Mark Branagan

Contractors or Employees – the end of the Each-Way bet?

Mark Branagan

1 June 2015

Employment Contracts Employment Policies

Businesses grappling with the difficult distinction between independent contractors and employees will be relieved to learn of the outcome of the recent decision of the Full Court of the Federal Court in Tattsbet Limited v Morrow.

Allowing an appeal by Tattsbet, the Full Court concluded that a woman operating a TAB agency in Queensland was an independent contractor rather than an employee. The decision bucked the trend in recent judgments that focussed on whether workers were ‘entrepreneurs’.

The Full Court embraced the principles from the two landmark High Court decisions of Stevens v Brodribb Sawmilling Co (1986) and Hollis v Vabu (2001), defining the appropriate legal test for distinguishing between contractors and employees as an assessment of the ‘totality of the relationship’ after considering a multi-factorial test.

Background and judgments

Ms Morrow ran a TAB agency for Tattsbet for several years in Logan, south east Queensland. Ms Morrow’s various contracts with Tattsbet over a period of years specifically stated that she was an independent contractor.

Ms Morrow employed staff to work at the agency, received lump sum payments from Tattsbet from which she paid the employees and paid workers compensation premiums for her employees. Ms Morrow did not take any annual leave or personal leave, was an active member of an employer association negotiating agreements with employees and engaged in the taxation system as a contractor dealing with GST, including submitting Business Activity Statements (BAS), remitting tax and claiming input tax credits.

Tattsbet summarily terminated the agency agreement with Ms Morrow in 2011. She commenced claims in the Federal Circuit Court (FCC) alleging that she was an employee rather than a contractor and alleging a breach of the National Employment Standards of the Fair Work Act 2009 (Cth) (FW Act).

Originally, the FCC found that Ms Morrow was an employee. The FCC was strongly influenced by the fact that Tattsbet maintained significant control over Ms Morrow and her conduct of the agency business. For example, Tattsbet selected the sites for the location of the agency, paid the rent, directed opening hours, had final veto rights over the employment of staff at the agency, did not permit the sale of any other products other than Tattsbet/TAB products and directed all training on the operation of the Tattsbet business. Ms Morrow submitted that she was nothing more than a branch manager employed to carry out Tattsbet business.

In the past few years, a series of Federal Court judgments (On Call Interpreters (2011), ACE Insurance v Trifunoskvi (2013) and Quest South Perth (2015)) had introduced a new layer of ‘entrepreneurship’ as an important factor in resolving disputes over the status of a person as either a contractor or an employee. These judgments went beyond simply acknowledging (as earlier cases had done) that if someone was running a business on their own account this was a factor contributing to the conclusion that they were a contractor rather than an employee. Instead, these cases effectively held that in order to be a contractor, the worker needed to be an ‘entrepreneur’. This test was so demanding that few, if any, people working for another business could ever be held to be contractors rather than employees – and as a result there had been numerous recent Court findings of ’employment’.

Following these cases, it was perhaps unsurprising that the FCC found that Ms Morrow was not an ‘entrepreneur’ in the sense of taking a risk, seeking to make profit and having an asset or goodwill to sell at the end of her work for Tattsbet. Rather, she was effectively controlled by Tattsbet, and was an employee.

Given the significant impact of this decision on Tattsbet’s operations, it was also no surprise that Tattsbet appealed to the Full Court of the Federal Court.

In allowing Tattsbet’s appeal, the Full Court found that the FCC erred in assessing whether Ms Morrow conducted her business as an entrepreneur. The Full Court stated that this was a distraction from the ‘central question’: ‘the question is not whether the person is an entrepreneur, it is whether he or she is an employee’. The traditional multi-factorial test adopted by the High Court in Stevens and Hollis is still the appropriate test. The Full Court also endorsed a comment from an earlier judgment that ‘working in the business of another is not inconsistent with working in a business of one’s own ‘. The Full Court concluded that Ms Morrow was in fact an independent contractor.

Observations

Making the call on whether a person is a contractor or an employee has always been a difficult task, particularly for business. The issue has often been described by Courts as ‘finely-balanced’, a matter of ‘intuition’ or even the subject of a ‘smell test’ – in other words, nothing short of an each way bet. Yet if the ‘entrepreneurial’ stream of decision-making had continued to flourish, there would be very few situations that would constitute a contracting relationship. With heavy penalties for sham contracting being dished out by the Courts, this had become a serious and risky issue for business.

While companies need to continue to be vigilant about the legal status of people working for their business, the Full Court decision should provide some comfort that it is possible to put in place real contracting arrangements that will stand up to judicial scrutiny.