Employee or Independent Contractor? The importance of proper characterisation in the context of Franchising

The characterisation of workers as either employees or independent contractors has persisted as a difficult and contentious exercise for Australian Courts. Particular attention has been paid to the method adopted by the Court, which historically involved a complex assessment of the ‘totality of the relationship’ between the employer and worker by reference to numerous factors.

Accurately determining whether a worker is an employee or independent contractor is particularly important for businesses, as the characterisation can substantially affect the entitlements that are owed by the employer/principal. By extension, a failure to correctly characterise a worker as an employee may subject the employer/principal to liability for underpayments of workers.

However, it’s not just the entity that directly employs the worker that should be mindful of this, as recent legal action has indicated an intention of the Fair Work Ombudsman to extend liability to franchisors in certain circumstances.

In the past two years, the High Court clarified its position and provided some ease of mind to business owners in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (‘Personnel Contracting’) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (‘Jamsek’). In the new test, rather than focusing on the nature of the relationship and the conduct of the parties, the Court now focuses upon the rights and obligations of the parties per the contract. If the terms of a valid written contract are clear and detail the relationship of the parties, the Court needs to rely on this contract when coming to a decision.

This newly adopted approach was put to the test late last year in a Fair Work Commission case, Deliveroo Australia Pty Ltd v Diego Franco [2022] FWCFB 156 (‘Deliveroo’).  In this case, the Full Bench of the FWC confirmed that when determining whether a worker is an employee or an independent contractor, the Court no longer focuses on the working arrangements in practice. But rather, a court is now ‘confined’ to a consideration of the terms in the contract between the parties.

So, the Court no longer looks at the conduct of the parties?

Whilst the cases have highlighted the importance of the contract between the parties, the Court may still be inclined to retrospectively look at the conduct of the parties in some circumstances.

These include where:

1. The contract is not comprehensive

If the parties have not comprehensively committed the terms of their relationship to a written contract, it may be necessary to look at the conduct of the parties to determine the true nature of the agreement.

2. The contractual terms have been varied by the conduct of the parties

The conduct of the parties may be reviewed by the Court to determine whether the terms of the contract have been varied by the parties.

3. The contract is a ‘sham’

The Court has emphasised that the prohibition on ‘sham contracting’ still stands strong. A ‘sham contract’ is where the parties agree on a legally binding contract, for the purposes of avoiding certain legal consequences.

If the contract is established to be a ‘sham’, the Court may still nevertheless look beyond the contract and review of the entire history of the parties’ dealings for the purposes of defining the relationship between the employer/principal and the worker.

What does the Court look at now?

The Court has highlighted that the contract is ‘king’, and the Court will generally focus squarely on the contract. It is important to note however that the various factors that indicate that the relationship is one of employment still continue to apply. Although, these factors should only be considered when looking at the rights and duties of the worker and the employer/principal under the contract.

Specifically, the Court will look at whether the contract includes the following:

• The right of the employer/principal to control the activities of the worker (this is the hallmark of an employee-employer relationship);
• A restriction on the worker to work for others;
• The right of the worker to delegate the performance of the relevant services;
• Whether the worker is required to provide their own tools and equipment;
• How the worker is required to represent themselves to third parties (for example, are they to wear a uniform bearing the company logo?).

Why is this relevant for franchisors?

In February of 2023, the Fair Work Ombudsman (FWO) commenced legal action against 85 Degrees Coffee Australia (85 Degrees), the head franchisor of numerous café’s operated across NSW and the ACT, for underpayment of workers directly employed by 85 degrees’ franchisees.

Despite 85 Degrees not directly employing the underpaid workers, the FWO is alleging that under sections 558A and 558B of the Fair Work Act 2009 (Cth) (FW Act), 85 Degrees, was a ‘responsible franchisor’ which knew or could reasonably be expected to have known that the underpayments were likely to occur.

The outcome of this case should be of particular importance to franchisors, as it represents the first instance where the FWO has alleged that a franchisor is liable for the actions of its franchisees.

Who is a responsible franchisor?

While there has not been any judicial consideration of the term ‘responsible franchisor’ to date, the FW Act defines the term as a franchisor which ‘has a significant degree of influence or control over the franchisee entity’s affairs’.

Franchisors should also be aware that the level of involvement for this type of action does not need to be to the same degree as for other actions for accessorial liability under the FW Act. Franchisors may be held liable for underpayments of workers where they ought to have known the underpayments were occurring.

It is worth noting that in the 85 Degrees case, the FWO is alleging that the franchisor had been on notice for many years about compliance issues, referencing previous instances where the FWO had penalised 85 degrees’ franchisees for underpayments and record-keeping contraventions.

How can franchisors prevent liability?

To avoid any liability for contraventions by franchisees, it is important that franchisors take reasonable steps to prevent contraventions by their franchise outlets by:

• Taking reasonable steps to ensure franchisees understand the applicable legislative requirements;
• Ensuring workers are correctly characterised as employees or independent contractors;
• Making arrangements for assessing compliance;
• Making arrangements for receiving and addressing complaints abouts alleged underpayments; and
• Encouraging franchisee employer’s to comply with the FW Act and other applicable legislation.

In the particular context of characterising workers as employees or independent contractors, it is imperative that you take due care to ensure comprehensive written contracts are put into place between your franchisees and their workers.

How can we help?

If you need in assistance with the steps you can take to protect yourself from liability as a franchisor, our experienced Corporate & Commercial and Workplace Relations teams can provide you with advice and guidance in relation to your obligations and rights.