One Business or Two? Revisiting the importance of goodwill in considering employment or independent contractor status

We have been assisting several clients recently with setting up contracts for new workers in single practice businesses like dental, medical, allied health and alternative therapy practices. It is critical to get these contracts right from the get-go to ensure compliance with relevant laws and avoid headaches if the relationship turns sour.

The key question is determining whether the worker is an employee or independent contractor. This question is more complex in businesses where the business of the “Principal” is the same as the work the contractor is engaged to perform – think dentist in a dental practice!

Helpfully, the Full Federal Court has already considered this issue.

Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118

The Full Federal Court’s decision in Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118 (Moffet) offers valuable insight into the cumulative factors that determine the true substance, practical reality, and overall nature of a working relationship – the “whole relationship” test used to assess whether a worker is an employee or an independent contractor.

At its core, the question of the nature of the engagement can be boiled down to an assessment of whether the worker is operating their own independent business, or if they are serving as a part of another.[1] If it’s the latter, they’re more likely to be found to be an employee under the Fair Work Act 2009 (Cth) (FW Act).

However, it can become complicated in single-practice environments. For example, when a dental clinic engages a dentist, or a physiotherapist engages another physiotherapist, as an independent contractor to work in their clinic. While this is common in the allied health and medical sectors, if only one business is being conducted, and it is that of the Principal, it may be more difficult to avoid the conclusion that an employment relationship is present.

Moffet offers some clarity on this issue. The Full Court said that in single practice environments, it’s important to ask whether the worker in question is creating goodwill in their own name or business. That is, does the worker gain any long-term benefit or saleable asset from the work they’re doing? If not, the lack of goodwill could be a factor weighing in favour of an employment relationship.

The decision in first Instance

Dr Moffet, a practicing dentist, originally operated his dental practice through a family trust. In 2007, he sold the practice to Dental Corporation Pty Ltd (Dental Corporation), an entity acquiring and managing dental practices. As part of the arrangement, Dr Moffet entered into a Services Agreement under which he continued providing dental services at the practice as an independent contractor.

The Services Agreement provided Dr Moffet considerable autonomy: he could determine his own hours, set patient fees, and take leave at his discretion. He also maintained his own professional indemnity insurance and was not paid superannuation.

Following his resignation in 2014, Dr Moffet claimed employment entitlements to annual leave and long service leave, arguing that he wasn’t an independent contractor, but was in fact an employee under the FW Act.

He also claimed an entitlement to superannuation contributions under the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGA Act).

The trial judge rejected the employment claim but found in his favour on the superannuation issue.

Both parties appealed.

The Appeal – The Full Federal Court’s Decision

The Full Court – comprising Justices Perram, Anderson, and Jagot – dismissed both appeals, effectively upholding the trial judge’s determination. However, the Court took issue with the trial judge’s failure to consider a key factor to determine the nature of the engagement which was the ownership of goodwill.

In determining whether a worker is an employee or independent contractor, the Court found that it is necessary to assess who owns the goodwill associated with the services provided.

This analysis drew on principles from Hollis v Vabu and ACE Insurance Ltd v Trifunovski,[2] in which the High Court and Federal Court respectively found that the lack of independent goodwill pointed towards a relationship of employment.

In Moffet, despite his tax returns indicating that he operated as a business separate to that of Dental Corporation (claiming deductions, describing himself as a dental surgeon), the Court found insufficient evidence that Dr Moffet had retained any separate goodwill in the dental practice.

Ordinarily, this would be a factor weighing strongly in Dr Moffet’s favour, because it would suggest that only one business was being conducted, and that Dr Moffet was working within it as an employee.

However, the Full Court ultimately did not find an employment relationship, citing the following factors as outweighing the factors pointing towards an employment relationship. The factors favouring his status as a contractor included:

• He could work when and as much as he pleased;
• His income was tied to the practice’s performance; and
• He underwrote minimum revenue for Dental Corporation.

This Decision reinforces that no single factor is determinative of the nature of engagement, whether it be autonomy, payment method, or ownership of goodwill. However, in situations where the Principal owns the premises, pays support staff, manages branding, and captures all the goodwill, there is a strong inference that the individual may be an employee.

Implications for your business

For contracting arrangements in single practice environments, the question of whose business is really being run remains critical. While Dr Moffet was ultimately held not to be an employee under the FW Act, the decision underscores the need to:

• Review contractor agreements to ensure consistency with the intended legal relationship;
• Consider who is generating the goodwill. If the contractor does not generate their own goodwill, employment risks increase; and
• When engaging contractors, ensure independence is substantive, not nominal. Factors weighing in favour of a contractor engagement include practical control over work patterns, the ability to delegate, discretion regarding fee-setting, and risk exposure.

Getting the engagement wrong can expose your business to legal and financial risk including protracted disputation and civil penalties as well as liabilities for back payments and interest.

For tailored advice on this issue, please contact our Employment, Discrimination and Equality team by emailing Kate: krowland@coulterlegal.com.au or calling her on 03 5273 5283.

[1] Jiang Shen Cai trading as French Accent v Rozario [2011] FWAFB 83307.

[2] Hollis v Vabu Pty Ltd [2001] HCA 44; ACE Insurance Ltd v Trifunovski [2013] FCAFC 3.