"Gaping hole" in employment relationship leads to the Fair Work Commission finding CEO an independent contractor

In brief - The Fair Work Commission (FWC) has delivered another judgment analysing the distinction between employees and independent contractors. 

Sarah Mandelson v Invidia Foods Pty Ltd, Angelo Sperling, Richard Simiane [2023] FWC 50, re-examines the topic after the High Court's recent decisions on this area of law of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek).

Facts

Ms Mandelson, the Applicant, was the sole director of Sarric Pty Ltd (Sarric). Sarric operated Serendipity Ice Cream (Serendipity), a food vendor in Sydney. Serendipity was sold to Invidia Foods Pty Ltd (Invidia) in February 2021 under a business sale agreement.

The business sale agreement included a term that if Ms Mandelson wanted to continue working for Serendipity, Invidia would enter into a written employment agreement with her and continue to employ her on a part-time basis after the purchase. 

A copy of the employment agreement was attached as a schedule to the business sale agreement. Whilst Invidia executed the employment agreement, Ms Mandelson never executed the agreement. After the sale was completed Ms Mandelson continued to work for Serendipity, assisting with product development and expanding the business' customer base.

From 31 May 2021, Ms Mandelson worked for Invidia for 8 months. Ms Mandelson retained her title as CEO of Serendipity, the same title she held before the execution of the business sale agreement. Ms Mandelson issued monthly invoices for the work she undertook for Serendipity. During this period Ms Mandelson was not paid wages or provided with statutory entitlements such as annual leave.

On 1 February 2022, Invidia told Ms Mandelson that her consultancy had ended effective immediately. Ms Mandelson subsequently filed a general protections claim involving dismissal with the FWC.

The FWC determined that there was no employment agreement between the parties

The failure of Ms Mandelson to return a signed employment agreement lead to contractual terms being agreed upon between Ms Mandelson and Invidia. The FWC found these terms established an independent contractor and principal relationship, rather than a relationship of employment. Deputy President Boyce noted that there was a "gaping hole" in Ms Mandelson's evidence because she was unable to explain what happened to the partially-executed employment agreement.

Deputy President Boyce also commented on the 'multifactorial test' which was the relevant legal test prior to Personnel Contracting. Deputy President Boyce noted the test "in many ways impinged upon one party’s legitimate contractual freedoms and encouraged or enabled the other party to depart or walk away from promises and agreements otherwise made and accepted on a bona fide basis".

Deputy President Boyce clarified that after Personnel Contracting, the Commission was now required to focus "upon the terms of a contract that were in fact agreed and the inescapable acknowledgement of same".

Deputy President Boyce specifically cited Justice Gordon's judgment in Personnel Contracting, where Her honour held: "where the contract is oral, or partly oral and partly in writing, 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".

The FWC found it was an agreed term of the oral contract that Ms Mandelson was to issue invoices to Invidia for the work she undertook. However, there were no terms specifying how Ms Mandelson was to perform her work or that she would provide her own equipment for her consulting work. Deputy President Boyce determined the oral contract between the parties contained "contractual terms that bear all the hallmarks of an independent contractor and principal relationship". 

Takeaways

This case applies the principles of Personnel Contracting which confirmed:

• Contracts for employment and/or independent contracting, are to be interpreted in the same way that contracts are generally interpreted under the laws of Australia.

• The classification of the relationship that exists between parties, whether employment or independent contractor and principal, is to be ascertained objectively by reference to the terms of a contract (identifying the rights and obligations of the parties under the contract), and not by reference to questions of fairness or the manner in which subsequent conduct and performance might undercover a ‘reality’.

• The common intention of the parties to a contract (as to the type of legal relationship they intended to create), whilst for objective determination, in the normal course, ought not to be retrospectively overridden or otherwise restricted.

This case demonstrates the importance of fully executed written employment agreements between employees and employers. A CEO being classified as an independent contractor by the FWC indicates the lack of importance of staff titles and instead highlights the value of the substance of each contract.