Sham contracting – are your independent contractors really employees? And entitled to be paid as such?
Nov 13, 2018Section 357(1) of the Fair Work Act 2009 (Cth) states that an employer must not represent that a contract of employment is a contract for services under which the individual performs work as an independent contractor, otherwise the employer is at risk of the employee seeking Court orders for the payment of unpaid entitlements (such as annual leave, superannuation, long service leave and the like), being entitlements that independent contractors are otherwise not entitled to. In the case of Armstrong and Miller against JLF Corporation Pty Ltd (“JLF”) [2018] FCCA 3166, the applicants sought relief against JLF, claiming that they were employees but they were not remunerated accordingly. They claimed entitlements arising from the National Employment Standard (as set out in the Fair Work Act) and under the relevant Award (being the Clerks Private Sector Award 2010). The entitlements claimed were:
- Annual leave
- Annual leave loading
- Superannuation
- Long service leave
They also sought the imposition of pecuniary penalties for contravening the Fair Work Act. The Court noted that the core issue to be determined was:
Whether, at the relevant times, the applicants were employees of [JLF] or independent contractors.
Background facts
JLF is a property development company. The first applicant commenced working with JLF in 1993 as a personal assistant to the Legal Manager. She was subsequently promoted to manager of the Legal Department and became a salaried employee. In 1999, the first applicant was responsible for employing the second applicant, as her assistant.
A change in the arrangements
In 2001, JLF undertook a financial review of the department within which both applicants worked, and informed the staff that they would be required to accept a reduction in their wages, otherwise their roles would be terminated and the tasks outsourced. Instead of accepting a reduction in wages, it was agreed by the first applicant and the JLF manager in a November 2001 meeting that the applicants would essentially transition from being employees to being contractors – a file note completed one of the applicants after the conversation with the JLF manager noted:
- They would be paid per contract;
- They could use JLF’s office space;
- They could use JLF’s office equipment;
- Any additional work would be done pursuant to a pre-agreed fee;
- They had the right to employ staff;
- 3 months’ notice was required to terminate the agreement.
JLF’s evidence was that the applicants were invited to “tender” for the contract, and that the first applicant in the meeting said that she would start her own business, employ staff, and complete the work for JLF in return for payment per contract. The Court noted that the applicant’s notes were made contemporaneously (that is, within a short period of time after the relevant meeting), whereas the JLF manager did not make any notes at all. In giving evidence to the Court, both applicants acknowledged that their employment with JLF came to an end on 30 November 2001, that they both received termination pay on 29 November 2001, and that they both were made redundant and accordingly received a redundancy benefit. Thereafter, the applicants performed services according to the agreement reached with the JLF manager in the November 2001 meeting. The agreement was formalised by a document executed by JLF and the first applicant in 2002. It was understood by the first applicant that she would work out a “split” with the second applicant. The applicants subsequently agreed on a 65/35 split, then applied for an Australian Business Number (ABN), noting their “partnership” on the applicant form, and submitted tax invoices for services (including GST) to JLF. Payment was made into a bank account in the applicants’ joint names.
The Court noted:
“Both [applicants] agreed that neither was required to inform JLF of how the work was being undertaken. No one from JLF enquired of [either applicant] about how the work was being undertaken or what arrangements were in place between [the applicants] for the sharing of the remuneration … The evidence shows that they were not supervised by others from JLF, at least on a day-to-day basis and they could keep their own hours.”
In 2003, JLF asked the applicants to pay rent for using the office space, and after some negotiation, a 3 year lease was eventually signed by the parties. A wall was constructed to create a separate area for which the applicants had exclusive use. Evidence was presented to the Court regarding the changing aspects of the relationship over the years – the re-negotiation of the fee to be paid, the requirement for the applicants to perform additional work following the departure of JLF staff members. In 2014, JLF took steps to obtain an express acknowledgement from the applicants that they were indeed independent contractors, not employees, following an application by a disgruntled former employee. The applicants sought legal advice and decided not to sign the acknowledgement. Shortly after, the applicants vacated JLF’s premises.
The legal test
Each case must be considered on its own facts, by looking at the totality of the relationship “to determine whether [the applicants] served JLF in JLF’s business or whether [the applicants] carried on a trade or business of their own”. It does not matter what the parties call their relationship in their contract – instead you need to consider various factors to determine the nature of the relationship. Such factors were listed in the 2013 decision of ACE Insurance Ltd v Trifunovski [2013] FCAFC 3:
- The terms of the contract
- The intention of the parties
- Whether tax is deducted
- Whether sub-contracting is permitted
- Whether uniforms are worn
- Whether tools are supplied
- Whether holidays are permitted
- The extent of control of, or the right to control, the “employee”
- Whether wages or paid or instead whether there exists a commission structure
- What is disclosed in the tax returns
- Whether one party “represents” the other
- For the benefit of whom does the goodwill in the business inure
- How “business-like” is the alleged business of the “employee” – are there systems, manuals and invoices and so on?
The Court’s decision
Whilst the applicants argued that JLF exercised significant control over the place where the applicants were to perform their work, when it was to be performed, the actual work to be performed, and the manner in which the work was carried out, the Court noted that there was an element of negotiation and agreement between the parties regarding each of these elements, or no agreement at all – the applicants made their own decisions in certain respects. For example, the applicants decided to reduce their working days from 5 to 4, when there was insufficient work. This was not negotiated with JLF. The Court held that, taking into account the totality of the circumstances, the relationship between the applicants and JLF was one of principal and contractors – the Court particularly noted the absence of set hours of work, set holiday arrangements and directions as to how the work undertaken was to be carried out on a day to day basis.
Contact the Shire Legal team if you have any questions.
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