In recent years, there has been intense media focus on the sharing economy (collaborative consumption) and the introduction of peer-to-peer-based sharing of access to goods and services, coordinated through online platforms. The murky legal status of ridesharing services in Australia, such as Lyft and Uber, and their impact upon traditional employment relationships has arguably attracted the most attention.
Despite a legislative response in some Australian States to legalise Uber there is continued agitation around unresolved aspects of Uber’s operations such as driver’s tax and insurance status, whether drivers are legally employees, and passenger safety. What can corporates learn as the debate rages on?
Uber was founded in 2009 and is one of the fastest growing companies in world history. There are currently over one million Uber drivers globally, serving 300 cities in 58 different countries worldwide.Uber is a ridesharing service that allows consumers with smartphones to submit a trip request on short notice, which is then routed to Uber drivers who use their own cars to ferry passengers from one destination to another.
Uber has disrupted the taxi industry worldwide to the broad satisfaction of passengers, but there are inherent legal risks with the model that are yet to be resolved, primarily around regulation of the industry and the true status of Uber drivers as employees or independent contractors.
Regulation of Uber in Australia
There is a natural tension in regulation between facilitating enterprise and protecting consumers and raising revenue; too light and the community can be put at risk, too heavy and innovation can be stifled and supply restricted.
At present, Uber has only been legalised in the ACT, NSW and WA. It remains illegal in a number of states and territories across Australia, including Qld and Tas. The Victorian Government is yet announce a position. Prior to the legalisation of Uber in some states, Uber consciously flouted the regulatory foundations of the taxi industry which created an imbalance for taxi drivers who follow such regulations and have a higher cost structure as a result. Following legalisation, Uber drivers in NSW will now be required to undertake criminal background checks, pay a separate licence fee and undergo regular car safety testing. Uber drivers will also not be allowed to pick up passengers from Sydney Airport, and taxis will continue to have exclusive rights to pick up hailing passengers from the street and from taxi ranks.
Questions of comprehensive driver background checks, consumer protection around what fees and charges would be associated with particular journeys, third-party insurance and safety requirements of taxi drivers not required of Uber drivers (including cameras in cars, training and insurance cover for professional drivers) are matters yet to be resolved.
The Australian Taxation Office (ATO) has recently made a determination that UberX drivers are providing taxi services. This means that Uber drivers must now have an Australian business number (ABN) and pay goods and services tax (GST). If Uber was not a taxi service, its drivers would only need to register to pay GST after earning $75,000.
In response to the ATO’s determination, Uber has lodged an application in the Federal Court of Australia to determine the issue of whether Uber can be described as a taxi service and, if so, whether its drivers should be required to pay GST.
The NSW Government is planning to introduce additional regulation for ridesharing platforms, including a review of the compulsory third party (CTP) scheme in respect of point-to-point transport. Currently taxis and hire cars are insured as a separate vehicle class, while ride-share services are mostly included in the general pool of passenger vehicles, resulting in significant disparity between what taxi and Uber drivers pay for CTP insurance.
A discussion paper focusing on six key options has been released by the State Insurance Regulatory Authority. One proposal is to create a new CTP class for ride-sharing vehicles. Another would see all taxis and hire cars brought into the same basic passenger vehicle class.
New levies for all taxis, ride-share cars and hire cars, based on the risks associated with where the car is hired from, and at what time of the day are also being considered by the NSW Government.
Are Uber drivers employees or contractors?
There are significant issues raised by Uber’s business model: specifically, its characterisation of its workers as “driver-partners” rather than employees. It has been argued, most notably by the Transport Workers’ Union, that the relationship between Uber and its drivers is more indicative of an employment relationship than an independent contractor relationship, and that Uber’s characterisation of driver-partners as contractors has consequently deprived them of statutory benefits they would otherwise receive as an employee (eg. paid annual leave, sick leave, long service leave, superannuation contributions etc).
Although Uber requires drivers to pay a commission for each ride, drivers are independent in many ways, determining, for example, when they are available to provide a ride on the Uber app. However, in addition to Uber acting as a third party, facilitating contact between drivers and passengers through its online platform, the company controls some aspects of the way driver partners conduct their business. The level of control exercised by Uber over the drivers is a key factor in assessing whether the drivers are employees or independent contractors.
The distinction between employee and independent contractor is significant. If Uber drivers are legally considered to be employees, Uber not only has an obligation as their employer to provide them with minimum employment entitlements, but may also be responsible for meeting all their operating expenses such as driver’s licence fees, petrol and car servicing costs, and insurance.
Why is the distinction between contractor and employee important?
The importance of the distinction between an employment arrangement and other contracting arrangements lies in the rights, obligations and legal responsibilities which attach to the different types of labour arrangements and the consequences of getting it wrong. The legal distinction between a worker who is an “employee” and a worker who is an “independent contractor” is not always easy to make. The courts decide whether a worker is an independent contractor or employee by assessing the entire relationship and looking behind the contract itself to determine the true nature of the relationship. The courts will apply a “multi-factor test” to the specific facts and circumstances relevant to a particular worker, considering a series of factors or indicia which might suggest that a person is or is not an employee. They include:
- Control. What degree of control is exercised over how the work is done? An employer has control over how the employee’s work is performed to achieve the required objective. A contractor on the other hand maintains a high level of discretion and flexibility as to how the work is to be performed.
- Delegation of work. Can the work be delegated? An employee must personally perform the work (although there may be the ability to delegate some duties to other employees). A contractor can delegate/subcontract all or some of the tasks to another person and may employ other persons as he/she sees fit.
- The right to exclusive service of the person engaged. Does the worker do other work? A full time employee is usually restricted to working for one employer during normal business hours and/or must seek permission to do other work. A contractor is free to do other work, provided it does not conflict with providing the services to the employer and can therefore accept as many contracts as he/she wishes with a number of entities/clients.
- Mode of remuneration. How is the work paid for? An employee is paid wages based on time worked not on the work performed (eg. by way of an hourly rate, annualised salary, etc) paid directly into the employee’s bank account, with additional superannuation benefits. Unlike an employee, a contractor is paid a fee, not for time spent but based on work performed or results delivered pursuant to the contract, upon production of an invoice. A contractor usually deals with his/her own tax and in some circumstances, GST is paid. Contractors are also responsible for their own superannuation contributions.
- Obligation to work or the right to dictate the place and hours of work. Can the work be refused? Employees usually must work at hours directed by the employer and do not have the right to continually refuse to perform a reasonable task. Unless contracted to the contrary, contractors are able to dictate their own hours of work and usually agree to the tasks to be performed beforehand.
- The provision and maintenance of equipment and uniforms. Who pays for materials and equipment? Employers own their equipment and pay for materials and if the employee incurs an expense related to their work duties, they are reimbursed. A contractor owns equipment and/or pays for materials — and if there are expenses they are met by the contractor.
- Business risk. Employees carry no enterprise or business risk and the employer is responsible for the quality of their work, with any re-work done at the further expense of the employer (the employee is also covered by the employer’s insurance policies). A contractor is responsible for the quality of the work and re-work is done at their own expense. Generally, a contractor is expected to take our his/her own insurance policies.
- View of the parties. How have the parties characterised the relationship? Employees are engaged directly by the employer and there is generally an expectation of ongoing work. The relationship ends by the employer dismissing the employee or either party giving notice. Legislative schemes (eg. unfair dismissal) may impact. A contractor is usually engaged to produce a particular result or outcome, or for a specific task or series of tasks, where the principal engages a company to perform the work (and worker is a director/employee of the company). The relationship ends in accordance with the contract.
- Integration. What is the worker’s relationship to the business? An employee is usually integrated into the employer’s business, whereas a contractor’s work is usually an accessory to the business and a contractor usually operates on their own account.
The consequences of getting it wrong
If a worker is engaged as an independent contractor or consultant, and a court or tribunal determines that the worked is in fact an employee, the employer could be exposed to:
- compensation claims under the Fair Work Act 2009 (Cth) (FW Act) for underpayment of wages, unpaid annual leave, unpaid superannuation and unpaid long service leave;
- unfair dismissal claims;
- vicarious liability; and
- prosecutions by the Fair Work Ombudsman (FWO) for breaches of the FW Act.
Prosecutions by the FWO can result in potential maximum penalties of $54,000 per breach for a corporation and a maximum penalty of $10,800 per breach for directors, managers and persons “knowingly involved” in the contravention of the FW Act as an accessory.
The distinction between employees and contractors can be particularly unclear when assessing non-traditional working arrangements that are increasingly common in the collaborative consumption model. This has been highlighted by Uber’s legal battles in America, where for example, the California Labour Commissioner’s Office held that an Uber driver in California was an employee, not an independent contractor and ordered Uber to reimburse the driver for expenses and other costs she incurred while driving for Uber.
While the test and factors in America differ slightly from those considered by Australian Courts, there are some similarities. The Labour Commissioner’s office found that the driver was an employee based on the level of control Uber exercised over the way the driver worked (eg. Uber specifies vehicles cannot be more than 10 years old, monitors drivers’ approval ratings and terminates their access to the app if their rating falls below a specific level; permits drivers to hire other people, but only Uber approved and registered drivers are allowed to use Uber’s intellectual property; passengers pay Uber a set price for the trip, and Uber in turn pays drivers a non-negotiable service fee).
In this case, the driver’s only assets were her car and her labour: her work did not entail any managerial skill; aside from her car, she had no investment in Uber’s business; Uber provided the app which was essential to her work and but for Uber’s intellectual property, she would not have been able to perform her work. To date there have been no cases in Australia that have considered these issues.
Tips for in-house counsel
Uber is clearly changing the face of the taxi industry across the globe, and is forcing competition in a market that was previously fairly closed. With new ways of working come new challenges to traditional labour structures, but until the case law defining employment relationships changes, the employee/contractor dichotomy will remain relevant.
In assessing whether a worker should be engaged as an employer or a contractor, in-house counsel should consider the following:
- Pressure test why a contractor model is being sought — what are the reasons? What are the benefits of the model? Would a casual employment relationship be more appropriate? Would a fixed-term employment contract be more appropriate?
- Regularly review your precedents — the law continues to evolve in this area. You must ensure that you have a system in place so that you can receive key updates and you should also establish periodic reviews of your precedent contracts and processes.
- Meeting some but not all tests — it is possible that your framework meets some tests for an employment arrangement, but not all tests. You should identify modifications to the work arrangements that can be made. If you are uncertain, seek specialist tax, insurance and employment advice.
- Set expectations from the beginning — when engaging independent contractors, be very clear about the nature of the relationship. Preferably, only deal with experienced incorporated independent contractors who understand the nature of the relationship.
- Clearly separate your practices out — create business culture, policy framework and systems that ensure independent contractors are clearly distinguished from employees. You should also ensure that your human resource practices and payroll processes clearly delineate between the two.
- Keep accurate and complete records — ensure contracts are signed. Ask yourself these questions — do your contracts accurately reflect how your business works in practice? Is there a paper trail of dealings with contractors? Have you got relevant declarations of evidence for exemptions? You should also seek guidance from your workers’ compensation insurer.
This article was first published in Inhouse Counsel, Vol 20 No 4, May 2016
 Luz L “Uber turns 5, reaches 1 million drivers and 300 cities worldwide. Now what?” The Washington Post 4 June 2015.Back to article
 Minister for Innovation and Better Regulation (NSW) “Review Of CTP Insurance For Point-to-Point Transport Vehicles” media release (10 March 2016).Back to article
 State Insurance Regulatory Authority Discussion Paper (NSW) Review of Compulsory Third Party (CTP) Motor vehicle Insurance for Point-to-Point Transport Vehicles (2016).Back to article