Employee or independent contractor? It’s a matter of control.
As many of our readers will recall, the High Court of Australia recently confirmed that the relevant test to determine whether a worker has been engaged as an employee or a contractor is a matter of contractual interpretation (see here for further information).
In the recent decision of Merlo v Global Business College of Australia Pty Ltd  FedCFamC2G 1011, the Federal Circuit and Family Court of Australia (the Court) applied those principles to determine whether a worker engaged as a teacher was a contractor or an employee.
The Applicant, Dr Lucas Merlo, accepted the role of trainer offered by Global Business Australia Pty Ltd (GBCA) in April 2016. He executed a contract (the Contract) which referred to Dr Merlo as a contractor, outlined the services Dr Merlo was expected to perform (including delivering classes to GBCA students and assessing their work) and set out his remuneration at $60 per hour. There was no proscribed roster or period of the engagement term. Rather, Dr Merlo simply arrived at work at the start of each semester. He generally worked for GBCA for 20 to 22 hours per week during semesters. Dr Merlo invoiced GBA for his services and was paid on invoice. He also conducted work for other entities in different capacities during the course of his engagement with GBCA.
On 11 December 2020, Dr Merlo attended a Zoom meeting with an employee of GBCA, Mr Yaseen, who advised that his hourly rate would be reduced to $45 and that he would no longer be paid for the marking and assessment components of his role. If he did not accept the pay reduction, Dr Merlo was warned that he would be replaced.
On 22 December 2020, Dr Merlo advised GBCA that he felt that the proposed pay cut was unreasonable. No response was provided by GBCA. Since that date, Dr Merlo has not worked for GBCA. GBCA has not contacted him in relation to his absence or asked him to return. Dr Merlo considered that this amounted to a constructive dismissal, as GBCA’s conduct in seeking to reduce his pay constituted a repudiation of the Contract.
Dr Merlo was of the view that, despite the Contract labelling him as a contractor, he was working as an employee.
The primary matter for the Court to determine was whether Dr Merlo was an employee or a contractor.
The Court reaffirmed that the correct characterisation of the relationship between the parties is determined by analysis of the terms of the contract, although the label given to the arrangement in the contract is not a decisive factor. The Court adopted the summary of Wigney J in JMC Pty Limited v Commissioner of Taxation  FCA 750 and noted that the legal rights and obligations established in a contract are decisive of the character of the relationship as long as the contract is not a sham. The Court then considered each of the relevant contractual provisions (which are summarised below) that may be useful in determining the nature of the relationship.
Degree of control
The Court noted that generally in an employment context, the ‘engagement subjects the person engaged to the command of the person engaging him, not only as to what he shall do in the course of his employment but as to how he shall do it.’ In this instance, the terms of the Contract did not require Dr Merlo to obtain approval of any of his teaching material, although GBCA was to be provided with a copy to ensure the material aligned with statutory requirements. He was also free to conduct any of the tasks associated with the role wherever and whenever he wished (other than, by necessity, the delivery of the classes). The Court held these factors are consistent with a principal-contractor relationship.
On the other hand, the Contract did not refer to Dr Merlo possibly delegating duties to someone else, which is more consistent with an employee-employer relationship.
Dr Merlo submitted that his work was so integrated into the GBCA’s operation that he could not be said to be operating his own independent business. However, the Court found that the Contract did not subordinate Dr Merlo or make his service an emanation of GBCA’s business, except in that Dr Merlo was expected to comply with appropriate statutory and professional requirements.
Dr Merlo submitted that his remuneration being paid on an hourly basis rather than by reference to work produced weighed in favour of him being an employee. The Court found that if he were simply preparing and presenting lectures, a ‘lump sum’ agreed fee may have been more appropriate. However, the Court found that this characterisation did not necessarily take into account the other tasks Dr Merlo was required to undertake, for which hourly payment may be more appropriate, such as grading work, undertaking administrative tasks and attending other meetings and conferences. Accordingly, the payment of remuneration by an hourly rate was a neutral consideration in characterising Dr Merlo’s role.
Taking all of these matters into consideration, the Court concluded that Dr Merlo’s relationship with GBCA was ‘not subservient or subject to any particular right of control by [GBCA]’ and that Dr Merlo was an independent contractor operating a discrete business. Accordingly, the Court was not persuaded that Dr Merlo was an employee and his claims were all unsuccessful.
Take home messages
Where an organisation intends to engage workers as contractors or employees, it is essential that the contract of engagement is carefully drafted to ensure it is clear and consistent with the particular type of engagement. This is the first step in protecting your organisation from any ‘sham contracting’ claims.
Should you wish to discuss any matters raised in this article, please contact please contact Sathish Dasan on + 61 8 8210 1253 or firstname.lastname@example.org, Thomas Tagirara on + 61 8 8217 1337 or email@example.com, or Annabelle Narayan on +61 8 8210 1292 or firstname.lastname@example.org.