Working Directors, Business Sales and Ice Cream: A post-Personnel Contracting decision on the employee v independent contractor test

Introduction

‍The High Court of Australia recently held in the Personnel Contracting Case that although the existence of an employment contract is highly indicative of an employment relationship, the parties' conduct must be in accordance with the contractual terms for an employment relationship to exist. The recent Fair Work Commission case of Mandelson v Invidia Foods Pty Ltd affirmed these principles as it was held that a worker who refused to sign an employment contract and instead provided consultancy invoices for payment was considered an independent contractor and not an employee.

‍Background

‍The applicant, Ms Sarah Mandelson, sold her food business, "Serendipity Ice Cream" to the first respondent, Invidia Foods Pty Ltd. As part of the Business Sale Agreement (BSA), Ms Mandelson was required to sign an employment agreement, as Invidia wanted Ms Mandelson to work on a part-time basis in running the Serendipity Ice Cream business.

Ms Mandelson never signed or returned the Employment Agreement (as required by and in breach of the BSA), and did not otherwise communicate her acceptance of the Employment Agreement to Invidia (orally, or in writing).

‍What differentiates an employee from a contractor?

‍The Fair Work Commission (FWC) held that Ms Mandelson was an independent contractor and not an employee. Instead of signing and returning her employment agreement, Ms Mandelson invoiced the respondent from a company, Sarric Pty Ltd, of which she was the director. This arrangement was partly in writing, partly oral. The description of the services rendered on the invoices included "consultancy", and "professional services". The invoices also accounted for GST, and the payments contained no distinction for income tax, superannuation or other entitlements.

After Invidia terminated the consultancy arrangement, Ms Mandelson unsuccessfully attempted to bring a general protections claim involving dismissal. Ms Mandelson argued that, despite never having signed it, the employment agreement was binding and, that an employment relationship existed.

‍Relevant Law: the Personnel Contracting case

‍The recent High Court case Construction, Forestry, Maritime, Mining And Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 considered that the presence of an established and comprehensive employment contract is highly persuasive in establishing an employment relationship. However, the majority also considered that the common intentions and conduct of the parties can be relevant when determining 'whether a labourer is conducting his or her own independent business, as distinct from serving in the business of the employer'.

Relevant factors include the autonomy of work, reporting obligations, regularity of working hours, leave arrangements and the disposition of the parties. Conduct of the parties that sufficiently contradicts the employment agreement may prevent an employee or employer from establishing an employment relationship.

‍Conclusion

‍The applicant's conduct (evidenced by email trails and supported by the respondent's evidence) demonstrated that both parties regarded the arrangement as a consultancy, and both had mutually agreed to a consulting arrangement instead of an employment relationship.The FWC found that:

• Ms Mandelson was entirely autonomous in performing her work;
• Ms Mandelson had no relevant reporting obligations;
• Ms Mandelson's working hours were irregular from day to day, week to week and month to month;
• Ms Mandelson did not request or report her leave days;
• Ms Mandelson performed a substantial amount of work for entities other than Invidia, particularly Sarric; and
• Ms Mandelson considered her relationship with Invidia to be a "consultancy".

Therefore, the conduct of the parties estopped the applicant from establishing an employment relationship, especially in circumstances where the draft employment agreement had not been signed by both parties.

‍Key Takeaways

• Written and properly executed documents (either employment contracts or consultancy agreements) should be entered into by both parties at the start of the relationship. It is sensible to obtain legal advice to ensure that the contractual documents accurately reflect the parties' intentions about the nature of the engagement.
• Engaging entities will not be protected against a finding of employment if their contracts are a 'sham', especially where their workers' conduct is substantially different from contractual provisions in any purported independent contractor agreement.

• Employers who do not meet award obligations, including in respect of annualised salaries, are at risk of prosecution and substantial fines. This is the case even if the employer takes steps to remedy the problem.
• Employers should act swiftly to remedy any errors. The considerable delay appears to be one of the deciding factors in the FWO's decision to prosecute in the SRG case.
• SRG inaccurately calculated back-pay owed which was another factor leading to FWO prosecution. Accordingly, when an employer identifies an error, legal advice should be sought immediately to ensure that the problem is rectified correctly and swiftly.
• Annualised salaries can be problematic in relation to employees covered by awards. It is prudent to seek legal advice to ensure that employees are receiving their entitlements in full.

If you require assistance in relation to any of the information provided above, Pragma's Employment lawyers can provide advice to you and your business to minimise your future risk. Contact us today by clicking here or call us on (08) 6188 3340.