Independent Contractor or Employee – Determination through Dismissal

A recent case highlights the importance of understanding your obligations when engaging an independent contractor and then again when ending the relationship. 

A multifactorial test will be applied in the absence of a written contract, which may determine a worker to be an employee, where the intent was for them to be an independent contractor. This article addresses how the test may be applied, the value of a written agreement and potential changes via impending industrial relations reforms. 

Background 

Ms.Lee conducted work as a tiler and grouter for P & K Total Services Pty Ltd, with their relationship ending in June 2023. Ms Lee claims to have been an employee and protected from dismissal, whereas P & K Total Services claim that she was an independent contractor and not provided those protections. 

P & K Total Services engaged Ms Lee via an oral contract, the terms of which were not explicitly clear, except that the initial intent was to engage Ms. Lee on a short-term basis. At the time that the relationship ended the engagement lasted for a little more than a year. 

The conduct of the engagement included the following characteristics: 

• Ms Lee was under clear instruction of the tasks that she needs to perform; 
• Ms Lee does not control her hours; 
• Ms Lee does not have the freedom to select how she completes her tasks and is given instructions every time she is required to attend a new site;  
• Ms Lee was to buy her own equipment; 
• Ms Lee was to have an ABN, provide invoices and be responsible for any taxation; and 
• Ms Lee submitted a series of tax invoices with her ABN 

Through a claim that the Applicant had been dismissed against her protected rights, the Fair Work Commission was required to determine whether Ms Lee was an employee or independent contractor, with consideration to the above characteristics, and whether she was dismissed. 

The Case 

Deputy President Lake of the Fair Work Commission first considered whether the Ms Lee was an employee or contractor. 

Had Ms Lee and P & K Total Services Pty Ltd entered into a comprehensive written agreement that specified the terms of their engagement the agreement would have been the “primary source of the parties’ legal rights and obligations” and would have been “decisive in characterising the relationship. ”  

A comprehensive written agreement will apply unless the agreement “is a sham, varied after it was made, or post agreement conduct, or context demonstrates that a term is legally ineffective.” 

As there was no agreement, the terms of the oral agreement needed to be explored against the post-agreement conduct. 

The post-agreement conduct was considered against indicia that test the “whether the worker is the servant of another in that other’s business, or whether the worker carries on a trade or business of his or her own behalf.”  

The indicia includes: 

• Whether the putative employer exercises, or has the right to exercise, control over the manner in which work is performed, place or work, hours of work and the like; 
• Whether the worker performs work for others (or has a genuine and practical entitlement to do so); 
• Whether the worker provides and maintains significant tools or equipment; 
• Whether the work can be delegated or subcontracted; 
• Whether income tax is deducted from remuneration paid to the worker; 
• Whether the worker is remunerated by periodic wage or salary or by reference to completion of tasks; 
• Whether the worker is provided with paid holidays or sick leave; 
• Whether the worker spends a significant portion of his or her remuneration on business expenses 

When considering the indicia, it is “not a mechanical exercise of running through items on a checklist to see whether they are present in, or absent from, a given situation.”  

Similarly, no one indicia will necessarily outweigh another under all circumstances. Rather, each case is determined with consideration to the overall picture created through the accumulation of detail provided by the indicia for and against the worker being an employee. 

The Outcome 

The Deputy President determined, in this instance, that Ms Lee was an employee, giving greater weight to the fact that Ms Lee did not have control over her hours, could not decline work freely, and received specific instructions for each task. 

He gave less weight to the factors that otherwise indicated that she was an independent contractor, such as the requirement to prepare her own invoices. This is due to the fact that employers may ask employees to prepare their own invoice to “disguise the employment relationship as one of an independent contractor to avoid tax, superannuation obligations and minimum entitlements prescribed by the [National Employment Standards]”.

Having determined that Ms Lee was an employee, the Deputy President then reviewed evidence regarding how the relationship ended. The last communication between the parties was a text from Ms Lee to the business indicating that they understood that they had been fired and thanking the business for the work.  

The Deputy President determined that the employment relationship was ended by the employer with consideration to the text message and the absence of any future offers to work after the text message. 

Lesson for Employers 

This case centered around the post agreement conduct of an employer.  

Had the business offered, and entered into, a comprehensive written agreement that specified the terms of their engagement, then the post agreement conduct may not have been explored in such detail or would have been considered against the written terms.  

This is often referred to as the ‘primacy of the written contract’. In this instance, terms involving how the contractor relationship could be terminated may have resolved any dismissal-related claim. 

Importantly, the Fair Work Legislation Amendment (Closing Loopholes No. 2) Bill 2023, seeks to remove the primacy of the written contract in the assessment of whether a worker is an independent contractor or employee. Should the Bill pass into legislation as it is currently written, the terms of the contract, written or oral, will be considered against the other indicia and subject to the same overall big picture view. 

Despite the potential change to legislation and the weight given to written contracts, business owners and managers are encouraged to always utilise comprehensive written contracts when engaging workers, either as employees or as independent contractors. 

Business Chamber Queensland have developed a number of comprehensives contracts for employees, and they are available to purchase for a nominal fee.

Employment contracts that are available include: 

• Casual Employment 
• Full-time Employment 
• Part-time Employment 
• Full-time Fixed-Term (Maximum Term) 
• Part-time Fixed-Term (Maximum Term) 

If you have any questions or comments about this case, or would like to know more about the resources available to members, please contact the Workplace Relations on 1300 731 988 or at [email protected] 

Case: Eunjin Lee v P & K Total Services Pty Ltd [2024] FWC 47