Employee, independent contractor or volunteer? A crucial distinction for Not-for-Profits

Not-for-profit organisations often have people working for them in a number of different capacities. In addition to employees, there could be independent contractors or volunteers.

The critical thing for all employers to know is that it does not matter whether a person is labelled as an employee, independent contractor or volunteer. What matters is the true nature of the relationship. A court could find that a person who is called a contractor or volunteer is in fact an employee.

Whether a person is an employee, independent contractor or volunteer will matter for things such as leave entitlements, superannuation, Federal and State taxes, workers’ compensation and access to the unfair dismissal jurisdiction. It is vital to get the distinction right.

Employee or independent contractor?

Engaging independent contractors rather than employees might seem attractive because independent contractors don’t accrue leave entitlements, aren’t covered by Awards and aren’t able to make unfair dismissal claims.

Wrongly classifying an employee as an independent contractor means that all those benefits are available to the worker and could result in penalties for sham contracting.

The test

When deciding whether a person is an independent contractor or an employee, courts will look at a range of factors in order to characterise the true nature of the relationship. For example:

• the greater the degree of control that an organisation exercises over a person, the more likely it is that the person is an employee
• if a person has an obligation to work, it is more likely that the person is an employee
• if a person is able to delegate work to others under their control outside the organisation, it is more likely that the person is a contractor
• a person who is responsible for providing their own equipment is more likely to be a contractor
• a person who is represented to others as having a connection with an organisation (eg by wearing a uniform with the organisation’s logo) is more likely to be an employee

Current issues involving the employee/independent contractor distinction

Some of the most popular businesses today engage the majority of their staff as independent contractors rather than as employees. Companies like Foodora, Deliveroo and Uber engage their people as independent contractors, or turn the arrangement on its head by operating as service providers to the operators of independent businesses.

A recent decision from the UK held that Uber drivers were in fact employees. If that finding stands, Uber will have to compensate drivers in the UK for unpaid employee entitlements. What might that mean for Uber in Australia?

Third party involvement

The involvement of third parties (such as labour-hire firms or companies offering assistance with implementing independent contractor arrangements) does not guarantee that a worker is an independent contractor.

In the recent Full Federal Court decision of Fair Work Ombudsman v Quest South Perth Holdings, a hotel had converted its cleaners from employees to independent contractors with the help of a company which promised that the conversion would be legally valid. Despite that promise, the cleaners were found by the Court to still be employees of the hotel.

Similarly, in Fair Work Ombudsman v Australian Sales & Promotions Pty Ltd, the Federal Circuit Court held that a fundraiser who had been engaged supposedly as an independent contractor (with the help of a company that offered assistance with independent contractor arrangements) was in fact an employee.

In both cases, the employing organisations were ordered to compensate the employees for unpaid employee entitlements and significant fines were imposed. These cases illustrate the importance of being cautious about engaging individuals as independent contractors. An independent review of the arrangement should always be made first.

Employee or volunteer/intern?

Generally speaking, volunteers and interns are people who work for an organisation without being paid for their work. Volunteers and interns are not employees and as such do not have employee entitlements under the Fair Work Act 2009, they may also not be covered by an organisation’s workers’ compensation insurance.

The main difference between volunteers and interns is that while volunteers donate their time without expecting anything in return, interns expect training or experience in return for their unpaid work.

Where does the boundary between true volunteering and actual employment lie?

Courts may look at a volunteer or intern relationship and determine that the person is in fact an employee who is entitled to be paid. Similar to the situation with independent contractors, the courts will look at the true nature of the relationship.

The legal test – volunteers

The following factors may indicate that a person is not a genuine volunteer:

• the person is being paid for the work undertaken (even if that is only an ‘honorarium’)
• there is an obligation for the person to attend work

The more formalised the arrangement is, the more likely it is that a person will be considered an employee rather than a volunteer.

The legal test – interns

The key elements of a genuine internship are that:

• the intern does not undertake any significant ‘productive’ work
• the main benefit of the arrangement is to the intern
• it is clear that the intern is receiving meaningful training

If these elements are not present, the person may instead be an employee and will have a right to be paid for their work and a right to other employee entitlements under the Fair Work Act 2009.

Not-for-profits – Beware!

To say with certainty that a person is an employee, independent contractor or a volunteer can be difficult but the consequences of wrongly classifying a person carries significant financial risk to the organisation.

For more information about this topic, please contact our Not-for-Profit team.