Director = Independent Contractor? The importance of clearly establishing a working relationship

Independent contractors, employees and directors all have different rights, obligations, roles, and responsibilities within a company. It is incredibly important that individuals, as well as businesses, understand the difference between these different working relationships.

An employee is someone who is employed to work in someone else’s business and generally provides their services exclusively to the employer. The employer is the employee’s boss and controls how, where and when they do their work (so far as reasonable). Employees are entitled to receive the benefit of the National Employment Standards (NES) and have minimum entitlements set by modern awards or enterprise agreements.

An independent contractor on the other hand is someone who works for themselves and provides their services to a range of clients. They operate their own business and are considered to be their own “boss”. Unlike employees, independent contractors to not receive the benefit of the National Employment Standards or any industrial instruments. The term of their engagement is generally set out in a contract between them and the company.

A director is responsible for overseeing the affairs of a Company in accordance with the Corporations Act 2001 (Cth). A director’s main obligations include:

  1. making informed decisions in good faith;
  2. not having a material personal interest in the decision and making it in the best interests of the company;
  3. keeping other directors (if there is more than one director) informed about the company’s financial position and performance; and
  4. making full and frank disclosure about any material personal interests a director may have.

 

The Importance of Entering into a Contract…

Legal and commercial uncertainty arises within a business when merely an oral contract is entered into, opposed to there being clear terms set out in a written contract. This issue was recently examined in the case of Sarah Mandelson v Invidia Foods Pty Ltd, Angelo Sperlinga, Richard Simiane [2023] FWC 50.

In 2021, the sole director of Sarric Pty Ltd, owned and operated Serendipity Ice Cream, sold it to Invidia Foods Pty Ltd after reaching an oral business agreement. The terms of the business agreement included that:

  • if the Director of Sarric Pty Ltd wanted to continue working for Invidia Foods Pty Ltd, Invidia Foods Pty Ltd would employ the Director on a part-time basis; and
  • an employment agreement that was to be signed and returned to the parties.

However, no agreement or contract of employment was entered into.

In reaching its findings that the worker was an independent contractor, the Fair Work Commission affirmed that the principles in the case of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1apply whether the contract is written, oral or some combination of both. Further, the Commission suggested that the “multifactorial approach” which was previously employed created “legal and commercial uncertainty” and the focus in determining a working relationship moving forward is not based upon the terms of a contract that were agreed. Noting that contracts vary in nature, Deputy President Boyce commented that “subsequent conduct may be admissible in specific circumstances for specific purposes – to objectively determine the point at which the contract was formed, the contractual terms that were agreed or whether the contract has been varied or discharged”.

Ultimately, if a Director wants to be labelled as a “Consultant” or “Contractor” rather than as an “Employee”, the Commission reiterated that merely labelling a worker “does not change the nature and content of the parties’ relevant rights and obligations under the contract”.

 

Key Takeaways

  • Relationships between parties will be assessed by the terms agreed between the parties, whether oral, written or a combination of both.
  • Ambiguity and uncertainty are avoided when terms are reduced to writing.
  • Titles and labels are not determinative of a worker’s classification.

 

* This article was prepared with the assistance of Ebony Billett *

 

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