Food for Thought From Foodora: Independent Contractor Vs Employee
As the recent controversy surrounding Foodora shows, the distinction between independent contractors and employees is not as clear cut as it seems.
The gig economy has brought convenience to the way people access many essential services such as transport and food. However, the employment rights of those working in it have entered unchartered territory and many questions have been raised as to the employment status of those working for companies such as Foodora or Uber, namely, whether they are an Independent Contractor or Employee.
In June 2018, these questions were answered. The Fair Work Ombudsman commenced legal proceedings against Foodora Australia Pty Ltd (Foodora) in the Federal Court alleging that Foodora engaged in sham contracting activity. These proceedings arose in relation to three delivery riders, who were engaged for work in 2015. The Fair Work Ombudsman claims that these riders were entitled to receive minimum entitlements as employees under the Fast Food Industry Award 2010, which Foodora did not meet.
The importance of understanding the difference between an independent contractor and an employee
Independent Contractors and Employees have different rights and entitlements under Australian law. As independent contractors are not employees, they are not protected under any industry awards or under the National Employment Standards (NES). Therefore, Independent Contractors do not have a minimum wage or a pay rate, but are free to negotiate payment as part of their contract. Further, independent contractors do not receive employment entitlements (such as leave, superannuation or worker’s compensation) unless they are negotiated into the contract.
The nature of the relationship between a business who hires an Independent Contractor is quite different to the relationship between an employer and an employee. Independent contractors run their own business and have a higher degree of control or autonomy over what work is done and how it is done, on a contractual basis. The law provides more extensive measures for protection of employees rights than it does for independent contractors because of this apparent distinction, which gives independent contractors greater negotiating or bargaining power.
That is not to say that independent contractors are not protected under the law. The Independent Contractors Act 2006 (Cth) provides for the review of unfair or harsh contracts, and allows contracts to be set aside or varied under a court order. The Court will take into consideration the relative bargaining positions of the parties, whether any undue influence was exerted and whether the total remuneration stipulated in the contract is less than that of an employee performing similar work.
What did Foodora allegedly do wrong?
The Fair Work Ombudsman alleges that Foodora engaged in sham contracting. Sham contracting is where an employer disguises an employment relationship as an independent contracting arrangement, usually to deliberately avoid giving workers employee entitlements. This is illegal under section 357 of the Fair Work Act 2009 (Cth).
Employee entitlements that the workers were allegedly denied include superannuation payments, minimum wage payments, casual loading, and penalty rates.
Foodora allegedly required each worker to have an Australian Business Number (ABN) and to sign a contract titled ‘Independent Contractor Agreement’. Despite this, it is alleged that the three workers were employees, not independent contractors, because of the level of control, supervision and direction Foodora exercised over the workers’ hours, location and manner of work, the requirement for the workers to wear a Foodora-branded t-shirt and use food storage boxes and/or bike racks supplied by Foodora, the fact that Foodora paid the workers fixed hourly rates and the workers did not negotiate their rates of pay at any time, and the fact that the workers were not genuinely conducting their own delivery business.
In looking at whether they were conducting their own delivery business, it was alleged that they were not in that they did not advertise these services to the public, delegate their duties, and did not have their own customer base, business premises and insurances.
Protect your business: How do you determine whether someone is an independent contractor or an employee?
A wholistic approach is taken in determining whether a person is an independent contractor or whether a person is an employee. No factor is to be given greater weight than another. Rather, the relationship should be considered in light of all the circumstances and factors. The paramount concern is the substance of the relationship, as opposed to the label.
Courts will take into account the following factors in determining what relationship workers have with businesses:
- Degree of control over how work is performed
- Hours of work and whether it is under an agreement that decides the hours to work in order to complete a specific task
- Ongoing expectation or work as opposed to engagement for a specific task
- Risk and responsibility, and whether profits, losses and liabilities fall on the person engaged in work
- Whether tools and equipment are provided for use (although alternative arrangements can be made under a contract for services)
- Whether the worker is paid regularly or submits an invoice to the business
The Fair Work Commission recently dropped its case against Foodora as the case in the Federal Court could not proceed while Foodora is in voluntary administration, without the leave of the court. This leaves us with questions about the potential outcome of this test case and the impact it would have on the ‘gig economy’. The Fair Work Ombudsman’s allegations seem to be in line with the UK position and certain US decisions on the status of Uber drivers as employees, not independent contractors. However, it is important to understand that these decisions depend heavily on the individual relationship between the business and the worker. In Australia, a recent decision by the Fair Work Commission suggests that Uber drivers are independent contractors, not employees.
So while this area of law is seemingly unsettled, it may be prudent to review your arrangements with the people whose services you engage. The lesson we can take from this is that it is better to avoid the potential penalties that may ruin your business if you engage in sham contracting arrangements.
Daphne Zhou is a legal intern at Lawpath. She is currently completing a combined Law and Communications degree at UTS and is interested in the way the law can be shaped by new legal technologies.