Can an employment relationship exist without a written contract?


The FWC recently ruled that an employee was eligible for general protections despite the absence of a written employment contract. What can HR learn from this decision?

A recent case heard by the Fair Work Commission (FWC) has shed light on how the law distinguishes an employee from an independent contractor when there is no written employment contract 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 that she had been unfairly dismissed from her role two months prior. 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 contract without explicit terms, the FWC examined a number of factors (see below) to determine whether there was an employment relationship despite the absence of a written agreement. 

Upon investigation, it determined that the worker had in fact been an employee for legal purposes, and she was therefore entitled to proceed with her unfair dismissal application.

“The main takeaway [from this case] is that employers need to have properly constructed contracts with employees or contractors which accurately and legally describe the working relationship,” says Andrew Jewell, Principal at Jewell Hancock Employment Lawyers.

“The absence of a contract counted against the employer in this scenario.”

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 her role, remuneration and entitlements to assess the relationship.

“The legal criteria used is often described as ‘not exhaustive’ and ‘not determinative’ – it’s not used as a checklist or mathematical function,” says Jewell. “Rather, in the absence of a contract, the Commission, or Court, will look to various criteria to work out 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
  • Whether the supposed employer had the right to suspend or dismiss the worker
  • Whether the worker provided and maintained significant tools or equipment
  • Whether the worker was provided with paid holidays or sick leave
  • Whether the worker was remunerated by periodic salary or by reference to completion of tasks
  • Whether income tax was deducted from remuneration paid to the worker
  • Whether the supposed employer exercised, or had the right to exercise, control over the manner in which work was performed, the place or work, and the hours of work. 

Given the nature of this worker’s role, the final point above would have been a particularly significant factor in the FWC’s ruling, says Jewell.

“The degree of autonomy is always a critical factor because employees tend to have less autonomy than contractors,” he says. 

“For example, if an individual can choose their hours, increase their work in order to increase pay at their own initiative, and take time off when it suits them, they are more likely to be a contractor. Whereas, if they are required to attend set hours, seek permission to have time off, and their earnings are limited to their set hours, they are more likely to be an employee.”

The FWC pointed to messages from the employer sent to the worker as evidence of her lack of autonomy in her role. For example, on one occasion when the worker asked her supervisor for a day off work, he flatly refused her. On another occasion, he had informed her she was required to start work at 7am, and she was not given the option to refuse.

It also noted that the worker did not have the freedom to select how she completed her tasks and was given instructions every time she was required to attend a new site. 

In its ruling, the FWC said these messages “demonstrate that the Applicant does not appear to carry on a trade or business of her own”, and that “It is clear from the evidence that there was an appearance of an employment relationship rather than one of an independent contracting arrangement.”

“The degree of autonomy is always a critical factor, because employees tend to have less autonomy than contractors.” – Andrew Jewell, Principal at Jewell Hancock Employment Lawyers.

What HR 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 contract in place.

“The main motivation for [disguising employment relationships as independent contracting] is to avoid entitlements due to employees – such as minimum wages, leave entitlements, superannuation and dismissal rights,” says Jewell.

“The primary risk is that the Commission, or Court, determines the individual is an employee and, accordingly, they get access to those entitlements. [There is also] the potential for significant penalties [for misinterpreting the employment relationship].”

Although this case was a clear incidence of ‘sham contracting’, he says, not all cases will be so black-and-white. Accordingly, in addition to ensuring that written contracts are in place, HR should be attune to any potential for confusion or discrepancies within their employment relationships.

“HR and employers can seek legal advice where there is a grey area, but otherwise should steer clear of any situations where the characterisation is not clear.

“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.”


Need help brushing up on HR laws and compliance? AHRI’s short course will give you an understanding of the key elements of legislation, regulation and practices HR needs to be across.


 

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Ron Nelson
Ron Nelson
1 month ago

Very insightful.

More on HRM

Can an employment relationship exist without a written contract?


The FWC recently ruled that an employee was eligible for general protections despite the absence of a written employment contract. What can HR learn from this decision?

A recent case heard by the Fair Work Commission (FWC) has shed light on how the law distinguishes an employee from an independent contractor when there is no written employment contract 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 that she had been unfairly dismissed from her role two months prior. 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 contract without explicit terms, the FWC examined a number of factors (see below) to determine whether there was an employment relationship despite the absence of a written agreement. 

Upon investigation, it determined that the worker had in fact been an employee for legal purposes, and she was therefore entitled to proceed with her unfair dismissal application.

“The main takeaway [from this case] is that employers need to have properly constructed contracts with employees or contractors which accurately and legally describe the working relationship,” says Andrew Jewell, Principal at Jewell Hancock Employment Lawyers.

“The absence of a contract counted against the employer in this scenario.”

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 her role, remuneration and entitlements to assess the relationship.

“The legal criteria used is often described as ‘not exhaustive’ and ‘not determinative’ – it’s not used as a checklist or mathematical function,” says Jewell. “Rather, in the absence of a contract, the Commission, or Court, will look to various criteria to work out 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
  • Whether the supposed employer had the right to suspend or dismiss the worker
  • Whether the worker provided and maintained significant tools or equipment
  • Whether the worker was provided with paid holidays or sick leave
  • Whether the worker was remunerated by periodic salary or by reference to completion of tasks
  • Whether income tax was deducted from remuneration paid to the worker
  • Whether the supposed employer exercised, or had the right to exercise, control over the manner in which work was performed, the place or work, and the hours of work. 

Given the nature of this worker’s role, the final point above would have been a particularly significant factor in the FWC’s ruling, says Jewell.

“The degree of autonomy is always a critical factor because employees tend to have less autonomy than contractors,” he says. 

“For example, if an individual can choose their hours, increase their work in order to increase pay at their own initiative, and take time off when it suits them, they are more likely to be a contractor. Whereas, if they are required to attend set hours, seek permission to have time off, and their earnings are limited to their set hours, they are more likely to be an employee.”

The FWC pointed to messages from the employer sent to the worker as evidence of her lack of autonomy in her role. For example, on one occasion when the worker asked her supervisor for a day off work, he flatly refused her. On another occasion, he had informed her she was required to start work at 7am, and she was not given the option to refuse.

It also noted that the worker did not have the freedom to select how she completed her tasks and was given instructions every time she was required to attend a new site. 

In its ruling, the FWC said these messages “demonstrate that the Applicant does not appear to carry on a trade or business of her own”, and that “It is clear from the evidence that there was an appearance of an employment relationship rather than one of an independent contracting arrangement.”

“The degree of autonomy is always a critical factor, because employees tend to have less autonomy than contractors.” – Andrew Jewell, Principal at Jewell Hancock Employment Lawyers.

What HR 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 contract in place.

“The main motivation for [disguising employment relationships as independent contracting] is to avoid entitlements due to employees – such as minimum wages, leave entitlements, superannuation and dismissal rights,” says Jewell.

“The primary risk is that the Commission, or Court, determines the individual is an employee and, accordingly, they get access to those entitlements. [There is also] the potential for significant penalties [for misinterpreting the employment relationship].”

Although this case was a clear incidence of ‘sham contracting’, he says, not all cases will be so black-and-white. Accordingly, in addition to ensuring that written contracts are in place, HR should be attune to any potential for confusion or discrepancies within their employment relationships.

“HR and employers can seek legal advice where there is a grey area, but otherwise should steer clear of any situations where the characterisation is not clear.

“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.”


Need help brushing up on HR laws and compliance? AHRI’s short course will give you an understanding of the key elements of legislation, regulation and practices HR needs to be across.


 

Subscribe to receive comments
Notify me of
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1 Comment
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Ron Nelson
Ron Nelson
1 month ago

Very insightful.

More on HRM