HRM220 - Managing Workplace Relations

Week 6 – Employee or contractor

Dr Noel Tracey
ntracey@usc.edu.au
Session Outline
• Explain how to create an employee
• Explain how to create an independent contractor
• Explain how to create a valid contract
• Discuss the express terms in a contract
• Identify the implied obligations for employers
• Identify the implied obligations for employees
• Define the types of psychological contracts
• Explain the three tests for establishing the nature of
the employment relationship

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Employment Relationship
The contract Express terms
Offer
Acceptance Implied terms
Consideration
Intention Psychological contract
Valid contract?

Is it a contract
FOR service or
OF service? Control test

Economic dependence test

Multi-factor or totality test

National Employment Standards

 Controls on hiring
• Under common law, generally free to contract with
whomever you wish

• Statutory restrictions:
• Child labour
• Foreign labour
• Anti discrimination
• Affirmative action
• Misleading or deceptive conduct
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Creating the Employment Relationship
Recruitment and Selection
• Offer of position
• Acceptance of offer
• Consideration – some benefit from the agreement
• Establishing the contract – intention to be legally bound
(agreement intended to be legally enforced)
• Is the party legally capable of making a contract?
• minors (those under 18)
• those with intellectual disabilities, impairment by drugs or
alcohol etc.

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Contracts
• The parties must genuinely consent to the terms of the contract
• not induced into contract by misrepresentation of a material fact
• not entered contract under a serious mistake (that was known, or
should have been known, to other party)
• not made under duress
• decision to enter contract not procured by some form of undue
influence exerted by other party (eg: blackmail)

• The contract must not be entered into for any purpose which is illegal.
• Probation/qualifying period
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Child labour & contracts

In Queensland: Qld Child Employment Act 2006 protects children from being
required to perform work that may be harmful to H&S; or that
compromises their mental, moral or social welfare
Specific restrictions introduced by the Act include preventing school-aged
children from being required to work longer than:
• 12 hours during a school week
• 38 hours during a week that is not a school week
• four hours on a school day
• eight hours on a day that is not a school day.
• School-aged children are not allowed to work between 10pm and 6am.
• Children between 11 and 13 years of age who are performing supervised delivery
work are not allowed to work between 6pm and 6am.
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 Contract of Employment

Contract of employment is primary source of rights & obligations between

employers & employees
May be written or oral, or partly both, or determined by a course of
practice
Contract cannot provide benefits which are less than those set out in
applicable industrial instruments (awards, agreements) or legislation
Contract may deal with specific issues relevant to employer’s
organisation (supplementing general conditions of awards, agreements)
Contract does not include provisions of award unless contract
specifically adopts or incorporates them
Contract contains both express and implied terms
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Express terms
These terms are usually written in your offer of employment or told to you when you
are offered a job:

– Title of the position and statement of the duties

– Wages or salary or remuneration benefits for the position
– Hours and days of work
– Leave entitlements
– Who you report to
– Where you are to work
– Probationary period (qualifying period)
– How the contract may be terminated
– The obligation to comply with lawful directions and policies (including the Code of
Conduct).
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Common Law & Implied Terms
Common law is judge-made law – based on precedent
cases
Once it is established that a particular contract is an
employment contract, the common law will
automatically imply certain terms into the contract.

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 Implied Obligations of Employers
Health & safety: a duty of care
• Employer must take reasonable care for the safety of employees by providing a safe workplace
and ensuring the employees are free from harm while working there
Reimbursement: a duty to indemnify
• Employer must indemnify employees against proper expenses that the employee incurs in course
of employment
Vicarious liability:
• Employer is responsible for damage caused through actions or omissions of employees during
course of employment
• Employer must provide work?
• those who stay at home and wait still serve
• Employer must treat employees fairly?

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Implied obligations of Employees
Act in good faith towards employer
 obey lawful and reasonable orders
 protect property and goodwill of employer
 not divert customers or business away from employer
 not accept bribes, and account for monies received
 not use/disclose confidential information unless authorised
 truthfully answer questions within scope of employment
 act honestly & not in manner inconsistent with best interests of employer
perform duties in a proper and competent manner
must use reasonable care and skill in performance of duties
must protect health & safety of fellow employees
inventions made within scope of employment are property of employer & must be made
available
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Psychological Contract
1. Psychological contract is not written and often not explicitly stated
or discussed + is not legally binding

2. Psychological contracts are defined as informal, implicit

expectations and perceptions of employers and employees; and
they imply reciprocal obligations on both parties (Maharaj, Ortlepp
& Stacey 2008)

3. Concerned with each party’s perceptions of what the other party to

the employment relationship owes them over & above what is
specified in the contract of employment – subjective

4. Two types of psychological contracts: relational & transactional

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 Types of Psychological Contracts
• Relational • Transactional
• Emphasises reciprocal • Emphasises instrumental
relationship between relationship between employer and
employer and employee employee
• Is about social exchange • Is about economic exchange
• Based on long-term • Based on short-term agreement
agreement of mutual trust, that focuses on narrow focus of
organisational stability and employee’s duties and the limited
loyalty between both parties involvement of employee in the
organisation

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Shifts in Psychological Contracts
Characteristic Old (Relational) New (Transactional)
Focus of ER Security & long-term Employability to cope
career in company with this & future
employment
Format Structured & Flexible &
predictable unpredictable
Duration Permanent Variable
Underlying Influenced by Driven by market forces
principle tradition
Intended output Loyalty & Value added
commitment
Employer’s key Fair day’s pay for High pay for high job
responsibility fair day’s work performance
Employee’s key Good performance Making a difference to
responsibility in present job the organisation
Employer’s key Stable income & Opportunities for self
input career path development
Employee’s key Time & effort Knowledge & Skills
input
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Violations of Psychological Contract

2 types of violations of psychological contract can occur:

• reneging
• where one party breaks a promise to the other
• incongruence
• when parties have a different understanding
concerning the obligations of the psychological
contract

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 Psychological contract
• Positive aspects • Negative aspects
• If upheld • If violated
• Trust • Reduced employee
citizenship
• Job satisfaction
• Retaliation via sabotage,
• Commitment theft or other aggressive
• Increased staff retention behaviours
• Organisational • Absenteeism
performance • Withdrawal of cooperation
• Innovative behaviour • Turnover

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Employee or independent contractor?
2 common types of legal relationships under which people perform work
• Employer and employee
• Principal and independent contractor
Increasingly complicated employment structures and business
arrangements are blurring the boundaries between employee &
independent contractor
• Why is the distinction important?
• Determines entitlements
• How do we determine which is in place?
Why is this important?
• Employees get specific benefits under industrial legislation and common law that
contractors do not receive.
• Getting this wrong can have enormous consequences for organisations and managers
individually:
• organisations may fail to comply with obligations under workers’ compensation and
superannuation legislation, or Tax law obligations
• organisations may fail to comply with obligations in respect of annual leave, sick leave
and other entitlements under industrial instruments or laws.
• In Australia could breach section 357 of the Fair Work Act which provides that it is an
offence to represent to someone that their engagement is an engagement as an
independent contractor when it is really an engagement as an employee (sham
contracting).
Who is an Employee?
At the core of the employment relationship is an agreement by the employee to
‘serve’ the employer
Employees work under a “contract of service” - both parties have continuing
obligation to perform their sides of the bargain
• Employees are required to comply personally with directions of the employer
–
• provided they are lawful & fall within the scope of job description
• In return employees receive –
• reimbursement for expenses incurred on behalf of employer
• workers’ compensation (WorkCover) if injured in employment
• redundancy/severance payments (with conditions);
• minimum entitlements (various types of leave);
• tax paid;
• superannuation
Independent Contractors

• Independent contractors do not serve – they provide ‘services’

• Operate under contract for service
• Independent contractors usually engaged & paid to achieve a particular
task or outcome, rather than perform the duties of a position
• Do not take detailed direction from the principal about how the work
should be performed
• Run their own businesses and may have multiple customers
• Often responsible for own expenses
Identifying an employment relationship
• Contracts of employment, like other contracts involve
• offer
• acceptance
• consideration
• intention to be legally bound.

• Common law uses various tests to determine if the person is an

“employee”
• control test
• economic dependence or organisation test
• multi-factor or totality test
Benefits for employers of not having employees
• Flexibility in ending relationship
• No access to unfair dismissal
• Ability to engage workers on ‘as needed’ basis
• No need to pay superannuation
• No need to pay leave entitlements
• No need to pay Work Cover insurance
• No need to deduct payroll tax
• Avoid liability for employee negligence
 Employers’ response –
Avoid ‘employing’ a worker
• Enter into an express written agreement which clearly states what the
relationship is and its terms
• Have each worker form a private company or partnership - contract is
with entity rather than worker
• Use labour hire agencies - agency supplies workers to client - client has
control over worker but is not ‘employer’ - agency is not ‘employer’ as
has no control over workers (NOT the case for OHS)
• Contract directly with worker and consensually incorporate features
considered by courts to be client/contractor rather than employment
relationship
Control Test
• Common law has traditionally recognised the degree of control employer has over
worker as significant factor in determining if worker is an “employee”
• The greater the capacity or potential to control, the more likely it is an employment
relationship
• Employers usually have right to determine:
– when, where and by whom work is performed
– the manner in which work is performed
• Can be problematic in the employment of technical or professional ‘experts’
– employer may not be capable of actively controlling or supervising work
– focus is on whether employer has reserved right to direct the manner in which work is
performed
Zuijs v Wirth’s Bros Pty Ltd (1995) 93 CLR 561

Facts: Z was an acrobat who performed a trapeze act in a circus show.

He fell during a performance, suffered injury and sought worker’s
compensation.
To be eligible for compensation, Zuijs had to be an employee of the circus.

High Court held: Z was an employee. Although the circus could not physically
control Zuijs once the trapeze act had commenced (because the circus lacked
the necessary expertise), Zuijs was still subject to the right to control by the
circus in relation to most other aspects of his act.
See over.
Zuijs v Wirth’s Bros Pty Ltd (1995) 93 CLR 561

•Zuijs was paid a wage

•He could be summarily dismissed for misconduct, and was subject to the
direction of the circus in relation to most other aspects of his act, including
•where the act appeared in the program,
•safety measures,
•when rehearsals were to be held,
•the costumes he wore,
•and his conduct before the audience.
•While only Zuijs possessed the necessary special skill or knowledge to carry out
the performance, these other factors have to also be taken into account, and
•While actual control is important, it is the right to control that is critical in
cases like this.
 Sgobino v State of South Australia (1987) 46 SASR 292.
• Facts: S engaged in 1978 as casual interpreter with Ethnic Affairs Commission.
Paid on an hourly basis with minimum of 3 hours. Allegedly hurt her back when
entering a court building while on assignment and claimed workers’
compensation.
• Held: interpreter was an employee. Argued for Commission that it did not have
actual control over the interpreter in the performance of her work. Argument
rejected. Court compared with interpreters permanently employed and other
occupations ( eg carpenters, crane drivers) where limited scope for actual control
but contracts of service acknowledged.
• S didn’t provide her own equipment for work but neither did permanent
employees; did not delegate her duties. Commission had right to control place
and time of her duties and various admin functions; required to arrive 15 mins
before each hearing and to carry her accreditation certificate with her.
• Scope for control if only incidental matters
Stevens v Brodribb Sawmilling Co Pty Ltd
(1985)
Facts: 63 ALR 513
• A truck driver who carried logs from a forest to a sawmill was injured
due to negligence by the person loading the logs on to the truck.
• The truck driver claimed compensation for his injuries from the
sawmill operator for whom the work was being carried out.
• The sawmill operator argued that both the truck driver and the
person responsible for loading the truck were independent
contractors, not employees.
 Stevens v Brodribb Sawmilling Co Pty Ltd (1985) 63
ALR 513
• High Court held: The sawmill operator wasn’t liable. The truck driver and loader were
independent contractors.
• The court suggested that the relationship between the parties should be examined in its
totality. The right to control, rather than the level of actual control, was significant, but
not the only relevant factor.
• A number of factors are relevant to the existence of an employment relationship,
including:
•the nature of the task undertaken and the freedom of action given to the parties to perform it;
•who provides the equipment;
•whether the task is ongoing or ‘one-off’;
•the amount of remuneration, how it is to be paid, and whether the employer is deducting income tax and the
superannuation Guarantee;
• the hours of work, and provision for holidays and sick leave;
• the method of termination; and, most importantly,
• the nature and degree of detailed control the employer has.
Economic Dependence or Organisation Test

• Economic dependence test focuses on the extent to which one party is

reliant on the other – for income, for work, for organisation/routines etc.

• Organisation test focuses on determining whether the service provider is

carrying on a business on his/her own account that is separate to the
employer, or whether the service provider is part of the employer’s
business
– are the businesses sufficiently separated – own premises
– are they sufficiently separately identified – own letterheads, registered
business names, own business cards etc.

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Hollis v Vabu Pty Ltd (2001)207 CLR 21

• FACTS: While working, a bicycle courier knocked down and injured a

member of the public. The injured person sued the courier company
for whom the bicycle courier was working, on the basis that the
bicycle courier was an employee of the courier company and the
courier company was vicariously liable for the actions of its employee.
• The courier company argued that the bicycle courier was an
independent contractor and not its employee, and therefore it wasn’t
liable for the actions of the bicycle courier.
 Hollis v Vabu Pty Ltd (2001)207 CLR 21
• High Court held: The bicycle courier was an employee.
• The High Court examined the working relationship between the courier company and the
bicycle courier and found that the bicycle courier:
• did not provide skilled labour, or labour that required special qualifications;
•  had made a capital outlay consisting of a bicycle and associated tools;
•  was required to wear the courier company’s uniform;
•  was presented to the public as a representative of the courier company;
•  had little control over the way in which work was performed:
•  set starting time;
• daily roster; and
• could not refuse work;
•  was subject to considerable control by the courier company:
•  the courier company had control of the allocation and delivery of parcels; and
•  the bicycle courier had to deliver parcels in the manner directed by the courier company.
Multi-factor or Totality test
• Multi-factor test is current test used to determine employment status – it
incorporates the previous 2 tests to some extent. Courts will also consider:
1. Whether relationship indicates a contract of service or for service
2. The nature of the work and the manner in which work is performed (relevant for
considering which indicia more important).
3. Terms and terminology of the contract must be considered
4. If examination of the indicia does not provide a clear indication, decision should
be based on whether worker was running own business with independence in
the conduct of operations (ie economic dependence test)
5. If still doubt, determination should be guided by notions of vicarious liability

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Sammartino v Mayne Nickless (2000) 98 IR
168
• FACTS: S was an owner-driver, working M-N courier service for 12
years. When dismissed for misconduct S sought a remedy in UFD.
• HELD FBAIRC: S was an employee.
• Multii factor test applied;
• Control test: control exercised much the same as that over other
employees
• Own business name and managed own tax
• Weekly payment consistent with that of waged employee
• Entitled to various forms of accrued leave
• Owned own van but compensated for repair and maintenance
• Costs as above made up one third of weekly payments
• Unclear right to delegate not decisive.
Danevski v Guidice [2003] FCAFC 252
• FACTS: D was was employed as a cleaner with Endoxos for 3 years.
E approached D and told him that he must transfer to a labour
hire co, MLC Workplace Solutions or resign. E terminated D’s
employment due to illness.
• D claimed UFD in the AIRC. Held no jurisdiction because D was an
IC.
• FCFC held that D was an employee and that MLC had no contract
with him, but merely an administrative role for E.
• D had continued to work under E’s direction.
• Paid by MLC but E determined how much he was to be paid.
• When ill D contacted E who made necessary arrangements to cover.
• MLC not involved in dismissal procedure.
Australian Air Express v Langford (2005)
NSWCA 96
• FACTS: L was a driver who made deliveries for AEC.
• He was injured by an AAE employee when a forklift ran
over his foot. He sought compensation as an IC.
• HELD: L was not an employee.
• He owned his own vehicle and paid for its operating
expenses. The expense was substantial.
• Some tax was deducted from his earning but not payroll
tax.
• No holiday or sickness pay.
• Could delegate to a substitute driver albeit with approval
from AAE.
On Call Interpreters and Translators Agency v
Commissioner of Taxation (No 3) [2011} FCA 366
• FACTS: On Call had failed to make super contributions for
interpreters and translators working for them. Argued that
they were ICs.
• HELD: Workers were employees.
• Interpreters and translators were performing work for On
Call not for their own businesses.
• Did not run any risk of profit or loss, create goodwill,
advertise to the public, negotiate fees or have independent
banking and finance accounts.
• Did not subcontract to others.
• On Call controlled performance according to standards set.
Totality Test Indicia (list of indicia is not exhaustive - Stewart 2008:48)
Indicative Criteria Employee Contractor

Does the hirer have the right to exercise detailed control over the way the √
work is performed, so far as they have scope to do so? (control test)
Is the worker integrated into hirer’s organisation ?(organisation/economic √
dependence test)
Is the worker required to wear a uniform or display material that associates √
them with the hirer’s business? (organisation/economic dependence test)
Must the worker supply and maintain any tools or equipment (especially if √
expensive)?
Is the worker paid according to task completion, rather than time worked? √
Does the worker bear any risk of loss, or have a chance of making a profit √
from the job?
Is the worker free to work for others at the same time? √
Can the worker subcontract the work, or delegate performance to others? √
Is taxation deducted from the worker’s pay? Is superannuation paid? √
Is the worker responsible for insuring themselves against work-related injury? √
Is the worker provided with benefits (paid holidays and sick leave)? √
Is the worker described as a contractor on contract of hiring? √
 Cases using totality test

• Abdalla v Viewdaze P/L t/as Malta Travel (2003) AIRC, Print PR 927971.
• Decision of AIRC Full Bench (2003) drew on High Ct findings in Hollis v Vabu
• Damevski v Giudice [2003] FCAFC 252
• Emphasises how courts will see through sham contracting arrangements
• Jamie Orlikowski v IPA Personnel Pty Ltd [2009] AIRC 565
• Gets at use of labour hire and ‘payrolling’ to attempt to avoid employer obligations
• Commissioner of State Taxation v Roy Morgan Research Centre (2004) market research interviewers who could
acceptor reject assignments to perform work, but were subject to detailed rules as to how they conducted interviews.
Found to be employees.
• Roy Morgan Research v Commissioner of Taxation [2010] FCAFC 52 – appeal dismissed. Between 2000 and 2006 Roy
Morgan paid people to conduct interviews on its behalf. Roy Morgan did not consider these people employees and did
not make superannuation guarantee contributions in accordance with the Administration Act.
• In 2007 the Commissioner of Taxation issued Roy Morgan assessments and amended assessments for the periods that
the Commissioner considered superannuation guarantee charge statements were required. Roy Morgan objected. The
Commissioner disallowed the objection. The Commissioner's decision was affirmed by the Administrative Appeals
Tribunal (AAT).
• Roy Morgan appealed the decision of the AAT to the Federal Court, which constituted a Full Court to hear the appeal.
One ground of appeal was that the Administration Act and the Charge Act were constitutionally invalid. The appeal
was dismissed.1  
• By special leave, Roy Morgan appealed to the High Court from the Full Federal Court's decision.   40
Narich Pty Ltd v Commissioner of Pay-roll
Tax (1983) 50 ALR 417
• FACTS: N employed Weight Watchers lecturers under a contract that
described them as IC’s and not employees.

• HELD by the Privy Council: Lecturers were employees.

• Workers were given ‘The Weight Watchers Lecturers Handbook’ which
controlled the the nature and scope of work performed.
• They were remunerated by a scale of fees and deducted their fees
from payments made by students in class.
 Australian Mutual Provident Society v Chaplin (1978) 18
ALR 385

Facts: Chaplin was a rep. for AMP insurance. Conditions of his

engagement were contained in a booklet. C brought a claim for LSL under
the state LSL Act.

Privy Council held: Agent operating his own business. Factors pointing
to C being an agent according to the booklet:
• Right to incorporate his business
• Unlimited right to delegate his duties to agents of his choice
• Right to enter into partnership (unusual for employee to be in partnership)
Plus in addition to the booklet:
• Income tax showed deduction that = nearly half his gross earnings because more
than half his income went into expenses.
 Sham Contracting: Section 357 FWA
Misrepresenting employment as independent contracting arrangement   
(1) A person (the employer ) that employs, or proposes to employ, an individual must not
represent to the individual that the contract of employment under which the individual is,
or would be, employed by the employer is a contract for services under which the
individual performs, or would perform, work as an independent contractor.
Note:  This subsection is a civil remedy provision (see Part 4-1).

(2) Subsection (1) does not apply if the employer proves that, when the representation was
made, the employer:
          (a)  did not know; and
          (b)  was not reckless as to whether;
the contract was a contract of employment rather than a contract for services.
Review

• The employment relationship is created through the contract of

employment, underpinned by legislation and industrial instruments.
• Essential issue is whether a person is an employee or an independent
contractor - contract of service v contract for service
• Express and implied terms provide rights and obligations to both parties in ER
• Creating contract of employment generates psychological contract of
perception & expectations which may result in conflict
Review
• Most legal problems arising from the employment
relationship relate to confusion over terms and/or
conditions of employment
• courts/tribunals have used range of tests to determine if
employee or contractor – control, economic dependence
or organisation, + multi-factors or totality test
• Multi-factor test is currently most frequently used
• problems can be reduced by clearly defining the contract
of employment - however, cannot conceptualise all
eventualities
References
Bray, M., Cooper, R., Waring, P & MacNeil, J. (2014), Employment Relations: theory and
practice, 3rd ed, McGraw-Hill, Roseville, Australia.
Gardner, M. and Palmer, G. (1997), Employment Relations Industrial Relations and Human
Resource Management in Australia, 2nd edition, Macmillan, Melbourne
Maharaj, M., Ortlepp, K. & Stacey, A. (2008), Psychological contracts and employment
equity practices: A comparative study, Management Dynamics, 17 (1), 16-30.
Stewart, A. (2008), Stewart’s Guide to Employment Law, Federation Press, Annandale.
Zhao, H., Wayne, SJ., Hlibkowski, B, & Bravo, J. (2007), The impact of psychological contract
breach on work-related outcomes: A meta analysis, Personnel Psychology, 60 (3), 647-657.
•http://www.austlii.edu.au/ use this site for access to law cases

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