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Contractors v Employees: Differentiating the two in today’s ‘Gig Economy’

Differentiating employee and contractor in the gig economy

Freelance or ‘gig’ work is on the rise, and businesses are taking notice of this change within the workplace as well as the desire for it. You only have to look so far as to see the effect apps such as Uber, Foodora and Deliveroo has had. Whilst there can be several benefits involved in businesses such as these, there are also legal risks that many companies don’t understand or consider when opting to go down this path.

One of the biggest issues with starting a platform such as Uber, Foodora or Deliveroo are the classification of the personnel. Are these drivers and cyclists employees or merely contractors? In order to differentiate between the two there are 11 key factors businesses need to consider in order to avoid any confusion as well as possible legal implications. The following cases help distinguish the differences based on these 11 factors and highlight the potential legal implications that may arise for an error in failing to discern the two.

Why Uber Drivers Are Not Employees

On 23 August 2019 the Fair Work Commission in Amita Gupta v Portier Pacific Pty Ltd; Uber Australia Pty Ltd [2019] FWC 5008 found an Adelaide Uber driver was not an employee of the company, and was in fact an independent contractor. Commissioner Hampton in his decision, relied heavily on the 2017 precedent of Kaseris v Rasier Pacific V.O.F [2017] FWC 6610, where the FWC held Uber drivers were subcontractors rather than employees, rejecting a Victorian Uber driver’s argument that he was an ‘employee’ and thus covered by the unfair dismissal laws under the Fair Work Act 2009 (Cth).

The two cases have similar facts; the two Uber driver’s accounts were deactivated by Uber due to poor passenger ratings or a failure to accept jobs, the individuals both brought an unfair dismissal claim against Uber on the basis that they were employees, and that this deactivation of their accounts ceased their “employment” with the company and were thus subjected to unfair dismissal.

Uber in both cases argued that the individuals were not employees due to its terms of engagement and lack of a “wages-work” bargain. The nature of the company was also considered, with Uber submitting their company merely offered a technology platform for people to utilise and at no point were the drivers ever employed by the company. In fact, the terms of the Service Agreement specifically outlined that the drivers were engaged with Uber in a “business relationship”, and not one of employment.

However, it is important to know, just because a contract stipulates one thing – if the actions of two or more consenting parties differ from this, it will be classified as a “sham contract”. In other words, just because a company may stipulate in writing that an individual is purely a contractor, but then treats the individual as an employee as defined under law – that individual is an employee.

To put it simply, if it looks like a duck, sounds like a duck…it’s probably a duck. This is called “sham contracting”, and this was explored in a case involving another food delivery company called Foodora.

These factors were also applied alongside the pre-established common law “multi-factor” test as established in Stevens v Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16 and Jian Shen Cai trading as French Accent v Michael Anthony Do Rozaro [2011] FWAFB 8307. The FWC examined the facts in relation to the tests and concluded:

  • Control: although the Services Agreement entered into had some control regarding vehicle maintenance and performance standards, drivers had control over when they logged into and off the app, which tasks to undertake or reject, and how to maintain his vehicle.
  • Taxation: the Service Agreement required drivers to register for GST and pay tax liabilities. Uber did not withhold PAYG tax.
  • Utilities: drivers had to provide their own utilities i.e. vehicle and phone, and had to pay their own vehicle registration and insurance.
  • Fare Charges: the Service Agreement indicating what fare to charge and did not allow drivers to set their own charge rate. However, the FWC held that the other factors considered outweighed this fact.

It was because of these overwhelming reasons the FWC held the drivers were merely contractors. However, there can be a fine line between employee and contractor, and some companies have learnt that the hard way…

The Demise of Foodora in Australia

Foodora Australia Pty Ltd operated a bicycle food-delivery business in Melbourne and Sydney until August 2018, when it announced that it was withdrawing from its Australian operations.

The Fair Work Ombudsman (FWO) in June 2018 prior to this announcement, commenced proceedings against Foodora alleging sham contracting practices that resulted in workers being underpaid both wages and superannuation.

In its prosecution, the Fair Work Ombudsman alleged that Foodora engaged in sham contracting, and that the three workers were actually employees of Foodora during the relevant period for a range of reasons, including:

  • the level of control, supervision and direction Foodora exercised over the workers’ hours, location and manner of work;
  • the requirement for the workers to wear a Foodora-branded t-shirt and use food storage boxes and/or bike racks supplied by Foodora;
  • Foodora paid the workers fixed hourly rates and/or amounts per delivery and the workers did not negotiate their rates of pay at any time; and
  • each of the workers was not genuinely conducting their own delivery business, in that they:
    • did not advertise or promote their availability to perform deliveries to the public;
    • did not delegate their delivery duties with Foodora to any other person; and
    • did not have their own customer base, business premises and insurance.

However, in August 2018, Foodora exited the Australian market and went into voluntary administration. The FWO discontinued legal proceedings against the company following its exit from the Australian market. As a result of the company’s liquidation, more than 1,000 workers received only 31% of their entitlements after the liquidator’s costs were deducted. Fair Work Ombudsman, Sandra Parker, concluded that it was highly unlikely that a further action would result in any additional payments being made to workers.

“It is very disappointing for the Fair Work Ombudsman to discontinue this matter because the question of whether Foodora delivery workers were employees or independent contractors was an important matter for a Court to consider,” Ms Parker said. 

During the liquidation process, Foodora administrators issued a statement to creditors admitting that it was likely the majority of their delivery drivers were engaged as casual employees, however, as Ms Parker said, the issue is yet to be determined by a court and leaves the answer widely open to interpretation.

Sham contracting remains a key focus of the FWO, with Ms Parker calling it a “priority”. The Foodora prosecution follows an October 2017 action where the FWO successfully had penalties of $35,000 imposed against a courier business, Z Transport Group, in relation to sham contracting of individuals and under-Award payments.

Deliveroo in the Hot Seat

Deliveroo has now found itself fighting a similar battle to that of Uber and Foodora, with a former delivery rider bringing an action in August 2019 against the company for a failure to pay minimum wage, penalty rates and superannuation. Similarly to the previous cases, a rider is claiming he was an employee during his time working for Deliveroo and as a result is entitled to the benefits that are associated.

The element of control will most likely be the most contentious issue, with the rider claiming Deliveroo exercised a great deal of control over him, including ranking and disciplining him based on his performance – a practice he claims is consistent with an employer-employee relationship. The matter will also explore sham contracting and whether riders were falsely labelled as contractors in order to save operational expenses as a result of employee wages.

The matter will be heard before the Federal Circuit Court of Australia in October 2019.

Other Jurisdictions’ Reasoning

In the United Kingdom, the Employment Tribunal of London reasoned that Uber drivers were in fact employees rather than contractors. This is the case Mr Kaseris based his action on, however, the FWC dismissed this argument as the relevant UK legislation was far broader than Australia’s Fair Work Act 2009 (Cth), with s 382 far more narrow in distinguishing an employee from a contractor.

This was similarly the case in the United States, with the California Labour Commission concluding that an Uber driver was an employee of the company. This decision was also made in relation to California’s employment legislation, which is also broad in terms of its interpretation.

In Spain, Deliveroo was another company forced to recognise and compensate 97 riders after a Spanish court held the riders were classified as employees and entitled to an array of benefits afforded to them under law.

Australia on the other hand has relatively narrow and clear wording in our legislation that determines whether a person is an employee or contractor, however, it’s important to ensure compliance regularly, as a person can slip from a contractor to an employee over time.

Other Ways of Engaging Workers to Achieve Greater Flexibility

Contractor arrangements can be attractive since employee entitlements are not payable and there is generally more flexibility in the relationship (hiring, firing and managing the working relationship). However, the case law indicates that the consequences of getting this wrong can be significant.

You can engage in workers in the following ways:

Where the central promise is the rate to be paid per hour and no Fair Work Act leave entitlements are payable (and unfair dismissal protection is modified)

For a set period of time, at the end of which the contract automatically ends

Where the engagement is to deliver a defined task or outcome and employment terminates on the achievement of that outcome

Where the worker is provided via a third party provider which is often the worker’s employer and bears much of the risk (although a premium would be paid for the provider’s own margin)

If it is decided that a contractor engagement is preferred, there are a range of contractual and practical issues to be considered so that the engagement is sound and legitimate.

The Finlaysons Lawyers Workplace and Safety Team are highly experienced with a wealth of knowledge across a diverse range of industries. Please contact Guy Biddle or Will Snow if you have any questions about current or future arrangements for your employed and contractor workforce.

This Alert is intended as an alert only. It does not purport to be comprehensive advice. Readers should seek professional advice before acting in relation to these matters.

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