees, nothing much changed, they did the same work, in the same way, they just got paid by CS instead of Quest.  Ultimately it is these converted employee’s that brought action against Quest through the Fair Work Ombudsman ‘FWO’ who claimed this conversion was a breach of the Fair Work Act 2009 (Cth)[8]FWA’ sham contracting provisions.

Issues & Analysis

Sham contracting under the FWA s.357 provides that:

A person that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment […] is a contract for services under which the individual performs, or would perform work as an independent contractor.’

The first issue is whether in a triangular arrangement such as this, where the employees voluntarily resigned and then applied to become independent contractors of CS, could Quest be characterized as “employing or proposing to employ” in the first instance and then whether that proposal misrepresented a contract of employment as a contract for services as an independent contractor.

The Court resolved this holding “There is no issue that the representation was made by Quest through CS acting as its agent.[9]”  However the Court in this case stated it did not rely on this[10] despite reaffirming its significance, stating “CS must be regarded as having performed those functions as the agent of Quest[11] and again “CS made those payments (of wages) as Quests agent.”[12]

The second issue was to answer whether there was a breach of the FWA S.357, the question had to be answered whether the housekeepers were employees and not independent contractors, and then whether the provision for ‘the contract of employment’ in the FWA S.357 could be characterized as including third party contractors like CS.

The process the Court adopted was to refer to previous decisions[13] and examine the “real substance of the relationship[14] to determine whether the person was an employee or an independent contractor. To do this the Court held “The pursuit of profit is at the core of entrepreneurship and to be regarded as one of the primary hallmarks if not the primary hallmark, of a business[15] and that “In pursuit of a profit, the independent contractor will not merely seek remuneration commensurate with the value of the personal services provided, the entrepreneur providing commercial services will want to be remunerated by making a profit[16]

The Court went on to analyse the triangular arrangement and held that “Given our view that, in relation to Best and Roden, the Hiring Agreement, (between CS and Best and Roden), was inoperative and that CS did not, either via that agreement or at all, provide the labor of Best and Roden to Quest”.[17] This was so despite the agreement being signed, CS paying Best and Roden and having them pay their own indemnity insurance, holding that “Those three factors are, in our opinion, substantially and decisively outweighed by factors to which we have already referred and which tend in favour of the conclusion that Best and Roden were employees (of Quest)”[18].

Despite the above findings the FWO’s case against Quest was dismissed because S.357 did not cover a representation by an employer about a contract, or future contract, with another party.   As Quest did not make the representations and there was no dispute in relation to S.357 and CS, there could be no breach.  The FWO appealed to the High Court.

High Court Decision

The High Court held[19] s.357(1) prohibits an employer from misrepresenting to an employee that the employee performs work as an independent contractor under a contract for services with a third party, finding that the misrepresentation could be attributed to Quest as it falls ‘squarely within the scope of the mischief to which the prohibition in s.357(1) was directed and is caught by its terms[20]’.

The Court considered that the reference to ‘contract of employment’ in s.357 should be construed as the object of the prohibition.  Therefore “an employer would be liable to pecuniary penalty if the employer said to an employee “you are employed by me as an Independent contractor.[21] Moreover the HCA considered the triangular relationship and held that “who might be the counterparty to the represented contract for services, and whether the counterparty might be real or fictional entity, is correspondingly immaterial to the operation of the provision.[22]

In other words, the prohibited representation need not be directly between the employee and employer, but includes any third party acting as an agent of the employer.

The High Court considered the view that the legislations intent was to prohibit sham contracts and use of third parties to defeat that intent would be “doing little to achieve its evident purpose within the scheme of Pt. 3-1. That purpose is to protect an individual who in truth is an employee from being misled by his or her employer about his or her employment status.  It is the status of an employee which attracts the existence of workplace rights”.[23]

Tattsbet Case Background

The case of Tattsbet Limited v Morrow [2015] FCAFC 62 ‘Tattsbet[24] involved a decision of the Federal Circuit Court that a person who ran a Tattsbet outlet as an independent agent was in fact an employee, Tattsbet appealed that decision.

Facts

In 2004, Morrow entered into the first of four agency agreements with Tattsbet initially to operate a store in Moorooka. She later applied unsuccessfully for an agency in Brisbane and from that application she was offered and took control of an agency in Logan Central, from time to time she was offered and accepted opportunities to operate other agencies while still running the Logan Central agency, this was during the period from 2005 until termination in 2011[25].

 

The primary judge held Morrow was not merely doing a clerical role, her role extended “to ensuring smooth operation of the agency and making sure it was open at relevant times and was adequately staffed.[26] Morrow did this, she employed staff[27] and was not only an “active” member but became Vice-President of the UNiTab Agents Association[28] it was also noted that she completed her own BAS Statements, was registered for GST[29] and of significance her income was related to the takings of the agency rather than her hours and the difference between her total business income and her net income, indicating the hallmarks of running a business were present.[30]

Issues & Analysis

The two main issues in this case are whether Morrow was an Employee or an Independent Contractor and whether Tattsbet breached s.340 of the FWA when it terminated Morrow’s agency, regardless of whether it is found that Morrow is an Independent Contractor or Employee.[31]

To answer the first part, the question was whether the primary judged erred in finding that Morrow was an employee.  Jessup J was critical of the primary judge’s focus on examining “a dichotomy between a situation in which the putative employee works in the business of another and a situation in which he or she conducts his or her business as an “entrepreneur[32] citing Buchanan J in ACE Insurance Ltd v Trifunovski (2011) 200 FCR 532, “working in the business of another is not inconsistent with working in a business of one’s own[33] adding “The question is not whether the person is an entrepreneur : it is whether he or she is an employee[34].

In examining Jessup’s reasoning in finding the worker was an independent contractor, the following indicia were highlighted in the decision:

Firstly the agency agreement itself provided that Morrow was an Independent contractor and this was held to be an “acknowledgement[35] rather than a provision of the contract, and although any attempt to place a “label” on the relationship would be of little importance, in this case it was significant as it reflected the reality of the relationship.[36]

Secondly Morrow was paid not for the hours worked but in reference to the value of the business transacted, she was not required to perform all the work herself, but was free to employ others to assist her or on occasion work in place of her.[37]

Thirdly her net income was about a third of the total revenues earned and she ran her agency as a business, paying GST, claiming deductions in BAS statements and forwarding to the ATO the GST amounts due.[38]

 

It was held that “the situation before his Honour involved a number of features that, in combination, compel the conclusion that Morrow was not the employee of Tattsbet[39] holding that “I take the view that the primary Judge’s conclusion that the agency agreement established a relationship of employer and employee cannot be sustained.[40]

 

Difference in Reasoning in Quest cf Morrow

In the case of Quest, North and Bromberg JJ (with agreement of Barker J) gave detailed attention to the question whether the cleaners were employees or independent contractors, the in course of which their Honors held that the answer to any such question would be yielded by first answering the question whether the workers in question were engaged in the conduct of their own businesses.[41]

 

Firstly, it is worthy to note that, Tattsbet, on the facts, is very different from Quest.[42]  In Tattsbet it was accepted that Morrow was working “in the business” of Tattsbet, using their premises, equipment, systems and had little scope to vary the way she worked, and insofar as the work there would be little to distinguish her from an employee, such as a store manager.   Using these indicia alone would suggest it was an employee and employer relationship[43].

 

The judgment text of Alsop CJ in Tattsbett considered the case of Quest and held it “does not require any different conclusion in this particular case.  The place of Morrow as an employer of workers in the agency, her means of remuneration, and the other factors pointed to in the reasons of Jessup J lead to the factual conclusion of a sufficient “enterprise” being undertaken by her to warrant the conclusion reached here by Jessup J, with which I agree.”[44]

Alsop CJ then dismissed the need to conduct further enquiry (as was held in Quest at [179]) in search for the “hallmarks of a business[45] such as whether a commercial enterprise is a going concern with employed capital and undertaking risk as there was already sufficient evidence in Tattsbet to indicate that Morrow was not and employee but an Independent Contractor.

 

Why it has caused confusion

The Tattsbet case caused some confusion as “at least since Hollis[46], it may be accepted that the distinction between an employee and an Independent Contractor is “rooted fundamentally in the difference between a person who serves his employer in his, the employer’s business, and a person who carries on a trade or business of his own[47]”, and then to further look that the hallmarks of a business which include acquisition of tangible and intangible assets in pursuit of profits, business aspiration to have goodwill or saleable assets beyond its physical assets, holding that these are all indicia of the hallmarks of a business[48].

With the Tattsbet decision, Morrow was working in the business of another and would not meet much of the hallmarks of a business set out in Quest, the Court resolved these differences and held Morrow to be an Independent contractor using a multi-factor test instead of the entrepreneurial test of Quest.

Conclusion.

In answering the question of determining the status of a worker, the Courts have adopted a colorful approach stating that; “the parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody call it a duck.”[49]

The mere use of a label, in an agreement, that a person is an “Independent Contractor” is insufficient to determine the true nature of the relationship.  A multi-factorial approach is required to assess whether the person is the victim of a sham contract arrangement which was noted in Quest as being :

an arrangement through which an employer seeks to cloak a work relationship to falsely appear as an independent contracting arrangement in order to avoid responsibility for legal entitlements due to employees[50]

 

Despite the apparent confusion in the approaches the Court has adopted in answering this question, in each case the Court has examined every facet of the relationship to determine its true nature, in Quest the employer relied on promises of CS that their “system” could convert its employees to independent contractors, relying on previous Court decisions, however, ultimately it was obvious that their system relied on a distinct set of facts and could not be applied universally.

 

The employees could not be labelled as independent contractors and expect that label to withstand the scrutiny of the Court.  The court considered the fact that they performed exactly the same work, in the same way and was not swayed by the attempt to use a contract that cloaked the employer – employee relationship.  CS acting as an agent of Quest to pay the wages of the employees (and having them contribute 1% to indemnity insurance) was an insufficient a cloak to satisfy the Court.

 

 

There is scope for an Independent Contractor to legitimately exist as we see in Tattsbet, where the person was running an Agency, she had the ability to delegate responsibility, hire staff, prepare BAS statements and in every aspect was operating her own business within a business and the Court held they cannot now invoke employee workplace rights and insist on Superannuation to be paid.

 

In both instances, the Court made the right decision, a decision after careful analysis of all the facts determined the true nature of the relationship, the Court exercised flexibility in the tests it applied based on the facts before it in each case, in Quest, the question was whether the workers were employees and it was answered by the fact that little of what they did had the hallmarks of a business.

 

In Tattsbet, despite many of the same hallmarks being missing, it was already evident through the multi-factorial analysis conducted by the Court that she was an Independent Contractor running her own business, with her net income being a third of total income, and all the other factors that made it clear she was not an employee.

 

In conclusion if it quacks like a duck, waddles like a duck, it’s a duck! That is to say, if it has all the hallmarks of a business or a multi-factorial approach can objectively conclude that the true nature of the relationship is one of a person engaged in their own business, then it is safe to conclude that the relationship involves one of a legitimate independent contractor.

 

 

If it crows a “cock-a-doodle-do” like it always used to, it’s a still Rooster, no matter what cloak you give it to appear that  it’s not, even the use of third party intermediaries to disguise that relationship will not assist when the activities of the person do not exhibit the hallmarks of a business and when a multi-factorial analysis of the facts cannot lead to a conclusion that the person is operating their own business, then the person must be characterized as an employee.

 

 

[1] Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] FCAFC 37 (17 March 2015), ‘Quest’.

[2] Tattsbet Limited v Morrow [2015] FCAFC 62 (11 May 2015), ‘Tattsbet’.

[3] Quest at [11].

[4] Ibid.

[5] Ibid at [12].

[6] Ibid at [13].

[7] Quest at [13].

[8] Fair Work Act 2009 (Cth)[8] ‘FWA’.

[9] Quest at [28].

[10] Quest at [131].

[11] Quest at [226].

[12] Ibid at [239]

[13] Damevski v Giudice [2003] FCAFC 252

[14] Quest at [317].

[15] Ibid at [181].

[16] Ibid.

[17] Ibid at [256].

[18] Ibid at [257].

[19] Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd & Ors [2015] HCA 15.

[20] Ibid at [22].

[21] Ibid at [17].

[22] Ibid at [15].

[23] Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd & Ors [2015] HCA 15 at [15].

[24] Tattsbet Limited v Morrow [2015] FCAFC 62 ‘Tattsbet’.

[25] Ibid at [10].

[26] Tattsbet at [38].

[27] Ibid at {45].

[28] Ibid at [47].

[29] Ibid at [48].

[30] Ibid at [49]-[50].

[31] Ibid at [7].

[32] Ibid at [61].

[33] Ibid.

[34] Ibid.

[35] Tattsbet at [65].

[36] Ibid.

[37] Ibid at [67]-[68].

[38] Ibid at [69]-[71].

[39] Ibid at [64].

[40] Ibid at [72].

[41] Tattsbet at [62].

[42] Tattsbet at [62].

[43] Ibid at [63].

[44] Ibid at [3].

[45] Quest at [179].

[46] Hollis v Vabu Pty Ltd (2001) 207 CLR 21.

[47] Quest at [177].

[48] Quest at [179].

[49] Re Porter (1989) 34 IR 179, 184.

[50] Quest at [89].



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