08 Jul 2011

Two-limbed test distinguishes employees from contractors

by Joe Catanzariti

Called on to settle the distinction between an employee and an independent contractor, the Federal Court has relied on a "totality approach" that looks beyond the contractual description.

The case of On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No.3) [2011] FCA 366 fleshes out the importance of the distinction between an employee and an independent contractor, as well as highlighting the difficulty for businesses in assessing whether the relationship between a company and someone providing personal services is classified as that of employment or an independent contractor. With its decision, the Federal Court also indicated how costly it can be to businesses if they fail to establish the correct distinction.


On Call Interpreters and Translators Agency Pty Ltd owns and operates a business which provides interpreting and translating services to its clients. In conducting its business, On Call engages skilled individuals in interpreting and translating. The interpreter is free to reject the job and to undertake work provided by rival companies, but cannot renegotiate the rate at which they are remunerated for work through the company.

In 1989, On Call sought a ruling from the Australian Taxation Office (ATO) that its workers were independent contractors rather than employees. Based on the facts provided at the time, the ATO ruled that the relationship was not an ongoing relationship and that employer/employee relationship did not appear to exist. On Call partially relied on this advice to treat its interpreters as independent contractors.

Having recognised and treated most of the interpreters as independent contractors, On Call did not make the minimum superannuation contributions required for employees under Superannuation Guarantee (Administration) Act 1992 (Cth). The Commissioner of Taxation then considered the interpreters to be employees of On Call within the meaning of the Act, and assessed that the company was liable for contributions on behalf of the over 2,500 interpreters on its books for a five-year period until 2007.

The company challenged this ATO ruling, and Justice Bromberg of the Federal Court dealt with the question of the distinction between an employee and independent contractor. Note that the previous ruling of the ATO was not relied on by On Call in this proceeding.

The "totality" approach

The main issue considered in this Federal Court case is whether the interpreters utilised by On Call over the relevant period were employees under the definition of the Superannuation Guarantee Act, or whether they were indeed self-employed independent contractors.

In his decision, Justice Bromberg looked beyond the mere contractual description of the relationship to look into the real substance of the relationship, the parties' roles, functions and work practices which establishes the "totality of the relationship". This approach was a practical and realistic multi-factorial approach consistent with Hollis v Vabu Pty Ltd (2001) 207 CLR 21. He added that this approach involves what may be described as a "smell test", or a level of intuition.

Justice Bromberg laid out the two-limbed test which appeared to be the central question to the application of the totality approach to determine whether a person working for a company is an independent contractor or an employee:

"Viewed as a 'practical matter': (i) is the person performing the work an entrepreneur who owns and operates a business; and,(ii) in performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?

"If the answer to that question is yes, in the performance of that particular work, the person is likely to be an independent contractor. If no, then the person is likely to be an employee."

In analysing the first limb, Justice Bromberg set out several indicia, including whether risk-taking is involved in the pursuit of profits and whether goodwill is being created by the economic activities of the business. He found that, among other things, that there was no evidence of repetitive and continuous business activities, and generally the goodwill that was created was more akin to that of a valuable employee.

On Call flagged to the court that the interpreters treated themselves as being self-employed, liaised with the ATO as if they were self-employed and even had their own ABN. But this was not considered to be a turning point by Justice Bromberg, and on the basis of the evidence he was not satisfied that the interpreters treated themselves as self-employed.

For the purposes of the second limb, Justice Bromberg set out a separate set of indicia, including questions on whether the capacity of control and direction of the business was present and which business was being represented.

The court found that On Call has the right to control and direct the business according to its standards and practices.

Importantly, the court found that the interpreters were representing and portraying the activities of On Call and not, allegedly, their own business. On Call was held by the court to be the business that the interpreters' work was being performed for.

Sampling of witnesses

On Call only led evidence from seven witnesses when there were about 2,500 interpreters that were affected by its decision to treat them as independent contractors. This approach was criticised by Justice Bromberg, who noted that generalisations and extrapolations from such a small number of samples were likely to be speculative and unhelpful for the rest of the affected interpreters.

He was not satisfied of how the witnesses constituted a representative sample – stating that this question on whether someone provides personal services is a question whose indicators call for evidence that is personal to the individual.

He was not satisfied that all the witnesses owned and operated their own business, finding that only two of the seven did, and reiterated that the sample was not representative.

Decision and implications

Justice Bromberg dismissed an appeal by On Call against the objection decision made by the Commissioner, and held that On Call had failed to establish that the majority of its 2,500 translators and interpreters were independent contractors. As a result, the company was liable to pay the superannuation guarantee charge under the Superannuation Guarantee Act after failing to make the minimum superannuation contributions required.

This decision emphasises the importance for businesses to correctly delineate between independent contractors and employees. The parties' description of the relationship is not enough. A court may simply look beyond the terminology used in the contract and look at the totality approach to determine the relationship.

Employers need to be aware of sham contracting, because such arrangements mean they may fail to provide employee entitlements under the Fair Work Act and face a maximum penalty of $33,000 for each breach.

Considering the costs of getting the relationship wrong, it might be worth re-evaluating the existing relationship to ensure that the service provider is being characterised in the correct way.

This article was written when Joe Catanzariti was a partner at Clayton Utz and does not necessarily reflect his views as Vice-President of the Fair Work Commission.

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