1. Legal Framework Differentiating Employees from Independent Contractors

a. The General Distinction Between Employees and Independent Contractors

An employment contract is accepted as a form of agreement between an employing company and an employee whereby the employee, in return for consideration in the form of regular salary or wages, undertakes to provide services to a business through the provision of their personal labour.6 Conversely, an independent contractor is a person who conducts a business through which they provide a service or services to a principal for the benefit of their own commercial enterprise.7

The distinction between employers and contractors at common law has therefore been described as being “rooted fundamentally in the difference between a person who serves his employer in his, the employer’s, business, and a person who carries on a trade or business of his own.”8

The jurisprudence in Australia, consistently with most other countries, recognises that it is a fundamental characteristic of an employment relationship that a person employed is subservient to their employer and must carry out any duties reasonably required of them. Consequently, the Courts will imply the existence of terms of fidelity and loyalty in all contracts of employment such that “where a person has entered into the position of servant, if he does anything incompatible with the due or faithful discharge of his duty to his master, the latter has a right to dismiss him.” 9

On the other hand, the very nature of an independent commercial enterprise “will usual- ly involve the acquisition and use of both tangible and intangible assets in the pursuit of profit”10 and therefore no such duties of fidelity and loyalty arise.

Put more simply, the distinction can be described in terms of a contract for the provision of services, or a contract of service.11

b. The Legal Test for Distinguishing an Employment from an Independent Contracting Relationship

The legal definition of ‘employment’ is not prescribed in Statute, but rather derives from a range of common law tests developed principally to establish vicarious liability in tort.12 The relevant test is multifactorial,13 seeking to determine “whose business the putative employee was toiling”14 by reference to the “totality of the relationship.”15

In order to determine the above question, the multifactorial ‘totality’ test requires an examination of indeterminate indicia of employment and contractor relationships, considered by authorities as assisting an enquiry into the true nature of the contractual relationship and its terms.16

Indicia of Employment Relationship

• the organisation for whom the work is performed has the right to direct the manner of performance of the work, so far as there is scope for such direction;
• the commercial risk is borne by the organisation, as is the responsibility for any loss occasioned by poor workmanship or negligence by the employee;
• the organisation prescribes the times and locations for the performance of the work;
• the remuneration is in the form of a salary or wages;
• personal income (PAYG) tax is deducted by the organisation when paying the worker;
• the organisation provides the equipment and materials for the work;
• any use  of  the  worker’s  own  equipment  or  materials  is  compensated  by  the reimbursement or by an allowance;
• the organisation has discretion in relation to task allocation and termination of the engagement;
• the worker cannot perform similar work for other organisations;
• the worker is presented to the public as being part of the organisation;
• the worker has no inherent right to delegate their work to another, though there may be power to delegate some duties to other workers; and
• the worker receives benefits such as annual, sick or long service

Indicia of a Business

• the contract is for a given result, rather than the mere provision of labour on an ongoing basis;
• the worker maintains a high level of discretion and flexibility as to how the work is to be performed, even if the contract contains precise terms as to the material to be used and the methods of performance;
• the worker bears the risk of the commercial loss or profit from the job, and the responsibility and liability for any poor workmanship sustained in the performance of the task;
• the worker sets their own hours of work;
• the worker provides their own equipment and assets;
• the contract does not include provisions for the worker to take paid leave;
• payment is predicated upon satisfactory performance of the contract;
• the worker supplies an invoice for payment and / or quotes an Australian Business Number;
• the worker is responsible for their own expenses;
• the worker is expected to insure against the risk of being injured at work, and / or the risk of causing loss to others in the course of performing the work;
• the worker advertises their services to the public at large and accepts work from other parties;
• the worker has a power to delegate or sub-contract performance of the work to others; and
• the worker is capable of accruing goodwill in their own business through their performance of work for the
• The above lists are certainly not exhaustive and each case will be decided on its own Ultimately, the courts will assess the totality of the workplace relationship to determine whether the worker is, on balance, an independent contractor or an employee.17Below is a more detailed look at the relevant indicia.

Control
The level and degree of control exercised by one party over the other is the most significant factor affecting the characterisation of a relationship. “Control” refers to things such as supervision and direction given as to how work is to be performed, and includes the authority to control work (as opposed to actual control). Generally, the gre- ater the level and degree of control exercised by one party over the other, the more likely the relationship is to be characterised as an employment relationship.

However, it is important to bear in mind examples in which, despite workers enjoying significant autonomy and choice regarding their hours and operational elements of their job, the fact that the organisation took ultimate responsibility for quality at all stages of the production process demonstrated a sufficient degree of control to establish an employment relationship.18

Mode of Remuneration
There is a notable and indicatory difference between the modes of remuneration for an employee as opposed to that of a contractor. Employees are typically paid on a periodic basis based on hours worked. Independent contractors are usually paid a pre-negotiated amount upon submission of an invoice at the completion of a service. Further, receipt of a fee as opposed to a regular wage or salary is indicative of an independent contractor relationship.

Wages that are not based on skill, difficulty of task or allotment of time for completion of the job suggest an ordinary employment relationship. Where the worker bears risk for unsatisfactory completion of the job, this suggests a contractor relationship.19  Payment following submission of an invoice by the worker will also carry weight – unless this has been dictated by the employer.20 In one case, a company generated and issued invoices to itself on behalf of its contractors. The Court examined this process and determined that the recipient-generated invoices were akin to payslips typically issued by an employer to an employee and therefore did not assist a finding that the workers were contractors.21 Although the courts do not always consider the mode of remuneration alone as a reliable indicator of the workplace relationship due to contemporary methods of payment, the court has already considered remuneration based on hours of work set out in timesheet entries as one of the (several) factors that indicated an employment relationship22.

Provision of Tools and Equipment
More often than not, where the person has to purchase and maintain his or her own tools and equipment, this will point to a contractor relationship.23 However, in light of this, modest sums spent on equipment or sums counterbalanced by privileges provided by the employer for the enjoyment of the worker will rarely be significant in the assessment.24

However, owner-drivers again create issues; and it has been found that even where an employer pays for signage on a vehicle owned by a worker, this does not necessa- rily outweigh the fact that the employee supplies and maintains an expensive piece of equipment.25

To provide contrast, where the couriers, who were responsible for providing and maintai- ning their own bicycles, were found to be employees, the court noted the relative capital cost of such a burden. Conversely, in another case26, the court found that ownership of a truck is sufficient to satisfy the requirement for investment of capital; and thus held that the owner-driver was a contractor. This was justified by the fact that owning and maintaining a truck is significantly more expensive than a pedal bike.

An independent contractor is likely to make a substantial investment in assets, using their own tools and equipment (for example, their own phone and computer), as well as hold policies of insurance for their business and for public liabilities. By contrast, an employee would be more likely to use tools and equipment provided to them by their employer and has no obligation to indemnify their employer from loss.

The provision of training in relation to company products and policies can also be indica- tive of an employment relationship.

Representations to Third Parties
Where a worker is required to don the livery of their employer during their work hours, this will suggest an employment relationship. This was most famously affirmed in a case where a bicycle courier was required to wear a uniform with the company logo “Crisis Couriers” emblazoned on its back.27 Similar examples include providing and directing the worker to use company stationary and a company email address for corresponding with third parties, and the use of the worker’s name or image in marketing materials, in particular, on the company’s website.

Risk and liability
An independent contractor will be responsible for any faults in their work and will often carry their own insurance and indemnify himself. By contrast, an employer will be liable for most of the mistakes of an employee and will have insurance to reflect this.

Business Expenses
An independent contractor is likely to pay their own overheads and business expenses and hold their own policies of insurance and any relevant trading licences, where as an employee will often be reimbursed by their employer for any costs incurred in the performance of their work.

Exclusive Engagement
The right  to  the  exclusive  services of a  person is characteristic of  an employment relationship. A true independent contractor would be free to perform work for other people.

However, jurisprudence noted that the mere freedom to work for others may be illusory28 – and as such, the court must take into account “the level of economic dependence of one party upon another, and the manner in which that economic dependence may be exploited” in applying this test.

Separate Place of Work and Advertises Services
This category is somewhat linked to the above ‘performance of work for others’ test. Put simply, an inference that workers carry on business on their own account is more easily made if they have a location for their own business that is in actuality separate from the impugned employer’s.29

Furthermore, where the worker actively advertises their own business without reference to a connection with their employer, this factor will be in favour of their status as an independent contractor.30

We appreciate that permitting contractors to work for others during the term of their engagement with the Principal may be commercially unwise. Nevertheless, explicit references to the exclusive services of contractors to the Principal, lends weight to an argument for employment. Most Principals allow the contractors to perform work for others, provided that it does not influence their delivery of services to the Principal.

Right of Delegation
A requirement that an individual should personally carry out the work is often typical of an employment relationship. Independent contractors frequently have power to delegate work to others, either with or without the consent of the party contracting their services, by either recruiting his or her own employees, or subcontracting the work to others.

The importance of powers of delegation will be touched upon again below. However, the Court of Appeal31 held that in deciding whether a person is an employee, it is the totality of the relationship that is important and as such the right to delegate or provide a substitute carried significant weight but was not completely decisive.32 In one case, two insurance salesmen were found to be employees, despite both trading through corporate vehicles and hiring their wives to assist them with administrative tasks.33

Contractor agreements should contain the express right for the contractor to delegate his work to any other person or entities under the contractor’s supervision. Any contrac- tor agreement should ensure that the contractor is solely responsible for ensuring that any agent, employee, contractor or person engaged by the contractor to perform the work complies with all relevant laws.

Employment Obligations and Entitlements (Taxation, Superannuation and Leave) While the courts have, in the past, considered the treatment of employee entitlements and obligations such as tax deductions, superannuation contributions and leave entitle- ments as an indication of the workplace relationship, these matters are not determina- tive.

Typically, an employer withholds applicable tax deductions and superannuation contributions from an employee’s remuneration, whereas an independent contractor should be paid a gross (untaxed) amount and is responsible for administering their own taxation and superannuation planning. Further, an employee is entitled to paid leave (such as annual leave, personal leave and parental leave), whereas an independent contractor is not.

At best, the treatment of these obligations and entitlements will assist a court in determining the intention of the parties.
Nature of the Work
In assessing the employment relationship, the level of skill involved in the work may be a factor taken into account by the courts. Independent contractors are typically associated with a provision of skilled labour. Further, unskilled work often implies the need for more control over the worker and therefore, denotes an employment relationship.

Professionals and tradespeople are the two most significant groups that will be conside- red by a court to be self-employed. A requirement to hold a licence if the person is not considered an employee is only a minor consideration if attempting to deem him or her as a contractor.34

Business Goodwill

A genuine independent contractor will often have the aim to generate its own business goodwill through the services it provides. However, if a worker is expected and/or required by their contracting business to be viewed by the public as a representati- ve of that business (such as through the use of uniforms, business cards and general representations to the public), the worker’s ability to generate business goodwill will be significantly restricted.

Express Label Given to the Relationship

The courts will often assess a worker’s ability to generate business goodwill independenttotheircontractingbusiness,indeterminingwhethertheyareanindependent contractor or employee.

As set out above, the courts’ general approach is that they will not necessarily consider themselves bound by the express labels used by the parties but look to the relationship in practice.

However, where the nature of the relationship is ambiguous, consideration will be gi- ven to an express label. In this regard, how the parties characterise the relationship and express that in documentation, may be considered by the Courts in determining the in- tentions of the parties, and as part of the overall factors to be considered. In Re Porter; Re Transport Workers Union of Australia, Gray J noted:35

“The parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognises it as a duck … [T]here is no parti- cular reason why a court should ignore the practical circumstances, and cling to the theoretical niceties.”

The power to Incorporate

An independent contractor relationship is more likely to be found in circumstances where the contract for service is with a company rather than an individual, as employers do not typically engage companies as employees. In one case however, the Federal Court of Australia determined that the right to incorporate does not preclude a finding that the relationship between the worker and the company was one of employment. Looking into the substance of the relationship, the Court gave little weight to the power to incorpora- te because “the entity selected to do the work... was the individual…, and the company featured only as the recipient of the fees that would otherwise have been paid to the [individual]” 36

As has been stated, the primary exception to the above is where the worker is permitted under the employment contract to delegate or subcontract the relevant work without permission or qualification from the employer.37 In these circumstances, the worker will almost always be classified as a contractor.38 However, where that power requires approval by, or conditions to be met to the satisfaction of the employer, this indicator will be given less weight.39

c. General Differences in Tax Treatment

Taxation  systems  fundamentally  differ  between  employees  and  contractors.  The distinctions can be primarily confined to tax regulation with regards to remuneration of workers; and personal services income provisions for contractors outlined in divisions 83- 87 of the Income Tax Assessment Act 1997 (Cth). These will be discussed independently of each other.
Withholding tax from remuneration
In the context of an employer-employee relationship, an employer is obligated under Schedule 1 of the Taxation Administration Act 1953 (Cth) to deduct taxes from wages paid to an employee, and remit that sum to the Australian Taxation Office (“ATO”). An employee will be taxed at the maximum rate possible unless they provide their employer with a valid tax file number.40

Conversely, the taxable revenue generated by independent contractors is taxed at the applicable company rate, which is ordinarily lower than the tax rates for individual employees. Contractors are also paid the gross sum of earnings and must generally meet their own tax obligations, however, an independent contractor and a business may enter into a voluntary agreement to withhold tax from remuneration payments.41
Personal Services Income Provisions
A self-employed individual can often claim a much wider range of deductions with regards to their expenses. Given the ease with which a contractor may  obtain an Australian Business Number (“ABN”),42 engaging as a contractor can be quite attractive to some people, particularly in more senior roles.

The Income Tax Assessment Act 1997 (Cth), however, places an onus upon individuals seeking to earn income from self-employment to prove that they are genuinely running a ‘personal services business’. Moreover, this requirement will become increasingly pertinent in scenarios where a self-employed individual earns 80% or more of their income from a single source.

The personal services income (“PSI”) test established by the Income Tax Assessment Act 1997 (Cth) is not dissimilar to the common law test articulated above, however an individual found to be an independent contractor by a court will not necessarily enjoy the same status in light of this legislation.43

The tests include:
• whether they advertise services to the public
• whether they engage others to help perform the work
• whether they have their own business premises
• whether they are paid to produce a particular ‘result’
• whether they are obliged to rectify defects in their work

It is important to note that an employee deemed as such under the PSI provisions does
not become an employee for any other legal purpose.

d. Differences in Benefit Entitlements

National Employment Standard

Under the National Employment Standard and the Fair Work Act 2009 (Cth) (FW Act), employees are entitled to the following benefits:44
• paid annual leave of four weeks;
• maximum working hours of 38 hours per week, plus reasonable additional hours;
• the ability to request for flexible working arrangements;
• parental leave;
• paid personal leave, including carers and compassionate leave;
• long service leave;
• community service leave;
• public holidays;
• a minimum notice period for termination and a minimum amount of redundancy pay; and
• minimum rates of pay.

In contrast, independent contractors are not entitled to these benefits.45
Superannuation

Under superannuation law in Australia, employers have an obligation to pay the superannuation guarantee for their employees at a minimum rate of 9.5% of their base earnings if the employee:46

• is paid $450 or more (before tax) in salary or wages in a month; and
• is 18 years old or over, or
• the employee works for more than 30 hours in a week.

In regards to contractors, a Principal may be obliged to pay superannuation at the minimum rate for a contractor in some circumstances. In particular, if a Principal pays a contractor under a contract that is wholly or principally for labour, the Principal has to pay superannuation contributions for the contractor. This is because the contractor is deemed to be an employee for superannuation guarantee purposes. This is even if the contractor issues invoices under an ABN.47

Generally, a contract is principally for labour if more than half of the value of the contract is for the person’s labour, which may include:
• physical labour
• mental effort, or
• artistic effort.48

Workers’ Compensation

Workers’ compensation is covered by State and Territory laws and entitles employees to claim benefits for job-related injuries.49
Some independent contractors are covered for workers’ compensation in some states and in specific circumstances.

An example is contractors under labour hire services arrangements, who are covered by the NSW workers’ compensation scheme pursuant to the Workplace Injury Management and Workers Compensation Act 1998 (NSW), which deems them workers for the purpose of claiming workers’ compensation.

However, not all contractors are entitled to claim workers’ compensation and it will depend on the relevant state legislation. All employees however are covered by workers’ compensation legislation and entitled to its benefits.
Benefits under Work, Health and Safety Legislation
Under the various State and Federal Work Health and Safety Acts, a form of which applies in all Australian jurisdictions,50 a person conducting a business or undertaking must ensure, so far as is reasonably practicable, the health and safety of:

• workers engaged, or caused to be engaged by the person, and
• workers whose activities in carrying out work are influenced or directed by the person,
• while the workers are at work in the business or 51

"Worker" is defined broadly under section 7 of the Work, Health and Safety Act 2011 to

include both employees and independent contractors.

Accordingly, independent contractors and employees have equal entitlement to a safe and healthy workplace, and both can consequently sue for associated breaches.

e. Differences in Protection from Termination

Termination under Common Law
Under the common law, an employer has the right to dismiss an employee at any time provided that a reasonable period of notice is given.52 This is subject to State and Federal laws, as well as to any terms governing termination in the employment contract. In contrast, the relationship between an independent contractor and a Principal is governed by contract. Accordingly, the Principal may only terminate the contract without penalty if the worker has failed to perform its obligations according to the contract terms, by agreement or where the contract provides for termination.53 A bre- ach of contract, resulting in damages, will arise where there is an unlawful termination of the service contract.

Notice Period
Section 117 of the FW Act specifies the minimum  period  of  notice  that  must  be given to an employee or employer on termination of the employment relationship. This period can fluctuate from 1 to 5 weeks depending on the employee’s age and length of continuous service with the employer at the end of the day the notice is given.

A contravention of the minimum period of notice may give rise to a cause of action. Conversely, no minimum period of notice is provided under statute for the termination of a contract between an independent contractor and a Principal. As such, protection will only arise if it is provided for in the service contract.

Unfair Dismissal
An employer’s common law right to dismiss an employee on reasonable notice is further qualified by the FW Act, which provides statutory protection for eligible employees54 from dismissal on grounds that are “harsh, unjust or unreasonable.”55 Contravention of this provision will result in a remedy being awarded to the employee.

In contrast, independent contractors are not employees for the purposes of the FW Act and therefore cannot access the unfair dismissal regime under the FW Act.

Adverse Action
Both employees and independent contractors have rights and remedies pursuant to the General Protections provisions of the FW Act. Those provisions allow both employees and independent contractors to bring a claim if the employer or principal, has taken “adverse action” against them because they have exercised a “workplace right” under a workplace law.

f. Local Limitations on Use of Independent Contractors

The Independent Contractors Act 2006 (Cth) promotes freedom to enter into genuine independent contracting relationships.

The Act also seeks to minimise limits on the use of independent contractors in genuine contracting relationships.56

In particular, the principal objects of the Act are:57

• to protect the freedom of independent contractors to enter into service contracts;
• to recognise independent contracting as a legitimate form of work arrangement that is primarily commercial; and
• to prevent  interference  with  the  terms  of  genuine  independent  contracting

arrangements.

Accordingly, there are few limits on the bona fide use of independent contractors.

However, the use of independent contractors will be limited where it is a ‘sham arrangement’. Likewise, the law allows a certain level of scrutiny and redress in circumstances where the independent contract is in fact an unfair contract, and makes provision for remedies for unfair contracts.

Moreover, deeming provisions in legislation, such as in superannuation legislation, may impose additional obligations on principals who hire independent contractors.

g. Other Ramifications on Classification

Discrimination Laws
Likewise, whether an individual is classified as an employee or as an independent contractor will not affect their entitlement to seek a remedy under the various state and federal discrimination laws. Employees do, however, have additional protections from unlawful discrimination under the FW Act.58
Intellectual Property
The characterisation of a person’s employment status may also determine beneficial ownership of intellectual property created by a worker. Copyright in an original work is ordinarily owned by the author of that original work,59 however, copyright legislation provides an exception to this rule,60 allowing an employer of an author the right to own the copyright subsisting in their original work provided that:

• the worker is engaged under a contract of service; and
• the work  was  made  by  the  author  “in  pursuance  of  the  terms  of  his  or  her employment.”

The term “contract of service” is not defined in the Copyright Act and therefore the courts would apply the common law tests identified above, to determine the existence of an employment or contractor relationship. 61
Negligence
An employer owes a duty of care to his/her employees. Therefore, an employer may be liable for compensation to the employee where there has been a breach of this duty.

In regards to the position of independent contractors, the Court of Appeal has held that though a principal owes a duty of care to independent contractors, this duty is not co-extensive with the duty owed by the employer to his/her employees. Similarly, a principal does not owe a duty to control the working systems implemented by the contractor where it is reasonable to assume that the contractors are competent to control their system of work without supervision by the Principal.62
Vicarious liability
An employer is vicariously liable for the actions of his/her employees performed in the course of employment.63

However, an employer is not vicariously liable for any actions committed by an independent contractor in the course of performing work for the employer.64

Unfair Contracts
The Independent Contractors Act 2006 (Cth) provides independent contractors with a remedy for unfair contracts and it is possible to apply to the court to review and set aside a contract or term under that Act.

Under the Independent Contractors Act 2006, an unfair contract is one where a person performs work on terms that are unfair, unconscionable, against the public interest or are designed to avoid the provisions of Federal or State industrial laws.65

The Independent Contractors Act 2006 applies to those who have a service contract with a constitutional corporation, or the Commonwealth, or where a service contract was formed or performed in either the Australian Capital Territory or the Northern Territory.

h. Leased or Seconded Employees

Where a host company enters into a bona fide labour-hire arrangement that is not contrived to disguise what is in fact an employment relationship, the possibility of a court finding the host to be an employer of a worker is still significant, particularly if the work undertaken is permanent and unskilled.

For example, in Damevski v Guidice,66 a cleaner worked for a firm as an employee. He was then told that he would no longer be employed directly, but would instead be hired through an agency. He signed a document prepared by the firm that indicated his ac- ceptance of an offer of engagement by the agency. However, the firm assured him that “nothing will change”. This helped persuade the court that, viewed objectively, he still had a contract with his original employer and hence could pursue a claim against it for unfair dismissal. This was so even though he was now paid by the agency.

Similarly, the NSW Industrial Relations Commission observed that an agency had no real or effective involvement or control in any aspect of the worker’s recruitment, day-to-day employment and dismissal and held that the agency operated more like a “service company which was used as a conduit by the Host to pay the applicant’s wages and to deal with on-costs such as workers compensation”67.

It is critical that companies recognise that in any test of characterisation, the substance of any workplace arrangement will prevail over its form. As noted above, the distinction between employers and contractors is “rooted fundamentally in the difference between a person who serves his employer in his, the employer’s, business, and a person who carries on a trade or business of his own.”68

Labour hire arrangements have recently come under considerable scrutiny by the courts and regulatory bodies, in particular, organisations that engage unskilled and semi-skilled workers through labour hire agencies. The very nature work performed by unskilled and semi-skilled persons lends itself to a finding that the person could not have been running a business of their own and the Courts have described such a proposition as “prima facie, intuitively unsound”.69 In such cases, the relevant question is not whether the workers were employees or contractors, but whether a contract of employment can be implied between the worker and the labour hire agency, or the worker and the host company in which the labourers work. The host organisations have increasingly been found to be the true employer of the workers so engaged, irrespective of the contractual arrangements in place between the organisation and the labour hire company, and the labour hire company’s contractual arrangements with agents.

In a recent case (“Quest Case”), 70 a company that operated serviced apartments effecti- vely re-engaged two of its long-term housekeeping employees as independent contrac- tors to provide identical housekeeping services, but via a form of tri-partite contracting arrangement, referred to as an “Odco” arrangement.71 Under the Odco contracting ar- rangement, the workers were first engaged as independent contractors to a third party labour hire company, who in turn, supplied the services of the workers to the Host com- pany under a labour hire agreement.

At first instance, the Federal Court accepted that the Odco arrangement was lawful and therefore held that the housekeepers were legitimate contractors. On appeal, the Fe- deral Court of Australia, Full Court (“Full Court”) examined the substance of the hou- sekeepers’ working relationships, applying the multi-factorial totality test and found it improbable on the evidence that any reasonable person would accept that they were working in business for themselves.72

One key point of contention in the Quest Case concerned whether the Host business contravened section 357(1) of the FW Act by misrepresenting to the workers, the nature of their employment relationship with the labour hire business. Section 357(1) provides:

A person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.

On appeal to the Full Court, the Host company was successful in arguing that section 357(1) had limited application and could not extend to representations made by an em- ployer to an employee, to the effect that the employee was engaged under a contract for services with a third party.73 In finding that the workers were employees of the Host, but that the Host had not contravened section 357(1), the Full Court left a loophole that would protect Host businesses, utilising Odco contracting arrangements, from liability to pay pecuniary penalties for contravening the Sham Contracting provisions of the FW Act.74

However, on a subsequent appeal to the High Court of Australia, that decision was over- turned. The High Court held:75

The prohibition in s 357(1) is against an employer making a particular repre- sentation to an employee or prospective  employee.  The  prohibited  representa- tion concerns the character of the contract, which exists or would exist betwe- en the employer and the employee  as  a  contract  of  employment,  under which the employee performs or would perform work. The content of the prohibited representation is that the contract of employment is or would be a contract for ser- vices under which the employee performs or would perform work as an independent contractor.

 The cumulative decisions of the Full Court and the High Court in the Quest Case have effectively neutered the use of Odco style contracting arrangements as a means of circumventing the Sham Contracting Provisions of the FW Act. The Quest Case has now been returned to the Federal Court to determine pecuniary penalties.

Genuine labour hire arrangements are, nevertheless, still commonplace in Australia, particularly for casual staff, short-term projects and transient workers, such as seasonal labourers. Secondments are also common, particularly for skilled technicians and workers in professional services fields, such as accounting, law and medicine.

Tortious Liability
On a separate note, a worker under a labour hire agreement (“Agency Worker”) may cause damage either to the host or to a third party whilst working under the labour hire agreement. While an employer is vicariously liable for the tortious wrongdoings of an employee during the course of employment, there are additional complications for host businesses.

The key principle is that if the host has assumed effective control over all facets of the Agency Worker’s work so that the agency worker becomes the temporary employee of the Host, then the host, instead of the agency, can be liable for the tortious conduct of the Agency Worker if injury is caused to a third party.

In the Victorian case of Deutz Pty Ltd v Skilled Engineering,76 a labour hire company hired out a forklift driver, who, whilst driving the forklift, negligently caused extensive damage to the host’s property. The court was reluctant to conclude that there had been a temporary transfer of employment from the labour hire company to the Host based on the following principles:

• only in exceptional circumstances will an Agency be able to shift vicarious liability to a temporary employer (i.e. host);
• transfer will be less readily inferred when a worker is hired out with a machine or where a skilled worker is provided;
• transfer may occur where the Agency Worker is operating the equipment under the absolute control of the Host; and
• a transfer may occur in certain circumstances, including where the Host can direct not only what the workman can do, but how he is to do it.

The Court held that there had been no temporary transfer of employment to the host, rather the agency retained control. The agency had recruited the worker, paid his wages, established safety protocols, provided safety training, provided clothing with the agency logo, supervised the worker and had the power of dismissal.

Therefore, if labour hire mechanisms are implemented, it is important that the host genuinely sever the relationship of control between it and the worker in order to reduce its exposure to a claim in tort.