Employee vs. Contractor – the debate continues on

admin@hlslegal.com.au | August 14, 2019

HLS Legal

By Megan Flower


The last few years has seen a rise in the ‘gig economy’. Examples include:

  • ride-sharing services like Lyft and Uber;
  • food delivery services like Deliveroo, Uber Eats and Foodora; and
  • odd job task services like Airtasker.

These types of companies often operate on the premise that their workers are independent contractors, rather than employees. The companies have lower overheads as they do not need to pay superannuation contributions, leave entitlements or costs associated with award or regulation compliance.

However, simply labeling a relationship as one of contractor and principal will not mean that is a relationship of that nature.

The law

Under section 357 of the Fair Work Act 2009 (Cth) (FW Act), it is an offence for an employer to represent to a worker that they are an independent contractor, when in actual fact they are an employee. An employer can be liable for pecuniary penalties of up to $63,000 per breach of this provision.

However, there is no single rule to define the difference between an employment relationship and a contractor one. Instead, the courts and commissions engage in an objective multi-factorial assessment based on the individual facts of a situation.

The collapse of Foodora Australia Pty Ltd

In mid-2018, the Fair Work Ombudsman (FWO) commenced legal action against Foodora Australia Pty Ltd (Foodora) in the Federal Court of Australia.[1] It was alleged that their workers, who were called independent contractors, were in fact employees and were entitled to the minimum conditions under the Fast Food Industry Award 2010, on the basis of:

  • the level of control, supervision and direction Foodora exercised over the workers’ hours, location and manner of work;
  • the requirement to use Foodora-branded apparel and equipment;
  • the workers were paid fixed hourly rates and/or amount per delivery and these rates could not be negotiated; and
  • the workers were not genuinely conducting their own delivery businesses as they did not:
    • advertise or promote themselves to the public;
    • delegate their duties to others;
    • have their own customer base; or
    • have their own business premises or insurances.[2]

Many parallels could be drawn with the case of Hollis v Vabu Pty Ltd [2001] HCA 44, where couriers were found to be employees, not independent contractors. The outlook of this case looked promising for the FWO.

However, Foodora entered external administration and the court proceedings could not continue during this administration, without the leave of the Federal Court or the administrator’s written consent.[3] On 3 December 2018, Foodora entered into a deed of company arrangement and the legal action subsequently recommenced with a case management hearing set for 28 June 2019.[4]

On 21 June 2019, the FWO decided to discontinue its legal action against Foodora as it was highly unlikely that the court action would result in payments to its former workers or the recovery of financial penalties because Foodora had ceased its Australian operations.[5]

The discontinuation of its court action should not be viewed as an action of lenience by the FWO. Rather, it was simply a decision that the resources of the FWO would be better directed towards businesses who are currently profiting from the sham contracting economy in Australia. It should also be noted that as part of the administration process, the former Foodora workers received approximately 31% of the entitlements owing to them.[6]

Klooger v Foodora Australia Pty Ltd [2018] FWC 6836

Whilst the FWO’s legal proceedings against Foodora stalled, an unfair dismissal application brought by one of its former contractors, Joshua Klooger continued forward in the Fair Work Commission.

Foodora made a jurisdictional objection to the application on the basis that Mr Klooger was not an employee but an independent contractor.[7] Commissioner Cambridge applied a multi-factorial test to determine this question.

On 16 November 2018, Commissioner Cambridge held that the correct characterisation of the relationship between Foodora and Mr Klooger was that of employee and employer.[8]

Factors that favoured an employment relationship included:

  • shifts had fixed start and finish times and geographical locations, and whilst workers could select their shifts, the available engagements were still determined by Foodora;[9]
  •  the contract contained many provisions that were similar in form and substance to those ordinarily found in employment contracts, even though the service contract tried to reinforce that the elationship was to be of a principal and a contractor;[10]
  • Foodora had a considerable control over the performance of the work through the batching system, where an employee had to meet certain requirements in order to maintain a high ranking;[11]
  • whilst Mr Klooger could work for other delivery companies, this could simply be compared to having multiple part-time jobs;[12]
  • Mr Klooger did not have a separate place of work, nor did he advertise his services to the world at large;[13]
  • Mr Klooger did not have a substantial investment in the capital equipment that he used to perform the delivery work, nor was a high degree of skill or training required for the delivery work;[14]
  • Mr Klooger was presented to the world at large as an emanation of Foodora as he was expected to dress in its branded attire and equipment;[15]
  • Mr Klooger’s work did not involve an established profession, trade or distinct calling;[16]
  • Mr Klooger’s conduct in his work would have created goodwill for Foodora or damaged its public standing;[17] and
  • Mr Klooger did not spend a significant proportion of his remuneration on business expenses.[18]

It was noted that Mr Klooger had allowed other riders to work on his Foodora account through a substitution scheme.[19] This sub-contracting via the substitution scheme was perhaps one of the most significant factors in favour of a contractor relationship.[20]

The service contract provided that Mr Klooger could nominate another person to perform his work, but only in the event that Mr Klooger was unable to perform the work and with Foodora’s consent.[21]

However, Mr Klooger’s substitution scheme involved significantly different arrangements and was initially operated without Foodora’s knowledge.[22] Even though Foodora management later endorsed the substitution scheme, it was in circumstances where Foodora knew at least one sub-contractor was working in breach of Australian law and other sub-contractors were workers that Foodora had refused to engage directly due to non-compliance issues with its service contract.[23]

The substitution scheme was in clear breach of the service contract and facilitated contraventions of Australian law so Foodora should not have permitted its operation.[24] As such, the substitution scheme could not be an acceptable basis for the validation of the characterisation of the relationship between Mr Klooger and Foodora.[25]

After determining that Mr Klooger was in fact an employee of Foodora, the Commissioner held that Mr Klooger had been unfairly dismissed and ordered that he should receive $15,559 in compensation.[26]

Uber Australia – contractors, not employees

In contrast to the Foodora situation, the FWO announced on 7 June 2019 that following an investigation, it had determined that the drivers working for Uber Australia Pty Ltd (Uber Australia) were not employees.[27]

The FWO looked at evidence including drivers’ contracts, log on and log off records, interviews with drivers and Uber Australia, ABN documents, payment statements, banking records and pricing schedules.[28]

The FWO concluded that the Uber drivers were not subject to any formal or operational obligation to perform work, that is the drivers had control over whether, when and for how long they perform work on any given day or week.[29]

This was a key factor in their determination that the drivers were not employees of Uber Australia.[30]

However, the FWO were careful to note that its investigation related solely to Uber Australia and was not an investigation of the gig economy more generally.[31]

A crackdown on sham contracting in the gig economy

In Klooger v Foodora Australia Pty Ltd [2018] FWC 6836, Commissioner Cambridge stated at paragraph [106]:

Contracting and contracting out of work, are legitimate practices which are essential components of business and commercial activity in a modern industrialised economy. However, if the machinery that facilitates contracting out also provides considerable potential for the lowering, avoidance, and/or obfuscation of legal rights, responsibilities, or statutory and regulatory standards, as a matter of public interest, these arrangements should be subject to stringent scrutiny…

In early 2018, the previous Fair Work Ombudsman, Natalie James wrote that:

While there is a huge attraction to the services offered by the gig economy, the entities offering those services cannot ignore the longstanding law. In seeking the Court’s determination of this issue, we hope to bring greater clarity to the legitimacy and sustainability of the arrangements under which those workers delivering these services are operating.[32]

Sham contracting has also been identified as one of the priority issues that the FWO will focus on for 2019/20.[33]

The FWO has remained steadfast in its pursuit to seek clarity over whether workers in the gig economy are employees or contractors. Companies need to be conscious that business models which are successful overseas may not be compatible with Australia’s employment and industrial relations laws.

If you have any questions about this issue in relation to your business, please contact us on (08) 9322 5202.

This article is intended to be informative only and does not constitute legal advice. If you are concerned about your individual circumstances, please contact a lawyer.

[1] Fair Work Ombudsman v Foodora Australia Pty Ltd ACN 605 948 052, NSD999/2018.
[2] Fair Work Ombudsman, ‘Fair Work Ombudsman commences legal action against Foodora’ (Media Release, 12 June 2018) <https://www.fairwork.gov.au/about-us/news-and-media-releases/2018-media-releases/june-2018/20180612-foodora-litigation>.
[3] Ibid.
[4] Ibid.
[5] Fair Work Ombudsman, ‘FWO discontinues legal action against Foodora’ (Media Release, 21 June 2019) <https://www.fairwork.gov.au/about-us/news-and-media-releases/2019-media-releases/june-2019/20190621-foodora-media-release?print=1>.
[6] Ibid.
[7] Klooger v Foodora Australia Pty Ltd [2018] FWC 6836, [3].
[8] Ibid [102].
[9] Ibid [68] – [69].
[10] Ibid [70] – [72].
[11] Ibid [73] – [74].
[12] Ibid [75] – [76].
[13] Ibid [77].
[14] Ibid [78].
[15] Ibid [89].
[16] Ibid [94].
[17] Ibid [95].
[18] Ibid [96].
[19] Ibid [14] – [15].
[20] Ibid [79].
[21] Ibid [80].
[22] Ibid [82].
[23] Ibid [85] – [86]
[24] Ibid [87].
[25] Ibid.
[26] Ibid [124] & [138].
[27] Fair Work Ombudsman, ‘Uber Australia investigation finalised’ (Media Release, 7 June 2019) <https://www.fairwork.gov.au/about-us/news-and-media-releases/2019-media-releases/june-2019/20190607-uber-media-release>.
[28] Ibid.
[29] Ibid.
[30] Ibid.
[31] Ibid.
[32] Natalie James, Fair Work Ombudsman ‘The Gig Economy: Navigating new ways to work’ (Media Release, 20 June 2018) <https://www.fairwork.gov.au/about-us/news-and-media-releases/2018-media-releases/june-2018/20180620-gig-economy-op-ed>.
[33] Fair Work Ombudsman, ‘FWO launches 2019-20 priorities’ (Media Release, 3 June 2019) <https://www.fairwork.gov.au/about-us/news-and-media-releases/2019-media-releases/june-2019/20190603-aig-pir-media-release>.