When an independent contractor’s engagement ends it is not uncommon for them to look back at the engagement and question whether they were, in fact, an employee. With that retrospective pondering comes the question of entitlements and whether there are any employment entitlements they could now claim. These entitlements include accrued annual leave, long service leave, superannuation, redundancy pay and notice of termination.

The Federal Court of Australia (“FCA”) has been faced with this situation recently and the decision has highlighted not only the risks associated with miscategorising an employee as an independent contractor, but also when an employee may be awarded reasonable notice.

Background

The case involved an information technology specialist who was initially engaged by the company as an independent contractor in January 2005. In 2006, as a result of the ongoing nature of the work, and to avoid registering for GST, the specialist was added to the company’s payroll. The specialist was then paid wages with PAYG withholding and superannuation deducted. Various other events occurred throughout the specialist’s time with the company which the specialist pointed to as evidence of his employment status.

In 2020, the company informed the specialist that they no longer required his services and that his engagement would be terminated. The company made a payment to the specialist of:

• five weeks’ notice of termination (paid in lieu);
• 12 weeks’ long service leave; and
• 12 weeks’ redundancy pay.

The specialist was told “as a gesture of good faith for your years of dedication as a contractor to the Company, we will pay you the same amounts that we would pay to our permanent employees in this position despite you being a contractor and therefore not having these entitlements”.

The specialist then filed a claim alleging that he was, in fact, an employee, and he was entitled to various employment entitlements as well as reasonable notice of the termination of his employment.

What did the Court say?

The FCA found that the specialist’s engagement converted from an independent contractor to employee due to a shift in the nature of his role within the employer’s organisation in 2006. The FCA found that the specialist had been engaged as an employee from 2006 until the termination of his employment in 2020.

Accordingly, the specialist was entitled to a range of payments including accrued annual leave, personal/carer’s leave (for absences where he should have been paid) and payment for public holidays.

While the company had paid the specialist five weeks’ notice (the minimum amount required by the NES), in the absence of an express notice provision in a written contract, the FCA found it was appropriate to imply a term of “reasonable notice”.

There have been many cases over the years where employees have been awarded reasonable notice (which usually exceeds the NES entitlement). The specialist argued that he was entitled to reasonable notice of 12 months. However, in the circumstances, the FCA found that three months was reasonable notice. This was assessed having regard to the specialist’s length of service, seniority, age and the ability to find suitable alternative employment. The specialist was also entitled to damages for breach of contract for the employer’s failure to provide reasonable notice on termination of employment.

Key Takeaways for Employers

It is always best practice to commit the terms of an employee’s employment or independent contractor’s engagement to a written contract. But this is not a “set and forget” exercise. The contract should be reviewed and updated on a regular basis, particularly following any significant changes to the position or nature of the engagement. Long serving workers engaged under outdated or informal arrangements are a particular risk category for employers. A well-drafted employment contract remains the best safeguard against costly disputes over notice and termination entitlements.

Further, as this case shows, employers cannot assume that compliance with statutory notice periods will discharge implied contractual obligations. Employers must have regard for an employee’s individual circumstances, the terms of engagement and be alive to the possibility of implied terms.