Hired, fired and converted into independent contractors: are they employees?

The Federal Court of Australia recently dealt with a case involving allegations of employment law violations, including misclassification of employees as independent contractors and failure to pay wages on time.

The decision examined the interplay between employment contracts and independent contractor agreements, highlighting the importance of proper worker classification and timely payment of wages, especially when dealing with vulnerable workers.

The case centred around a company that operated a business generating research into robotics, coding, and artificial intelligence for the health and wellness industry. The company engaged three workers with disabilities through a disability employment services provider.

Background of the case

Initially, the workers were hired as employees in August and September 2020, with agreed terms including set work hours of 12 hours per week on Thursdays and Fridays, monthly pay, and coverage under the Miscellaneous Award 2020.

The workers performed duties such as summarising websites on health-related topics, creating presentations and research memoranda, and attending Zoom calls regarding work progress.

However, about six weeks into their employment, in early October 2020, the company attempted to "convert" the workers to independent contractors.

The workers were informed that they would need to obtain Australian Business Numbers (ABNs) and sign independent contractor agreements. Their hours were reduced to 8 hours per week, but their hourly rate was increased from $19.84 to $25 per hour.

Employee vs. contractor

The Court delved deep into the nature of the employment relationship, examining both the written contracts and the practical realities of how work was performed.

Despite the company's attempts to classify the workers as independent contractors, the Court found that the true nature of the relationship remained one of employment.

Key factors in this determination included:

• The workers were required to assist managers and work towards the company's business success
• The company maintained control over work hours and tasks
• All intellectual property generated by the workers belonged to the company

The Court emphasised that simply labelling a worker as an independent contractor is not enough to make it so. As stated in the decision:

"A 'label' which the parties may have chosen to describe their relationship is not determinative of the nature of the relationship and will rarely assist the Court in characterising the relationship by reference to the contractual rights and duties of the parties."

Protecting vulnerable workers

The Court took particular note of the workers' vulnerability, given their disabilities and the fact that they were being paid at minimum wage rates. This power imbalance was a significant factor in assessing the seriousness of the company's conduct.

The decision highlighted the importance of protecting workers' rights, especially those in precarious employment situations.

The Court noted that misclassifying employees as contractors can have serious consequences, potentially depriving workers of important entitlements and protections under employment law.

Failure to pay and non-compliance

In addition to the misclassification issues, the company failed to pay the workers for their work from late August through to late October 2020.

The total amount owed was $6,420.59, which was not paid until mid-November 2020. One worker reported having to borrow money from a short-term lender due to the non-payment.

The company also failed to comply with a notice issued by the Fair Work Ombudsman to produce documents related to the investigation. This notice was issued on 23 December 2020 and required compliance by 20 January 2021, but the company did not provide the requested documents.

In determining the appropriate penalties for the company's violations, the Court considered a range of factors, including:

• The nature and extent of the contravening conduct
• The loss and damage caused to the workers
• The size and financial position of the company
• The involvement of senior management in the contraventions
• The company's lack of cooperation and contrition

The Court emphasised the need for both specific and general deterrence in cases like this. As stated in the decision:

"Civil penalties, in contrast to punishments imposed by the criminal justice system, are imposed primarily, if not solely, for the purpose of deterrence (specific and general)."

The total penalty imposed on the company was $197,000, reflecting the seriousness of the contraventions and the need to deter similar conduct in the future.

The Court's decision emphasised several key points:

"The purpose of s 357 is to protect an individual who is in truth an employee from being misled by his or her employer about his or her employment status. It is the status of an employee which attracts the existence of workplace rights."

"The penalty must be sufficiently high that it is not considered to be an acceptable cost of doing business, but should not exceed what is necessary to achieve the object of deterrence."

"In determining what is reasonably necessary to achieve specific and general deterrence, relevant considerations may include ... the character of the contravention and the character of the contravenor."

These underscore the serious consequences that can flow from misclassifying employees and failing to meet basic employment obligations. Employers were reminded to carefully review their worker classifications and ensure they are meeting all their legal responsibilities to their employees.