No contract, no clarity: long-term ‘contractor’ ruled an employee and awarded damages in the Federal Court

The worker was engaged by a company as an independent contractor from January 2005 to April 2020 to assist in developing the company’s database system and there was no written agreement in place. Initially, he worked the hours he considered necessary to perform the services, rendered invoices through his ABN at the agreed rate and continued to perform work for other businesses. 

However, in January 2006, when it was evident that the project would require further work into the foreseeable future, the worker sought to be placed on the company’s payroll system. This request was accepted by the company, and from then on, he was issued monthly ‘Pay Advices’, recording payments as ‘wages’, with income tax and superannuation contributions withheld. 

Over time, the worker’s services were also expanded by the company, to the extent that he was required to perform the role of Data Management and IT Manager for a period. The expanded services limited his capacity to work for other clients and eventually, he exclusively performed services for the company. He also relevantly had the company business cards, participated in periodical performance reviews and took approved unpaid annual leave and personal leave. 

When his engagement ended in February 2020, the company paid him 5 weeks’ pay in lieu of notice and a ‘gratuity’ (equivalent to 12 weeks’ redundancy pay and 12 weeks’ long service leave). 

The worker commenced Federal Court proceedings claiming he had been an employee since January 2006, and on this basis, the company was obligated to pay him his accrued annual leave, paid public holidays, paid personal/carer’s leave and reasonable notice of termination. The company maintained he was an independent contractor throughout the entire period. The company’s defence to the worker’s claims was that he was not at any time engaged pursuant to an employment contract and therefore, none of his claims could be sustained. In the alternative, the company argued that he was a casual employee. 

The Court held: 

• the worker was engaged as an independent contractor between January 2005 and January 2006. From January 2006 onwards, he was employed as a permanent employee.
• From January 2006 to his termination, the worker was entitled to be absent from work without loss of pay on public holidays and occasions where he took carer’s leave.
• On termination, the company was required to pay the worker:
  • an amount equivalent to the value of his accrued but untaken annual leave; and
  • an amount in lieu of reasonable notice, which, in the circumstances, was three months’ notice.

Most businesses are now required to use the ‘whole of relationship’ test to determine whether a worker is a contractor or employee. This test is set out in section 15AA of the Fair Work Act 2009 (Cth) and considers the real substance, practical reality and true nature of the relationship. This requires an assessment of the totality of the relationship between the worker and the business and other factors such as the terms of the contract and how the work is performed in practice (ie the amount of control over how work is performed, integration into the business, mode of remuneration and the provision of tools and equipment).

In this case, there were no written contractual terms to consider and therefore, the Court was required to consider the rights and duties of the parties.

It was determined that the contracting relationship that was established in 2005 was varied by other terms at a later point and became an employment relationship.

The Court found that various factors which arose in the relationship between the company and the worker were indicative of an employment relationship. It determined that the payment terms, including the company’s deduction of the worker’s income tax and superannuation made it ‘as good as impossible’ to reconcile with the notion that he remained an independent contractor from 2006 onwards. 

It is well-established that contracts which do not contain an express term regarding termination may, by implication of law, be terminable upon the provision of reasonable notice. 

What is considered ‘reasonable’ depends on a variety of factors, including:

• length of service
• age
• seniority
• the likelihood of finding suitable alternative employment. 

The company submitted that the worker’s contract was terminable upon payment equivalent to the amount of notice required under s 117(2) of the Fair Work Act, which is based on the employee’s period of continuous service. The worker argued that he was entitled to reasonable notice of termination, and that the amount of reasonable notice was 12 months.

It was held that section 117 of the Fair Work Act does not confer a right of termination, rather, it assumes such a right exists elsewhere (ie the employment contract). Where no such right is conferred expressly (whether by contract or other instrument), reasonable notice will be implied.

The Court found that a period of three months’ reasonable notice was implied into the worker’s contract, having regard to the fact that he was tertiary educated, almost 70 years old (and close to retirement), he had worked for the company for over 14 years, his earnings were approximately $130,000 per annum and in the broader employment context of COVID-19. 

This case highlights two important compliance considerations for employers:

• correct worker classification: ensure workers are correctly classified as independent contractors or employees, having regard to the current statutory test. This is particularly important where a contractor’s services, payment terms or hours change over time, including where a temporary engagement becomes ongoing or the timeline for a project gets extended; and
• clear termination clauses: include clear notice of termination clauses in all contracts, to avoid uncertainty and the risk of a reasonable notice claim.