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Are you employing a contractor or employee

Written by Rick Fitzpatrick • Director
Published on 25 Dec 2018

A recent landmark court case decision was made in favour of ex-Foodora employee, Josh Klooger, by the Fair Work Commission. Interestingly, Mr Klooger won this court case through an unfair dismissal claim that would not be possible under the contractor work classification Foodora identified in his initial service contract.

So what unique circumstances did the Fair Work Commission pinpoint to identify Mr Klooger as an employee?


Foodora – Identifying a contractor or employee

One of the key factors in identifying Mr Klooger as an employee of Foodora was the way in which work should be completed for the service.


What expectation was there for the way work should be conducted?

The service contract stipulated that the “contractor”  is expected to accept work through Foodora’s rostering system while wearing Foodora specific work attire. From these details, the Fair Work Commission found that “The service contract contains many provisions which are similar in form and substance to those that would ordinarily be found in an employment contract document.” raising the first major red flag for Foodora’s service contract.


Who had control – “Contractor” or Principal?

Another issue regarding the classification of Mr Klooger centred around who had control. Despite classifying workers as contractors, Foodora exercised a high level of control in the manner of which workers perform work. One of the main ways Foodora did this was by implementing a worker batching system which gave higher ranking workers the first-choice selection of work shifts. Workers would rank higher for working longer shifts, working more, and choosing to work on weekends.

The “considerable capacity to control the manner in which the applicant performed work” was noted by the Fair Work Commission as a key point in favour of Mr Kloogers unfair dismissal claim.


Does the “Contractor” operate separately from the principal?

An additional aspect that was analysed was the business operations of the “contractor” outside of their service to the principal, in this case, Foodora.

For example, an electrician may be hired as a contractor to work on a job for a principal business. In the instance of our illustration, that electrician performs work on this job for the principal business, but outside of that job, they also operate their own business where work and jobs are completed for their personal business income.

Mr Klooger did not conduct any business outside of his work for Foodora. Another aspect in support of Mr Klooger focussed on his tools of trade. The only investment made by Mr Klooger as a contractor was his bicycle, an asset of which he also used privately. The Fair Work Commission identified this investment as a tool that “does not require a high degree of skill or training”, a key point that again worked in favour of Mr Kloogers claim against Foodora.


Delegating work – Foodora’s defence against Mr Kloogers claim

One of the key points Foodora highlighted in support of their contractor claim was the substitution scheme that was being employed by Mr Klooger. During the course of his service for Foodora, Mr Klooger successfully managed and delegated work that he was expected to conduct for Foodora a trait that is common to contractors. Foodora even went on record in correspondence with Mr Klooger, commending him on his “entrepreneurial initiative“.

Despite this, the Fair Work Commission identified the substitution scheme as being in breach of Foodora’s own service agreement, lessening the weight of this argument despite Foodora’s eventual acceptance of Mr Kloogers substitution scheme.


Identifying as Foodora – was it mandatory?

A requirement to appear in Foodora attire and branding was highlighted in the service agreement as a key aspect of the unfair dismissal claim. This requirement is uncommon for contractors and was used as evidence in support of Mr Kloogers unfair dismissal claim.


Who faces reputational damage for services conducted?

Another key area the commission focused on was who faced reputational damage in instances where riders did not perform to the standard expected by customers. Due to the requirement for all service providers to wear Foodora branded attire, reputational damage was expected to fall squarely on Foodora’s brand, not the rider or “contractor” as stipulated within their service contract.


What was the outcome?

The Fair Work Commission decided that Foodora had indeed unfairly dismissed Mr Klooger after he spoke out publicly about the company’s worsening pay and conditions. The total amount awarded to Mr Klooger was $15,559. Unfortunately, Foodora appointed voluntary administrators on 17 August 2018.

The commission pursued the case on public importance grounds.


How do you know whether you are employing an employee or contractor?

Getting the facts of an employment relationship right is crucial to protecting your business from being exposed to material liabilities. Some of the key factors the Fair Work Commission outlined include:

  • Does the work involve a particular profession or skill set?
  • How much control the contractor has over how the contract is executed?
  • The ability of the contractor to delegate work to another person.
  • Whether the contractor supplies their own tools or equipment.
  • Whether the contractor has their own place of business.
  • The contractor’s ability to generate goodwill or saleable assets during the course of the contract?
  • How the contractor is paid (hours worked, or a result)
  • The level of risk the contractor bears.
  • Whether the contractor is independent or in reality simply part of the organisation the contract to.

There is no one single point that determines whether you are hiring an employee or contractor. Instead, a determination on whether you are hiring an employee or contractor is made on the balance of evidence for all factors involved.


What could happen if you incorrectly classify someone as a contractor

Incorrectly classifying a worker as a contractor can have far-reaching consequences for your business. For example, if you misclassify an employee, it will have an impact on superannuation guarantees, PAYG withholding, workers comp, and payroll tax. Regardless of whether you’ve genuinely misclassified an employee or not – all entitlement obligations will need to be met.

Making a mistake on the classification of an employee can be incredibly costly for your business, especially if the mistake only becomes apparent over a number of years.

Because of this, it is crucial that you know what to consider before hiring workers for your business.

Check out another recent blog in this category.

Rick Fitzpatrick is the founding director of Fitzpatrick Group. Rick is a Certified Practising Accountant (CPA), Chartered Accountant (CA), Registered Company Auditor, Registered Tax Agent and Certified Business Coach.
Authour \u2022 Rick Fitzpatrick

Director, Fitzpatrick Group

Post Categories: Small Business | Tax Essentials

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