Australia's employment law system has been based on the employee vs contractor dichotomy for many years – depending on a worker's characterisation, they may be entitled to or precluded from a range of benefits. However, recent decisions about the nature of casual employment are a reminder that even within the "employee" category, there is still scope for dispute as to entitlements.
People have come to understand that they are either an employee: entitled to certain entitlements like sick leave, annual leave, and paid holidays; or a contractor: not entitled to those things, but generally paid at a slightly higher rate. Contractors also have to address things like tax and superannuation themselves.
The fairness and appropriateness of this binary system has been under threat in recent years, especially with the growth of 'gig' economy jobs like Uber, Deliveroo, Airtasker and the like. These rapidly growing businesses push the boundaries of the employee/contractor divide by enforcing such things as corporate dress, behaviours, and supervision. Many people work solely for one entity, are not free to set their own hours or method of work, generate no goodwill of their own, and are entirely dependent on these apps, yet are considered and treated as contractors, not employees.
The court's approach to defining employees vs contractors
The legal system in Australia has developed a multi-factorial approach to determining which category a person falls into – whether they be employee or contractor. The factors considered include such things as:
- the right to set your own time
- the right to determine the way in which work is done
- the right to delegate to others
- provision of uniforms and tools
- whether you are developing your own goodwill or whether any increase in goodwill accrues to the employer.
No factor is solely determinative and all matters need to be looked at.
One factor that can be considered is what it says in the contract of engagement. The Courts understand parties may express their understanding of the relationship that they are entering into – but the Courts are not easily fooled. They understand that many want to characterise an employee as a contractor, and will look at the true position rather than how it is described in a contract.
While the normal position is that you are either an employee OR a contractor – is it possible to be both?
Can workers be classified as both employees and contractors?
The answer, as provided by the decision of the Full Federal Court in Dental Corporation Pty Ltd v Moffett, is yes – provided it is for different things.
In that case, Dr Moffett was a dentist and had built up a successful practice in Sydney. In 2007 he sold his practice to Dental Corporation but agreed to continue to work in the practice. Critically the agreement permitted Dr Moffett to set his own hours and his own holidays. He continued to run the practice much as he had before the sale and was responsible for management decisions. In addition he had a performance incentive scheme which would allow him to earn a bonus for over-performance, but which required him to make payment for under-performance – something which occurred in the first year and he had to pay the sum of nearly $300,000 to Dental Corporation.
In late 2012 the relationship between the two began to sour, with Dr Moffett reducing his hours, starting to work in another practice, and eventually leading to his resignation in late 2014.
The issue before the Court was whether Dr Moffett was entitled to certain employment entitlements:
- Annual Leave – the right to annual leave is regulated by Division 6 pf Pt2-2 of the Fair Work Act and the decision of entitlement turned on whether Dr Moffett was an 'employee'.
- Long Service Leave – the right to Long Service Leave arose because of the operation of the Long Service Leave Act (NSW), which similarly turned on whether Dr Moffet was 'a person employed'.
- Superannuation – the right to superannuation arises because of the Superannuation Guarantee scheme, and the test provided by the Superannuation Guarantee (Administration) Act (SGA Act) likewise refers to an 'employee' – but includes an expanded definition of that term.
The Federal Court at first instance, and the Full Federal Court on appeal, found that Dr Moffatt was not an employee for the purposes of annual leave or long service leave. The Court then turned to the issue of superannuation.
Here the consideration is different. Section 12 of the SGA Act sets out who is defined as an employee for the purposes of superannuation. The section specifically states that it is intended to expand the meaning of the term – with the clear intent that more workers are entitled to superannuation than traditional 'employees'. The most relevant sub-clause of s. 12 is sub-clause (3) – which provides that a person working under a contract wholly or principally for the labour of a person is an employee for the purposes of the SGA Act.
Dr Moffett was employed under a contract which required him to personally perform services and did not permit him the right to delegate the task entirely to someone else. He could employ others to assist, but must provide personal service. Because the Services Agreement he had with Dental Corporation was 'principally' for his own personal labour and with him in his individual capacity (and not through a company or other corporate entity), he was to be treated as an employee for purposes of superannuation.
And there you have it – Dr Moffett, like many other people who have wide flexibility over their work, but who must provide labour personally – is simultaneously both a contractor for annual and long service leave, and an employee for superannuation.
Can it work the other way – Can you be an employee for annual or long service leave, but a contractor for superannuation?
Case study – claiming long service leave as an employee & superannuation as a contractor
The answer should be 'no' – but there are accountants and lawyers who would answer 'yes'. Even the ATO seems to say 'maybe'.
HHG Legal Group has just assisted a client in exactly this situation. Our client worked for a company, M. When he was employed he was informed that he would be a contractor, and would need to be employed through a company. Our client suggested that he be employed through the corporate trustee of his family trust P Pty Ltd. For many years our client worked for M. He was directly supervised by the owner of M, his hours were set, he had to get approval for leave, he was, for all intents and purposes, an employee. M was assessed for payroll tax on the basis our client was an employee. Eventually M went into liquidation. Our client lodged a proof of debt for his unpaid entitlements. His claims for leave were accepted, and he was paid a portion of his entitlements under FEG – all of which effectively acknowledged he was an employee.
However, when it came to his superannuation entitlements the liquidators of M, and their lawyers, insisted our client was not an employee for superannuation purposes. They did this principally on two grounds:
- They claimed that the ATO has responsibility for recovery of unpaid super, so any claim should come from the ATO,
- They claimed that in any event our client was not an employee for superannuation purposes.
In the Federal Court the liquidator appeared to abandon the first argument but maintained the second. They seemed to do so on the basis that our client could be an employee for all other purposes, but because he used a corporate entity to enter into his contract, superannuation could not be payable pursuant to s 12(3) of the SGA Act. They also referred to an ATO position paper suggesting this was the case.
In our view their position was fundamentally wrong.
Firstly, the express purposes of s. 12 of the SGA Act is to expand the scope of people entitled to superannuation. It expressly includes the common law test of employee. If it excluded those who contract through a company it would not only decrease, but would decrease substantially those numbers, and provide an obvious and readily exploitable loophole.
Secondly, the text of sub-clause 3 does not readily apply to a contract between two corporate entities for the labour of a third person. The sub-clause states:
"If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract."
The meaning of the sub-section is clear when person A is employed by company B to do work. In that case you can clearly identify 'the person', and 'the other party'.
But what about the situation where you have company M contracting with company N for the labour of person O? In that situation you can identify 'the person', but which of M or N is 'the other party'?
Thirdly, such a position is inconsistent with authority on the issue. There are numerous cases in the Federal Court where workers who have used a corporate entity to enter into contracts have been found to be eligible for superannuation, including On Call and Roy Morgan.
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.