Contractor or employee? Defining workers in the gig economy


A former Foodora Australia delivery rider, Joshua
Klooger, recently won an unfair dismissal claim despite a service agreement
that classified him as an independent contractor. We explore the implications
of the case.

Pivotal to
the Fair
Work Commission’s decision
was the classification by Foodora of Mr
Klooger as an independent contractor. The “Corporate Rider” was employed under
a service agreement titled “Independent contractor agreement”. At the initial
rate of $14 per hour and $5 per delivery, corporate riders would log into an
app (the shifts app) which, at predetermined times each week, displayed
available shifts. The shifts identified start and finish times and a specific
geographical location where the delivery work would be undertaken. The riders
could then decide what shifts they wanted. The riders undertaking shifts were
provided with a Foodora branded insulated box, and other Foodora branded attire
and equipment. Once the shift started, the riders would receive notifications
through the app of an order to be picked up from a restaurant. Once the order
had been collected, the rider would confirm the pick up, then the deliveries app
would advise the delivery address.

In 2016, Mr
Klooger’s friend and fellow Foodora delivery rider had his visa cancelled. As a
result, Foodora suspended the friend’s access to the shifts and deliveries app.
Instead, Mr Klooger gave his friend his access to the Foodora app allowing him
to select and fulfil shifts. Over time, three other individuals did the same. Mr
Klooger would reconcile his account, deduct tax and a further 1% for his
involvement, then pay the substitutes. While the Foodora contract allowed for
substituting, it required prior written consent. However, when Foodora became
aware of the substitution scheme it took no steps to stop it and instead
commended Mr Klooger for his “entrepreneurial initiative.”

The rates Foodora
paid to riders and the way in which shifts were allocated changed over time. In
July 2016, the hourly rate for new riders/drivers was reduced to $13 plus $3
per delivery, and a $1 per delivery payment for Friday, Saturday and Sunday
night work. Towards the end of 2016, Foodora removed the hourly rate for new
riders completely, fixing a flat $10 per delivery payment. The flat rate was
progressively reduced further and by February 2018, the rate for new delivery
riders had dropped to $7 per delivery. In addition, a new “batching system” was
put in place which established a fortnightly assessment process that ranked
individual delivery riders and offered shifts according to rank. The highest
ranked riders were offered shifts well before lower ranked riders.

determining whether a worker is a contractor or an employee, the courts say “…
the distinction between an employee and an independent contractor is rooted
fundamentally in the difference between a person who serves his employer in
his, the employer’s business, and a person who carries on a trade or business
of his own.”

The factors
identified by the commission in this case are helpful indicators:

How work is fulfilled. The commission determined that
while the riders had the choice to accept the shifts, the shift start and
finish times and geographical locations were fixed by Foodora. Despite the
ability to self-select shifts, the commission saw that the “process for
engagement is similar to a variety of electronic and web-based systems that are
frequently used to advise, in particular, casual employees of available shifts
that are offered.” While the system is not as prescriptive as naming particular
employees, the commission saw the results as essentially similar.

What the contract said. While the Foodora service agreement
attempts to establish a relationship of principal and contractor, the
commission found that, “The service contract contains many provisions which are
similar in form and substance to those that would ordinarily be found in an
employment contract document.” These included clauses dealing with rostering
and acceptance of jobs, the attire to be worn when on shift, the specific
nature of the engagements to be undertaken including requirements that the
contractor is to comply with all policies and practices of the principal.

Who had control? Foodora had “… considerable capacity to
control the manner in which the applicant performed work.” The commission also
noted that the batching system meant that to maintain a high ranking, riders
had to perform a certain number of deliveries during a shift, work a minimum
number of shifts in a week and work a number of Friday, Saturday and Sunday

Generating business. In Foodora’s favour was the fact that
it did not prevent its riders from working for other companies or delivery
platforms. However, in this case the commission compared this ability to casual
restaurant staff working for more than one restaurant.

Is the contractor operating separate to the principal? One of the aspects of many
contractor versus employee cases is whether the individual holds themselves out
to the public as a separate business in their own right – do they have their
own place of business. In this case, Mr Klooger worked exclusively for Foodora.

Supply of tools of trade. Mr Klooger’s only investment as a
contractor was his bicycle which he also used privately. An asset which the
commission points out does not require a high degree of skill or training.

Delegation of work. One of the factors that determines whether
someone is a contractor or employee is their capacity to delegate work to
others. The substitution scheme operated by Mr Klooger was a significant factor
in this case as he was delegating work. However, in this instance, the
commission saw that the substitution scheme was a breach of Foodora’s own service
agreement not evidence of delegation despite their eventual acceptance of the
scheme by Foodora.

Identifying as Foodora. Riders had to identify as being
from Foodora. Clause 4 of the service contract established an expectation
riders dress in Foodora branded attire, and utilise equipment displaying the
livery of the Foodora brand.

Tax, leave, and remuneration. As Foodora classified the riders
as independent contractors no tax was deducted from payments made. Riders were
not entitled to holiday or sick leave. When Foodora paid Mr Klooger, they would
generate a recipient created invoice. Once Mr Klooger had reviewed the invoice
and made any corrections, the invoice would be paid.

Reputational damage. If the riders did not perform to the
standard expected by customers, it was Foodora that faced reputational damage
not the riders.

While Mr Klooger
won his case and was awarded $15,559, Foodora appointed voluntary
administrators on 17 August 2018, well before this case came before the
commission. The commission pursued the case on public importance grounds.

Foodora is
by no means the first company to fall foul of the definition between contractor
and employee; there are a litany of companies that have stepped over the
definitional boundary but it is one of the first to test platform based work
relationships in the gig economy.

not all gig economy businesses engaging with workers using a platform are at
risk. In December 2017, an unfair dismissal claim against Uber was dismissed. Many
of the factors evident in the Foodora case were not evident in Uber’s model.
Interestingly, the commission noted that current laws that determine work for
wages and the nature of employment relationships “… developed and evolved at a
time before the new “gig” or “sharing” economy. It may be that these notions
are outmoded in some senses and are no longer reflective of our current
economic circumstances. These notions take little or no account of revenue
generation and revenue sharing as between participants, relative bargaining
power, or the extent to which parties are captive of each other, in the sense
of possessing realistic alternative pursuits or engaging in competition.
Perhaps the law of employment will evolve to catch pace with the evolving
nature of the digital economy.”

the commission’s warning on the gig economy was the 2017
Senate report
 that asked
whether the gig economy is “hyper flexibility or sham contracting.” In addition
to exploring the model of organisations like Deliveroo, the Senate committee
demonstrated how apps like AirTasker are being used by businesses for ongoing
roles without the burden of employment. The fee Airtasker takes is charged only
to the worker. Posters deposit payment into an account managed by the company,
and Airtasker then releases 85% of that money to the worker, once the job
poster declares the work to be complete.

What to do if you engage contractors

If you engage
contractors, it is essential to get the facts of the relationship right.
Business owners need to take a proactive approach to reviewing arrangements to
ensure that the business is not exposed to material liabilities. Key factors

  • Whether the work involves a
    particular profession or skill set.
  • The level of control the contractor
    has over how the contract is executed.
  • The ability of the contractor to
    delegate work to another person.
  • Whether the contractor supplies his
    own tools or equipment.
  • Whether the contractor has his own
    place of business.
  • The contractor’s ability to generate
    goodwill or saleable assets during the course of the contract.
  • How the contractor is paid (for
    hours worked or a result).
  • The level of risk the contractor
  • Whether the contractor is
    independent or in reality, simply 'part and parcel' of the organisation they
    contract to.

No single
factor is determinative; it is the weight of evidence, on balance, across all
of the factors.

The implications of
misclassifying a worker

implications of misclassifying a worker go well beyond industrial relations. If
a business misclassifies an employee, it impacts on superannuation guarantee
(SG), PAYG withholding, workers compensation, and payroll tax. These
entitlements will often need to be met even if the misclassification was a
genuine mistake.

For SG
obligations, there is no real time limit on the recovery of outstanding
obligations. However, the ATO will generally only go back 5 years unless the
individual employee can prove an entitlement beyond this point. Remember that
employers that fail to make their superannuation guarantee payments on time don’t
just pay the outstanding superannuation but are subject to the SG charge (SGC)
and lodge a Superannuation Guarantee Statement. SGC is made up of:

  • The employee’s
    superannuation guarantee shortfall amount;
  • Interest of 10% per annum;
  • An administration fee of $20
    for each employee with a shortfall per quarter. 

normal superannuation guarantee contributions, SGC amounts are not deductible
to the employer, even when the liability has been satisfied.

Getting it wrong can be a very costly exercise particularly if the error is evident over a number of years.

If you are uncertain about the classification of existing or future contract employees, give Stephen Maze a call on +61 2 9221 6666 or drop him a line.