FWC limits the High Court’s sham exception for independent contractors
The Full Bench of the Fair Work Commission (‘FWC’) has handed down the most significant decision to date following the recent High Court decisions which changed the independent contracting landscape in Australia (read our analysis of those decisions here).
The decision of Deliveroo Australia Pty Ltd v Franco  FWCFB 156 gives employers useful guidance as to how the FWC will apply the Personnel Contracting and Jamsek cases and what factors may be considered significant in assessing independent contractor agreements.
In the high-profile appeal, the FWC also appears to have identified new constraints to the circumstances in which an agreement can be a ‘sham’. This is important, as the recent High Court cases decided that unless an independent contracting relationship, the subject of a written agreement, was alleged to be a sham, the relationship could only be examined through analysis of that written agreement.
Deliveroo’s appeal against the single member decision, handed down in May 2021, was significantly delayed due to the anticipated decisions of the High Court. The appeal was stayed by the Full Bench in August 2021 and re-commenced in February 2022 after the Personnel Contracting and Jamsek decisions were handed down.
The Constraints of a Sham
One of the key principles provided for in Personnel Contracting is that when characterising a relationship regulated by a wholly written, comprehensive contract, which is not a sham or otherwise ineffective, the question as to the nature of the relationship is to be determined solely by reference to the rights and obligations under that written contract. This is in contrast to the previous and widespread approach which required an assessment of the totality of the relationship, including post-contractual conduct.
In the Deliveroo decision, the Full Bench of the FWC rejected the worker’s argument that the sham exception should apply and that the Full Bench should look beyond the terms of the written contract.
The Full Bench referred to the “well-understood” definition of a sham as stated by the High Court in Equuscorp Pty Ltd v Glengallan Investments  HCA 55 as being:
“…the steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences…”
In referring to the High Court’s commentary in Equuscorp, the Full Bench stated that when assessing whether an agreement is a sham:
“The important point is that the requisite intention must be that of both parties to the ostensible contract, usually if not always with the objective of deceiving a third party.”
The Full Bench’s adoption of this interpretation of a sham is significant, because in an employment law context, it essentially requires that both the alleged contractor and the alleged principal enter into the relevant independent contracting agreement with the intent to deceive a third party. As was the case in the Deliveroo decision, there will seldom be circumstances in which there is that mutual intention from both the contractor and the principal to deceive another party.
While the Deliveroo decision is the most significant Full Bench decision handed down since Personnel Contracting and Jamsek, it is not the first application of the cases. In the case of Chambers and O’Brien v Broadway Homes  FWCFB 129, handed down in March 2022, the Full Bench also considered the High Court’s interpretation of the concept of a “sham” in Equuscorp Pty Ltd v Glengallan Investments. While the Full Bench in that case also made no finding of a sham, it was without any reference to the mutual intention to deceive factor that was identified in the Deliveroo case.
It must be acknowledged that this decision was only handed down on 17 August 2022 and may yet be subject to an appeal. It is also relevant to note that the Full Bench’s decision is not binding on other Courts in Australia, and so it will be interesting to see whether a superior Court takes the same approach should the factual scenario to do so present itself.
The effect of this decision may also be short-lived with the newly elected Federal Government’s commitment to legislative reform to regulate “employee-like” independent contractors. The extent of the federal government’s intended legislative reform is, as yet, unknown.
The Four Key Factors
Four aspects of Deliveroo’s written contract were accepted by the Full Bench as “weighing decisively” in favour of a finding that Franco was an independent contractor, and ultimately formed the basis of that finding:
The first was a demonstrative example of the effect of focusing on the primacy of the contract over the totality of the relationship when assessing whether a relationship is one of employment or independent contracting. The written contract in this case indicated that Deliveroo had a lack of control over Franco. This is significant as the FWC found at first instance, on its assessment of the post-contractual conduct, that Deliveroo did, in fact, exercise control over the manner in which Franco undertook the services.
Relevantly, while Franco was required to pick up an order and deliver it “within a reasonable time”, he was permitted to do so using any route he determined to be safe and efficient. This indicated that Deliveroo had no contractual right to control the mode of performance of the work and had only instituted a performance standard. A similar view was taken in respect of Franco’s contractual right to determine what type of vehicle he used, albeit that it had to be safe, reliable and legal.
Provision of equipment
Secondly, the Full Bench found it was irrelevant that Franco only provided a relatively low-cost bicycle or motorcycle to provide the services. The contract allowed for the delivery vehicle to be something more than this, and accordingly, it was possible that Franco “may provide” a “substantial item of mechanical equipment”. The Full Bench found this was sufficient to be decisively indicative of an independent contracting relationship.
Personal performance of the services
Thirdly, the Full Bench relied upon a settled factor in establishing an independent contracting relationship, in that the written contract did not require Franco to provide the services personally and permitted him to arrange someone else to perform services on his behalf. The result of the Personnel Contracting and Jamsek decisions is that it is now irrelevant for the Full Bench to consider whether it was ever commercially practicable for Franco to delegate the work in practice.
Payment of an administrative fee
Finally, the Full Bench accepted that Franco’s contractual obligation to pay Deliveroo an administrative fee for access to its software and for Deliveroo providing invoices and other administrative services was “inconsistent with the existence of an employment relationship.”
Performance Standards vs Control – The Difference
The Full Bench has provided clarity that terms in an independent contractor agreement which require the contractor to adhere to certain performance standards will not always amount to an exercise of control over the work (which might then be consistent with an employment relationship). In this respect, the Full Bench considered clauses that required the worker to “deal with others professionally when performing delivery services” and “provide the services with due care, skill and ability”.
The Full Bench accepted that such obligations were performance standards which are “entirely consistent with an independent contracting arrangement.”
Casual Employment & Independent Contracting – The Overlap
During the appeal, Deliveroo argued that three aspects of the arrangement should indicate a view that Franco was an independent contractor, prompting an assessment by the Full Bench of the differences between independent contracting and casual employment.
Firstly, Deliveroo attempted to rely on the contractual entitlement for Franco to accept and reject any work offered to him as being supportive of an independent contracting relationship, drawing comparisons to a similar entitlement in Uber driver contracts that caused the Full Bench to find an independent contracting relationship in the case of Gupta v Portier Pacific Pty Ltd  FWC 5008. However, the Full Bench applied the reasoning in Personnel Contracting to reject this submission, finding that the right to accept or reject work may also be indicative of casual employment.
Secondly, Deliveroo contended that Franco’s right to provide services to other parties, including its competitors, was also indicative of independent contracting. Interestingly, Deliveroo attempted to argue the distinction between this case and casual employment was that in practice Franco was able to work for competitors simultaneously – a distinctive feature not found in casual employment relationships. However, the Full Bench found that the need to assess the relationship by reference to the written agreement between the parties cuts both ways and rejected Deliveroo’s attempt to include post-contractual conduct as being relevant to the question of the nature of the relationship. In accepting Franco’s contractual right to provide services to competitors (without a reference to simultaneousness) was consistent with casual employment, the Full Bench did not give weight to this submission.
Deliveroo was successful in distinguishing a third feature of the relationship as being distinct from casual employment. Franco had a right to decide whether, when and where he provided services to Deliveroo. The Full Bench considered that this went further than any accepted notions of casual employment, where a casual employee has a right to decide whether they work but would not ordinarily determine when and where they work. While acknowledging this right of control was somewhat limited, it nonetheless was distinguishable from casual employment. However, given those limitations, the Full Bench did not consider the factor determinative.
Takeaways for Employers
It is yet to be seen whether the Full Bench’s interpretation and application of what will constitute a sham will stand in other jurisdictions and provide some further protection for employers or principals. Notwithstanding, the Deliveroo decision does provide some useful guidance for businesses which engage independent contractors. In particular:
- contractors can be lawfully required to meet performance standards without necessarily contributing to a finding that the relationship is one of employment;
- a contractor will not have to, in fact, make a significant investment in tools or equipment to assist in a finding of a valid independent contracting relationship. It may be sufficient that their obligations under the contract allows that they “may provide” a substantial item of equipment (however there is still potential for a difficulty here given sole trader situations and superannuation with the ATO’s ‘labour only’ test – which remains a subject of discussion when drafting independent contractor agreements);
- a right of delegation will be recognised even where it is not commercially viable, provided the circumstances do not extend so far as to constitute a sham;
- the obligation to pay an administrative fee by a contractor to a principal can be a significant factor in assessing an independent contracting agreement; and
- care should be taken to properly distinguish elements of the independent contractor’s obligations from those normally attributed to casual employment.
If you’re unsure whether your independent contractor agreements provide your business with sufficient protection in light of these recent changes in law, you should seek advice from the specialist employment lawyers at Aitken Legal today.
Disclaimer: The information contained this article is general and intended as a guide only. Professional advice should be sought before applying any of the information to particular circumstances. While every reasonable care has been taken in the preparation of this update, Aitken Legal does not accept liability for any errors it may contain. Liability limited by a scheme approved under professional standards legislation.