Do you need a written employment agreement?
The need for a written employment agreement is one we are often asked… so this ruling from the Fair Work Commission (FWC) has clarified this query.
Recently, the FWC ruled an employee was eligible for general protections despite the absence of a written employment agreement.
What can business owners and managers learn from this decision?
The FWC ruling has shed light on how the law distinguishes an employee from an independent contractor when there is no written employment agreement in place.
The worker in this case, who was engaged by the company as a tiler and grouter, brought a general protections application to the FWC in July 2023, alleging she had been unfairly dismissed from her role two months earlier. In response, the employer contested that the worker had been engaged as an independent contractor and was therefore ineligible for general protections.
As the worker had been engaged via an oral agreement without explicit terms, the FWC examined several factors (see below) to determine whether there was an employment relationship despite the absence of a written agreement.
Upon investigation, the FWC determined the worker had in fact been an employee for legal purposes, and she was therefore entitled to proceed with her unfair dismissal application.
‘The absence of an agreement counted against the employer in this particular case… and demonstrates why it is so important to have a written agreement with employees or contractors that describes the working relationship accurately and in accordance with legislative requirements,’ says Margaret Goody, Managing Director of Akyra Strategy & Development.
What criteria is used to establish an employment relationship?
During its investigation into the nature of the worker’s employment, the FWC examined various facets of the employee’s role, wages and entitlements to assess the relationship.
In the absence of an agreement, the FWC (or a Court) will consider various criteria to determine whether the individual is an employee or contractor.
Some of the key criteria cited in this ruling included whether the:
- Worker had a separate place of work and/or advertised their services to the public,
- Supposed employer had the right to suspend or dismiss the worker,
- Worker provided and maintained significant tools or equipment,
- Worker was provided with paid holidays or personal / carer’s leave,
- Worker was paid periodically or at the completion of tasks/projects,
- Income tax was deducted from the monies paid to the worker,
- Supposed employer exercised (or had the right to exercise) control over the way the work was performed, the place or work and the hours of work.
‘The final point above would have been of particular importance when the FWC was deliberating on all factors and more than likely contributed significantly to the FWC’s ruling,’ says Margaret Goody.
‘The degree of autonomy is always a critical factor because employees tend to have less autonomy than contractors,” she says. For instance, if the worker can choose their hours of work at their own initiative to ensure completion of the task/project within an agreed timeframe, it is more likely the worker is an independent contractor.’
‘However, if the business owner stipulates the hours the worker is required to work and when the worker needs to have permission for time off, and their income is limited to the set hours worked… then it is more likely the worker is an employee.‘
The FWC pointed to messages from the employer sent to the worker as evidence of the worker’s lack of autonomy in the role – e.g. on one occasion when the worker asked her supervisor for a day off work, this was flatly refused; on another occasion, the employer informed the worker they were required to start work at 7am. The worker was not given the option to refuse.
The FWC also noted the worker did not have the freedom to select how they completed their tasks and was given instructions every time they were required to attend a new site.
In its ruling, the FWC said these messages “demonstrate the Applicant does not appear to carry on a trade or business of their own” and “It is clear from the evidence there was an appearance of an employment relationship rather than one of an independent contractor arrangement.”
The degree of autonomy is always a critical factor because employees tend to have less autonomy than contractors.
What business owners/managers can learn from this case
This case is far from the first of its kind. The FWC’s decision referred to several previous cases where applicants had successfully established an employment relationship without a written agreement in place.
Whilst not common place, the main motivation for disguising the employment relationship as being that of an independent contractor rather than an employee is to avoid the worker accruing entitlements – e.g. leave entitlements, superannuation, minimum wages and dismissal rights.
In such circumstances, the business owner/manager is knowingly engaging in sham contracting.
Sham contracting exposes the business owner/manager to significant penalties for not correctly defining the employment relationship with the worker.
In this particular case, the FWC determined it was clearly sham contracting.
It’s critical that written agreements are in place and that the potential for confusion or discrepancies within their employment relationships is avoided – i.e. the worker is an employee whereby they will need an employment agreement, or the worker is an independent contractor whereby an independent contractor agreement is called for.
When working with our clients who believe the worker they wish to engage is an independent contractor, Akyra provides an employee v. independent contractor assessment form from which the designation of the employment relationship can be determined and relied upon.
‘So, if an employer wants to engage a contractor but prefers regularity of hours, then it should proceed with an employment relationship rather than take the risk that a court will overturn the independent contractor relationship,’ says Margaret Goody
Courts can impose penalties against businesses or individuals for sham contracting. The maximum penalty is $18,780 for individuals and $93,900 for corporations, per contravention.
Employers should always seek professional advice where there is a grey area and steer clear of any situations where the characterisation of the employment relationship is not clear to avoid the potential of claims to the FWC.
If you have any questions, please reach out to Akyra for a free 30-minute consultation.
Disclaimer – Reliance on Content
The material distributed is general information only. The information supplied is not intended to be legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.
