Employee or Independent Contractor: What’s the difference?

Australian workers are traditionally classified as either an employee or an independent contractor, but what’s the difference between the two?

In essence, independent contractors are afforded very limited workplace rights and do not receive various employment entitlements, including superannuation and annual leave. The Fair Work Act 2009 (Cth) imposes a civil penalty for employers who misrepresent employees as independent contractors, otherwise known as ‘sham contracting’.

So, what distinguishes an employee from an independent contractor?

Courts will look beyond the contract between the parties to determine the true nature of their relationship and may consider several factors including:

Whether control is exercised over the time, place and hours of work;[1]
Whether the ‘independent contractor’ performs work for others or has a genuine entitlement to do so. This will usually involve a consideration of whether the person performs services to further their own business, or the business of their employer.[2] An independent contractor will often have the freedom to make their own decisions in relation to pursuing profit and is often financially self-reliant, whereas an employee will rely on the employer for a regular, fixed income[3]; and
Whether a person has the ability to delegate or sub-contract their work to their own employees or associates.

These factors are not the only factors a court may consider when determining whether a person is an employee or an independent contractor and the facts surrounding the relationship between the parties will also be a relevant consideration.

Recent decisions illustrate that the traditional distinction between employees and independent contractors might be an outdated approach to the classification of workers.

Workers engaged in the gig economy, such as Uber drivers and food delivery drivers, are exposed to the risk of missing out on employment entitlements, because of their traditional classification as independent contractors.

Australian courts have criticised the current approach to the classification of workers and have called for legislative reform to ensure that workers in the gig economy are adequately protected against unfair treatment.

In Pallage v Rasier Pacific [2018] FWC 2579 Mr Pallage, an Uber driver, applied to the Fair Work Commission for an unfair dismissal remedy, after his access to the Uber application had been removed following poor driver ratings. Uber claimed that Mr Pallage’s Application should not be heard by the Commission on the basis that Mr Pallage was an independent contractor and thus could not apply for an unfair dismissal remedy.

The Commission noted that Mr Pallage worked hours consistent with a full-time employee and noted that the relationship between Mr Pallage and Uber was not insubstantial. The Commission also noted that Mr Pallage was required to meet particular standards regarding the vehicle he used and that it was apparent Mr Pallage was not running his own business independent to Uber, as an independent contractor might ordinarily do. Similarly, the Commission also noted that Mr Pallage was not able to delegate his work to others.

Despite a number of factors that appeared to indicate Mr Pallage should be considered an employee, the Commission held that certain factors, such as taxation, how Mr Pallage was paid, and the absence of employee entitlements weighed significantly against a conclusion that Mr Pallage was an employee. The decision demonstrates the practical difficulty of using the traditional approach to the classification of workers in the gig economy.

A different conclusion was reached by the Commission in Klooger v Foodora Australia Pty Ltd [2018] FWC 6836. This case concerned a former food delivery rider for the company known as Foodora. Mr Klooger claimed that Foodora had unfairly dismissed him following a public complaint he made about the rates paid to delivery riders.

In deciding that Mr Klooger was an employee and not an independent contractor, the Commission noted that Foodora exercised significant control over the time and place riders worked, as well as the minimum number of shifts required of riders. The Commission also noted that Mr Klooger was required to wear Foodora branded clothing and was presented “to the world at large” as an employee of Foodora. In handing down its decision, the Commission stated that the agreement was an attempt to disguise the true nature of the relationship between the parties.

These decisions and the increased use of online platforms as a means to generating income demonstrate a potential for legislative reform to ensure that people working in the “gig” economy are adequately protected against unfair treatment.

Legislative reform in this area has been seen in the United Kingdom, where a third category of employment, referred to as a “worker” exists. A worker in the United Kingdom is entitled to the minimum wage, protection against unlawful deduction from wages and protection from unlawful discrimination.

The classification of workers as independent contractors is essential to the viability of the gig economy and any legislative reform would need to address this issue. Introducing a third category of employment in Australia, as seen in the UK, would ensure protection for workers while maintaining the viability of the industry.

[1] Stevens v Brodribb Sawmilling Co Pty (1986) 160 CLR 16.

[2] On Call Interpreters & Translators Agency v Commissioner of Taxation (No 3) (2011) 279 ALR 341.

[3] Ibid.

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Employee or Independent Contractor: What’s the difference?