The Employment Demon

This book is dedicated to everyone who cherishes independence

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ACKNOWLEDGEMENTS

Ideas are seldom the product of a single mind.  We all draw upon the history, ideas and standards of the society which surrounds us, coupled with our personal experiences.  I have my parents to thank for raising a family in which the key objective was defining one's individuality within a framework of strong interpersonal and family relationships.  I have my wife and daughter to thank for never letting me forget the joy of working together.

The ideas for this book emerged over my lifetime to date.  The crafting of the words has been an eight-year exercise heavily dependent on two terrific friends, Michael James and Chris Ulyatt.  They have pushed me, prodded me, guided me and, most importantly, pulled me back on track when I was running in odd directions.  Of course, final responsibility for the contents of this book rests with me.

Richard J. Wood
June 2005

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CONTENTS

Acknowledgements

Introduction

1. The Employment Demon

   The nature of employment -- the common law -- the nature of contracts -- the nineteen indicators of employment -- illustrative court cases:  Mayne Nickless, Crisis Couriers and others -- the US experience -- employment tests:  how universal? -- employment and control

2. Damning the Demon

   Independent contracting versus employment -- Queensland's notorious Section 275 -- Queensland shearers speak out on independent contracting

3. Tax

   Employment and income tax -- Australia -- United Kingdom -- independent contracting and tax -- more Australian history -- PAYG:  a step forward -- a residual problem:  personal services income

4. Employment and Regulation:  Changing to What?

   Employment and non-tax regulation -- vicarious liability -- illustrative court cases -- discrimination, sexual harassment and unfair dismissal -- examples and comment -- the contract at will and its demise -- the role of the ILO -- a worrying development:  corporate criminality

5. To Work We Go;  To War We Go:  The Firm

   The nature of the firm -- the centrality of employment -- workers, bosses and managers -- Ronald Coase and transaction costs -- Elliott Jaques and employment bureaucracies -- employee loyalty -- the myth of the employer -- accountability -- the "independent employee" -- managers and motivation

6. Labour Regulation

   The hallmarks of labour regulation -- labour regulation versus commercial regulation -- labour regulation and justice -- the pivotal case of Electrolux -- state theft of the employment contract -- the view from the academy:  "wage slavery" -- free markets and employment -- challenges to the employment contract

7. Markets in the Firm

   The problem of the firm -- free markets and the firm -- free markets in the firm:  franchising and other arrangements -- examples and comment -- a startling example of markets in the firm:  Koch Industries

8. Values

   Democracy and equality -- political and economic freedom -- the power of the commercial contract -- individuals and employment -- the values revolution -- the death of employment

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INTRODUCTION

Bear in mind that I can treat anyone exactly as I please.

-- Emperor Caligula (AD 41) (Suetonius, The Twelve Caesars)

WHAT IS POWER?

In 2001, a 60-second television commercial appeared on televisions in the homes of many nations worldwide.  It was not directed at the ordinary consumer but at the comparatively small number of heads and senior executives of multinational corporations who were sitting at home with their families in "relax mode" after yet another hectic but power-filled day.

The advertisement depicted throngs of cheering, arm-waving crowds;  masses of people surging with outstretched arms reaching for one spot.  The grand stone temples identified the scene as that of ancient Rome.  Chariots mounted by armour-suited soldiers carrying the eagle-topped staff of Roman military authority stopped as one and wheeled in salute.  From the right-hand corner of millions of television screens the back head of a male figure emerged, turned and surveyed the scene.  Adorned as it was with a half-wreath of golden leaves, it was clearly that of the emperor.  The face exuded the arrogant, self-satisfied, assured but benevolent look of one who knew he had a vast empire at his single control.  At that point the text and voiceover of the advert delivered its message:  "How can you control all this without effective systems?"

It was an advert for one of the rising multinational computer software companies eager to attract the interest of top decision-makers in large corporations around the world.

It was an advert about power and about control.  It was about employers and employees.

In 60 seconds, the advertisement depicted the single most important image of how twenty-first-century society conceives of the modern corporation.  Business is a form of authoritarian but benevolent government in which an all-powerful head rules and controls a vast organisation.  The adoring employees know their place in a strictly hierarchical, machine-like, command-and-control system.  The people adore and obey the remote but god-like figure at the head, the employer.  In this vision, corporate business is like the business of ancient Rome:  warfare and the glory of victory!

No matter how erroneous or even distasteful this vision may seem to some in the 21st century, it remains the single most important idea that determines the attitude to business of individuals, society, government, and business itself.  It influences the legislation and regulation under which business operates, and has a vast impact on the structure of society.  This vision dominates how formal people-management dynamics operate inside firms, influences how our careers are structured, and affects our sense of self-worth and happiness.  It has profound impact on the psychology of the stock market and how companies and individuals make money.  It is a vision that came fully into focus midway through the twentieth century by the victory of the capitalist war machine that conquered tyranny in the Second World War.  It is a vision of success made possible by discipline.

But if that vision has succeeded, it has also reached its limits -- for it is also a flawed vision that leads people to underperform throughout their working lives.

This book is mostly about power -- the exercise of it by one individual over another in the work environment.  It is about the social, organisational, management and legal structures which create and prop up the powerful in our daily working lives.  But it is also a book about a belief, namely, that concentrated power is on the wane because it holds back social, economic and personal performance.

In particular, this book is about employment or, rather, the very specific legal, institutional and relationship nature of the employment contract that dominates work.  It is the employment contract that sustains the flawed vision and practice of command-and-control business in a power-driven world.  The legal idea and behavioural application of employment distorts relationships inside firms.  Every day that we go to work, employment causes us to underperform, to underachieve, and to remain unfulfilled.  Employment as a legal and operational force is a glue that holds power-driven organisations together, yet it also causes them to underperform.

If, as individuals, businesses and societies we are to move forward, we must recognise the nature of the employment contract.  Where we reject employment, we find new liberty, strength, equality and self-worth.  Societies function better without employment.  Businesses are more successful without employment.  Individuals are happier without employment.  Yet working without being employed is not easy.  In fact, non-employment goes against the natural grain of some powerful human instincts.  But the revolt against employment, against concentrated power, is a sign that we are becoming more civilised.

Slowly, employment is being rejected -- although its rejection is unrecognised and little discussed.  Its rejection is witnessed in the slow but inevitable insertion of market-based principles into the internal workings of firms.  It is witnessed in the huge rise in the number of people who earn their living as independent contractors, franchisees and small- and micro-business people.  It is witnessed by the millions of people who are "employed" in firms but feel in their hearts that the relationships are sour.  However, even as this transformation is happening, we hardly understand what it is we are changing from or into.  But the change is guided by a significant legal factor.  We use (and want to use) the liberty available through the commercial contract to guide our economic actions.

That is the topic of this book.

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CHAPTER 1

When human beings relinquish their individuality and identity of their own volition, they are also relinquishing their claim to being human.

-- John Paul Getty 1892-1976 ⁽¹⁾

Every day when we go to work to be employed, we enter a legal environment in which we voluntarily give up, in exchange for money, our basic human right to control ourselves.  Yet, as societies and as individuals, we have trained ourselves to ignore this essential fact.  We prefer to pretend that our human dignity, our individuality, our identity is intact, whereas in fact it is formally stripped from us.  The great nineteenth-century American jurist Oliver Wendell Holmes explained it this way:

There are few employments for hire in which the servant does not agree to suspend his constitutional rights of free speech, as well as idleness, by the implied terms of his contract.  The servant cannot complain, as he takes the employment on the terms which are offered to him. ⁽²⁾

Holmes's words, written in 1892, have not dated.  No matter how much the convoluted processes of the law in the twentieth century may have pretended to alter this legal reality, Holmes's words still set out the core facts about the employment relationship and the expectations constituted within the law.

During the twentieth century, the managerial idea and practice of the firm was wedded to this legal idea of employment.  It continues to be so today, certainly in theory and most predominantly in practice.  The legal concept of employment and the dominant economic idea of the firm are mutually dependent.  Most importantly, this legal idea of employment has a vast impact on how we relate to each other in our daily working lives.  To understand employment is to begin to fathom our working relationships.  And in the quest to understand economics, the behaviour of individuals, firms and economies cannot be understood without an appreciation of the centrality of this legal idea and practice of employment.

Employment is a specific type of legal contract.  Its essence is that the employer has a legal "right to control" the employee.  This legality is reflected in observed behaviour.

As the twentieth century turned into the twenty-first, everyone thought they knew what employment was -- namely, a simple work-for-pay relationship.  The International Labor Organisation (ILO) ⁽³⁾ uses the word with this narrow meaning, as do statisticians and economists.  But talking of employment as a work-for-pay relationship is imprecise and incorrect.  It is a source of significant misunderstanding of human behaviour at work and badly distorts labour regulatory approaches.

In explaining the modern legalities of employment, it is imperative to be precise if clarity and accurate comprehension are to be achieved.  The historical context of employment must be understood because it is integral to the modern meaning of employment.  Further, it is necessary to study employment in two separate but related contexts.  The first is to understand the employment contract as it stands on its own and unrelated to statute law that surrounds it.  Then it is necessary to understand how statute law (that is, law created by parliaments) has changed, moulded and modified the ways in which the employment contract operates in our daily lives.  The first few chapters of this book undertake that task.

This chapter looks at the employment contract as it would live if it were untouched by the statute laws of the second half of the 20th Century.  The second chapter looks at the reverse of the employment contract, that is, the commercial contract and how people supply their labour through the commercial contract.  Chapters 3 and 4 look at how statute laws have layered themselves upon the employment contract to create significant social policy distortions which affect all of us in very real ways.  Importantly, however, these layers of statue law have not changed the essential features of the employment contract.

The starting point and the focus of this chapter is the common-law definition of employment, which applies in all nations that are governed by the common law.  Unlike statute law, the common law evolves over time as a result of judicial decisions.  Although the common law has its origins in the English legal tradition, the common-law definition of employment extends beyond the English tradition and the concepts underpin labour law in most countries, despite national variations.  (This is dealt with in greater detail in the section "How Global are these tests?" later in this chapter.) Under the common law, employment consists of a specific type of contract.  Evidence that such a contract exists consists of certain kinds of human conduct and the commercial relationships that exist inside firms.  A common-law judgment that an employment contract exists thus amounts to a finding that individuals are behaving in a particular way.

WHAT IS THE COMMON LAW?

Common law is broad and covers many areas other than employment.  Common law is not legislation created by elected representatives, although legislation often uses common law as its starting point.  Criminal law has centuries of common-law principles embedded in it, protecting such rights as trial before a jury and the presumption of innocence.  Common law is thus one of the core protectors of often taken-for-granted human rights.  It is a set of guiding legal principles governing human relationships that has slowly evolved over centuries of social development, and so reflects both past and present social practices.  Under the common law, judges have the power seemingly to override the intention of a legislature as embodied in statute law, but only if the legislature has expressed its intent in an apparently illogical, contradictory or confused way.  A legislature that seeks to subvert or change common-law principles will find itself opposed by centuries of accepted legal understandings.  But inevitably it is the people who protect common law.  The people will reject legislatures that undermine the common law, not because they have a formal understanding of the law but because they intuitively understand it as "common sense".  Most legislation is consistent with the common law because legal terminology normally consists of specific common-law definitions.  The common law is thus the chief protector of the people against the ever-present threat of the tyranny of the legislature and of the excessively powerful.

WHAT IS EMPLOYMENT?

Under common law, the word "person" can be used to refer to individuals, partnerships (two or more individuals), corporations and associated trusts.  Contracts between persons can thus be contracts between individuals, between corporations and individuals, between trusts and corporations, and so on.  But what is unique about employment is that one party to the employment contract must be an individual natural person.  This restriction is based on common sense.  An individual, a corporation or a trust can be an "employer", but only an individual flesh-and-blood human being can be an "employee".

So employment is a specific type of contract between an individual, a partnership, a corporation or a trust on the one hand, and an individual on the other.  Under common law, a contract between two corporations or between a corporation and a trust is always a commercial contract.

In its broadest terms, the specific contract that is employment is a modification of the historical master and servant relationship.  It is a contract that gives the employer a "right to control" the employee.  But what does this "right to control" mean?  Put simply, it means that the individual who is the "employee" does not have the right to control the terms of the contract.  The right to control the terms of the contract rests at law with the person who is the "employer".  The "right to control" employment implies, suggests, or means that "employees", that is, individuals who normally are thought to control their own actions, do not have the right to control their own actions.  Their actions are potentially under the control of someone else.  When stated as simply as this, employment can appear as an affront to the dignity of human beings.

Compare this with the commercial contract, under which each person in a contract relationship has an equal legal right to control the terms of the contract.

This basic difference between the two contract types -- employment and commercial -- has huge economic and social implications which explain key social dynamics.

When employment exists, the legal understanding and the behavioural fact is that the employee does not have the right to control his or her own physical and psychological self.  The right to control is transferred from the individual to the employer.  Even if actual control of the employee does not occur, or appear to occur, or is constrained, it is the legal right to control that defines the employment contract.  It doesn't matter if the two persons consciously want this transfer of control;  if they behave as if control has been transferred, they will in effect enter an employment contract.  With employment, the employer makes decisions and the employee functions only within the parameters set by the employer.  In its crudest understanding, an employee is a piece of machinery, no longer a self-controlling person but instead a modified version of a wage slave!  The acceptance of money by an employee in the working relationship called employment is the selling of one's individual legal right to self-control.  It is the selling of individuality.

WHAT IS A CONTRACT?

For employment to exist, however, a contract must first exist and contracts exist only if specific human conduct is evident.  For example, two people standing in the street talking have a human relationship but not necessarily a contract.  The same two people, however, can create a contract between themselves.  No lawyer need be present and nothing need be on paper.  But five key pieces of behaviour must occur.  The persons must intend to create a legal relationship -- say, one wants to sell a book and the other wants to buy a book.  There must be clear terms -- namely, that a particular book is for sale.  There must be offer and acceptance -- one offers to sell the book and the other person agrees to purchase it.  There must be "consideration", that is, the legal idea of payment, which may involve money or bartering or something else!  There must be genuine consent -- that is, both parties understand that there is a contract and want the sale to occur.

These key common-law contract principles ensure protection for all parties.  For example, if the persons were in dispute after the book had been sold and went to court, a court would review the alleged contract between the parties, and if any of the key elements of a contract were missing, the court could declare that no contract existed.

The upshot is that people can, and most normally do, have relationships without creating contracts, but if people do create contracts, they inevitably have some type of relationship.  The two people who were involved in the book transaction may not have liked each other, or one may have felt sorry for the other, or they may have been blood relatives.  These are all human relationships that inevitably involve feelings and all the other psychological possibilities that exist within human relationships.  But the mere fact of a human relationship does not of itself cause a contract to exist.  Specific conduct must have occurred and be evident.

The first question, then, is this:  if people have a contract, what type is it and how does that contract affect or reflect the relationship they may have?  With employment, the relationship is quite clear.  The employer has "the right to control" the employee.  The employee sells his or her right to self-control.

HOW DO WE KNOW WHEN AN EMPLOYMENT CONTRACT EXISTS?

Every day of every year in every country, countless millions of people enter and exit contracts without the formal institutions of the law ever becoming involved.  Many of the contracts are contracts of employment.  In a tiny minority of cases, the persons find themselves in dispute and choose to go to the courts for settlement.  By looking at the court settlement of these disputes, a clear understanding of employment can be gained because the task of the courts is to examine the details of behaviour before making a decision.

Before considering the specifics of any legal contract dispute in a work situation, the courts always first consider the contract form to ascertain whether it is employment or some other form of contract.  They look for what they call a "contract of service", which is the universal legal name for employment.  Employment is sharply distinguished from the commercial contract, which is called a "contract for services".  A small and simple change of preposition and from singular to plural identifies the core of employment and its alternative, the commercial contract.  But at the same time, it masks a vast difference between the behaviour and human relationships involved with each type of contract.

Ascertaining the correct contract type is crucial because of the different human relationships and obligations that exist within the different contract types.  When a relationship is being investigated by the courts, the judges conduct a series of tests, effectively a series of "swinging pendulums" designed to establish whether employment exists.  If employment doesn't exist, but a contract is still present, they will find that the opposite of employment exists, namely, a commercial contract known as "independent contracting".  By studying how the courts distinguish between employment and independent contracting, we can come to a practical understanding of employment.  This is easily done by examining real-life court cases and the way in which judges arrive at their judgements.

In determining the existence of an employment contract, the courts undertake a detailed investigation of the specific circumstances they have been asked to consider.  The parties come together in court and are questioned by legal counsel before a judge or judges.  The process is usually expensive but has the objective of establishing whether the alleged employer had a "right to control" the alleged employee.  The judges apply clear tests which that are broadly consistent across nations (although variations in content and interpretation exist:  for example, some tests are held to be more important in some countries than in others).  In each case, the judges have the task of making a decision based on the balance of the evidence brought before them, given the particular circumstances and in the light of the full matrix of tests.  Inevitably, the judges find a series of behaviours that indicate employment and other behaviours that indicate its opposite.  Ultimately, they must make a decision based on the balance of evidence.

The courts use up to 22 possible major indicators which, in one way or another, dissect control at work into its ingredients, and apply tests against each ingredient.  These indicators have been identified through the study of hundreds of court decisions.  The major indicators are as follows:

• What is the degree of control?
• What is the style of remuneration?
• Who provides equipment?
• Is there an obligation to work?
• Can work be delegated to someone else?
• What is the intent of the parties?
• Who determines the hours of work?
• Is money deducted for holidays and leave arrangements?
• How is deduction of tax handled?
• How do government regulations apply?
• What are the contractual obligations?
• How is the work performed?
• Who takes the commercial risk on the end product?
• Who must rectify poor work?
• Who pays for the expenses of production?
• How is the job appointment handled?
• What are the powers of dismissal and termination?
• What do written documents say?
• To what extent is a person integrated into the business?

This broad set of indicators is not used in its entirety in every case or in every country.  What occurs is that a selection of indicators from this list is used, but the intent of the investigation is always the same:  to establish whether one person has a right to control an individual in the work situation.  To understand these indicators and how they all lead to the one destination of "control", it is necessary to look at them individually.

THE TESTS OF EMPLOYMENT

One:  What degree of control does the alleged employer exercise over the alleged employee? A court will inquire into how much discretion individuals may have over the performance of their work.  Are they under supervision on a constant basis?  Are they told how and when to do a task or are they pointed to the end result required and left to achieve it?  Take, for example, a jewellery manufacturer who has two people working for the business.  One person may assemble bits to make a standard design to the exact requirements of the manufacturer.  He is told the hand movements required and what type of flux to use, and production is done on a conveyor-type "line" according to a strict schedule as to when lunch and other breaks can occur.  A supervisor oversees his performance at every stage.  This person would profile as being in a "controlled" relationship.  If, by contrast, the other person was shown the end product needed and given the bits to be assembled, but could come and go as she saw fit, and supervision was limited to checking the end product for compliance with the required standards, this person would profile lower on the "control" scale.

Two:  What is the mode of remuneration? If the first person working as a jeweller was paid on an hourly rate, was paid overtime rates, had an allowance for using hot flux, had holiday pay deducted from his hourly rate and took holidays at a time that suited the company, this would indicate control and the person would profile toward being an employee.  If the second person received a flat hourly rate that included an amount to cover holidays, took holidays solely at her discretion, and received a bonus for each and every product finished to specification, this person would tend not to profile as an employee because she tended to control herself.

The remuneration test considers whether your time is being purchased, thereby indicating that someone controls you during the time you are at work, or whether you are being paid for the job you perform, indicating that you are focused on the end product as an independent contractor.

When you are employed, you are paid only on hourly, weekly or monthly rates.  Piece rates can sometimes be used.  But it is you that is being purchased and the right to your time.

When you are independent, you are paid when a job is finished for the whole of the job.  You are not being purchased;  rather, the product or service that you create or help to create is being purchased.  Progress payments can be based on hourly arrangements for convenience, but the overall job is the key.  Sometimes the job may be priced by considering the hours involved.  Sometimes the job may have an intangible outcome and therefore be difficult to price;  but the difficulty does not alter the fact of your independence.

Three:  Who provides and maintains equipment and/or resources? If the company provided the first jeweller all materials, a factory in which to work, a table and a chair to sit at, the person would profile as an employee.  If the second person could work at the factory if she chose, but could also take items home to work on and/or could buy materials required for which she was reimbursed in the final remuneration, she would tend to profile as an independent person.

Providing your own equipment indicates that you control most aspects of your work (independent contracting).  If someone else provides equipment, then this indicates that you exercise a lower level of your control over your work (employment).

When you are employed, you rarely provide your own equipment, which is always provided by someone else.  You are paid less than if you provided equipment.  The firm that provides your equipment is the party that claims business tax deductions for the equipment.

If you are independent, you are likely to provide your own equipment and maintain it, or you are liable to provide it or could provide it.  The degree to which you need to provide equipment will vary from circumstance to circumstance.  Sometimes the nature of the work may mean you provide very little, if any, equipment.  For example, seasonal fruit pickers are frequently independent contractors.  The nature of the work means it is not normally necessary for them to provide much equipment.  Not providing equipment does not mean that you are an employee, it just lowers your independent profiling.  Providing your own equipment means that you need to charge more and can claim the equipment as a business tax deduction against your own income.

Four:  Is there an obligation to work? If the first jeweller is required to be at the place of work at set times, must work overtime at the discretion of the company and can take holidays only when the company determines, he would profile towards a controlled employee.  If the second jeweller informed the company when she was available for work, took absences when she chose for holidays or to do other work as she pleased or chose to work long hours some days and shorter hours other days, she would tend to profile as an independent person.

You may be surprised to find that, when you are employed, there is a legal obligation to work, indicating that you do not control your own life.  If you are an independent contractor, you do not have a specific legal obligation to work, and so you exercise considerable control over your own life.

If you are an employee, you are required or expected to be at work at specified times.  Your working time is dictated to you by the demands of the business for which you work.  Even if you don't think you have this legal requirement -- for instance, because you work under an employment award or "industrial instrument" -- the employment document usually contains provisions such as "an employee shall be ready, willing and available for work when required by the employer".

If you are independent, you work because and when you want to work.  You can decide not to work, and you do not have to justify that decision to anyone other than as a courtesy which makes good commercial sense.  If you don't undertake work when you had previously indicated that you would, you will earn a reputation for being unreliable.  But making and sticking to your undertakings is the important thing.  You may work when your client needs you, but that is your choice, not a legal requirement.

Five:  Is the worker able to delegate the work to someone else and free to work for other companies, including competitors? If the company insisted that their jewellers could not work for anyone else (a common requirement) and would not let anyone else do the work required, the jewellers would profile as employees.  In this instance, the company is seeking to have a measure of ownership over the time of the persons and thus prevent them from working for competitors or becoming competitors themselves.  If, however, the jewellers could organise for part of their tasks to be done by someone else, conditional on meeting the required standards, and the jewellers were free to work where, when and for whom else they chose, they would tend to profile as independent persons.

Delegation relates to exclusivity of performance.  If you can arrange for someone else to do a job, this indicates that you are in control of the end result.  If the demand is that you personally do the work, then this indicates that you have been bought, and during the period of purchase you have lost your control over yourself.  Sometimes delegation may be difficult because of the specific skills involved, but this is an issue of practicality, not legality.

As an employee, you are expected to be the person who does the work and you are prohibited from arranging for someone else to do the work for you.  You are being purchased as if you were a commodity.  You would never "employ" another person to do your work or even help you.  You don't have that authority!

When you are independent, you can organise someone else to help you with part or all of the work.  You may "employ" someone and become an "employer" or engage other independent contractors who work with you on projects.  It is your responsibility, however, to ensure that the end result meets the required standards.

Six:  Intent.  This is perhaps the most important test of all.  In one court case, the judge said "In the final analysis I find the genuine intention of all parties, as expressed in contractual terms and in their conduct to be more persuasive than any of the other indicia which I have dealt with ..." ⁽⁴⁾  The intent indicator looks at individual attitudes and the attitudes of the persons with whom they work.  The question is:  do you want to control yourself or do others want to control you?

The question is deeply personal.  If you are employed, you are content to have others tell you what to do.  You don't want to ask whether an instruction is appropriate or not, because it's not your responsibility.  You go with the flow.  You are expected to be loyal to someone else and think that if you are loyal, you will be looked after.  You are happy to be a cog in a system.  You are happy to have your contract dictated to you by other people -- whether an employer or a union or a tribunal.

If you are an independent contractor, you want to be independent.  You want to control your own life.  You are not willing to have people dictate to you and you stand up for your position, beliefs and the professional approach you bring to your work.  You insist on being treated as an equal.  You are loyal to yourself and your professional integrity and capacity.  You insist on having control of your contract.  You may accept some contractual terms with which you are not completely happy, but overall you are satisfied with the contract.  You see the people with whom you work as independent beings as well.  The people who pay you are your clients, not your employers.

Seven:  Hours of work.  If you cannot determine when you work, you are controlled.  If you decide the hours you work, then you control yourself!

As an employee you are required to be at "work" at certain times and must not be "absent".  If you are absent, you must explain why.  You don't have control over your working hours, but must seek approval from others to vary them.  Your employer dictates your work lifestyle.

As an independent contractor, you choose when you work and how many hours you work.  You can work on weekends and not mid-week.  You can vary your hours as you see fit without seeking approval from anyone (though you may inform your clients as a sensible commercial courtesy).  You can modify your work to suit your lifestyle, which depends, of course, on how much work you wish to do.  This is tempered by the practical needs of your client, or the physical environment:  for example, if you work as an independent contractor in a building that is closed at certain hours, then your choice of working hours is constrained.

Eight:  Provision of holidays and entitlement to leave.  The withholding of "entitlement" money is a method of control.  It is a critical pointer to employment.

When you are employed, your employer withholds a portion of your salary as a method of determining when you can take holidays or other "leave".  You are paid less each week than could be the case.  You run the risk that, if your employer goes broke, the withheld "entitlements" money may be lost.  You are told by your employer when to take holidays and are paid when you are on holiday.

When you are independent, you receive the full payment for your work.  No money is held back from you.  When you work, you earn.  When you don't work, you don't earn.  You don't run the risk of losing "entitlement" money if a client goes broke.  You take holidays when you want.  Generally, your payments are greater than the net salary of an employee in the same line of business, because no money is deducted for holidays and other "entitlements".

Nine:  Deduction of income tax.  This is a common test across the globe, but only because governments find the status of employment a convenient administrative tool for the collection of income tax.  It was used in Australia, for example, up until July 2000 because the authority of the Australian Tax Office to require a payer to withhold income tax from a payee and send the money to the tax office was legislatively tied to the existence of common-law employment.  In effect, for the tax office to receive revenue, it had to push people into common-law employment.  The Australian tax system changed in July 2000.  Now the Tax Act stipulates the different administrative systems that require payers to withhold income tax from both employees and independent contractors.  In Australia, deduction of income tax is now a neutral issue in relation to the common-law assessment of employment/independent contracting.  In other countries, such as the USA and UK, deduction of income tax is still administratively tied to common-law employment and remains a factor in the common-law test.  This is discussed at length in Chapter Three.

Ten:  Characterisation of relationship for purposes of regulatory provisions.  Many pieces of legislation seek to regulate how we work or they collect tax from our remuneration.  The provisions of the legislation vary among countries and jurisdictions.  Some legislation is dependent on common law (as with some income tax acts).  Some legislation applies to both employment and independent contracting.  The implication for the common-law test of employment or independent contracting is that some regulations sometimes attempt to force you to be an employee, even if that is not your wish.

Relevant legislation covers income tax, payroll tax, worker injury insurance, equal opportunities, anti-discrimination, and occupational health and safety.  Generally, however, industrial relations legislation is the most important.

When you are employed, for the most part you do not control your contract.  In the Australian example of extreme regulation, industrial relations law controls most of your contract (sometimes your entire contract).  Even if you have an "individual" employment contract, the content must generally be approved by a tribunal.  Industrial relations tribunals dictate the terms of your contract, whether you agree or not.  The system is complex and legalistic, and you have no control.  The law takes your control of yourself away from you.  But, strange as it seems, the law also takes much of the control of the contract away from the employer.

As an independent person, however, your contracts are regulated under commercial-type law.  If you are in dispute over your contract, you have access to commercial courts and small claims tribunals.  Your contract can never be unconscionable and must be freely entered into by you.  But the courts will not seek to interfere in your contract unless you have a dispute.  The courts will not try to determine the content of your contract before you enter it.  The content of the contract is left for you to control with your clients.

Eleven:  Contractual obligations.  If you freely enter a contract in which you agree to be held to the requirements of the contract, you tend to control yourself.  Where you have agreed to obligations, you must fulfil those obligations.  Your client also agrees to obligations to you which the client must fulfil.  You are not independent if the contract tends to be open-ended and not result-orientated, leaving you with little control over yourself.  If the obligations can be changed without your prior approval by the other party, you don't control yourself.  You are employed.

In a commercial contract, the contractor assumes an obligation to perform the contract, in other words, to carry out the tasks specified in the contract.  When those tasks are performed, the contract is "completed" or "fulfilled".  The other party to the contract (the client) has a right to the performance of the contract.  In that sense, the contractor is obliged to the client but only because the obligation is to fulfil the contract which has been freely entered.

In an employment contract, the employee assumes an obligation of fidelity to the employer.  The contract need not specify any particular task or set of tasks to be performed, but within the terms of the contract, the employer may specify such tasks.  The contract is not, however, "completed" by the performance of such tasks, because the employee's obligation of fidelity to the employer continues as long as the employment contract is in force.  An employment contract is thus indeterminate about any tasks that may be performed under the contract.

This legal difference may appear to be fine (even academic) but it is important.  The consequence is that, when employed, you are merely part of a process and need neither understand nor care about the end result.  Your contractual obligation is to be "loyal" to the employer.  The employer may specify tasks for you to perform but the contract is not ended when those tasks are completed, since the obligation of loyalty persists as long as your employment contract persists.

If independent, you work to achieve a specific task.  For example, you are engaged to build a wall or a computer program, or to solve a particular problem.  Your obligation under the contract is to carry out the task specified in the contract.  Your client has a right to have those tasks performed and an obligation to pay you for the completion of those tasks.  When all contractual obligations have been performed, the contract is completed.

Twelve:  How the work is performed.  If you decide how you do a job, you control yourself.  If you are told how to do a job, someone else controls you.

When you are employed, someone else tells you how you must do a job and you just follow their instructions, generally without question.  You comply with legal requirements, but only because you are told to.  If the job process is wrong, you aren't "required" to care (even if you do care) because you are paid to do as you are told.  Your work procedures change only as and when someone else so decides and issues a new set of instructions.

If you are independent, you have a higher level of discretion about how you achieve an outcome.  The end result is the important thing, not necessarily how you get there, which is really determined by the price you are being paid!  You have a strong incentive to respect occupational health and safety requirements, to be honest and generally to know and comply with the law.  There may be safety or production requirements that need to be met to ensure a satisfactory end result.  You may need training to understand and acquire the skills necessary for your line of business.  But that does not mean you are "controlled";  rather, you are simply adjusting to practical realities.

Thirteen:  Risk.  Commercially winning (or losing) from a job indicates that you control yourself.  If someone else wins or loses from your job, this indicates that someone else has exercised the control.

As an employee, you do not have to care about profits or losses.  You are simply paid for the time you spend at the enterprise.  If a product proves faulty, there is no comeback to you.  You walk away at the end of the day without a care!

As an independent person, you gain a profit or suffer a loss from your work.  If your work is faulty, you can commercially suffer as a result.  But you can win big-time commercially if the product or service proves to be popular.

Fourteen:  Rectification.  Being responsible for your actions is a key indicator of control.  If you are held responsible, you control yourself.  If you are not responsible, it's because someone else controls you.

When employed, if you make a mistake you may be disciplined, but you won't be required to fix the error in your own time.  In the worst-case scenario, you may even face the sack, but someone else might fix your errors.  You do as you are told, but after that you don't have to worry.

When independent, if you make an error, you have to correct it at your own expense.  You probably need your own indemnity and insurance policies.  You are happy to back up your work by being prepared to fix problems in your own time.

Fifteen:  Expenses.  Being responsible for incurring your own expenses indicates a high level of self-control.  If you have to obtain prior approval for expenses, you are controlled by someone else.

As an employee, you find that you receive less money than an independent contractor for the same kind of work, but your employer pays your work-related expenses, such as telecommunications, accommodation, or transport.  You cannot claim any of these against your income, but your employer claims them as business tax-deductions at the end of each year.

As an independent contractor, payments made to you are higher than to an employee in the same line of business because you have expenses that an employee does not have.  You may cover all your own phone bills, work-related travel expenses, and so on.  You must record and track these and claim them as tax deductions from your business income at the end of each year.  Sometimes you may incur expenses that are passed on to your client, but this will covered by your commercial contract.

Sixteen:  Appointment.  If there is an expectation that your appointment through your contract is ongoing, this indicates that you have handed control of yourself over to someone else.  If your appointment is for the period of each agreed contract, this indicates that you maintain control of what happens to you in the future.

Seventeen:  Termination.  If there is a clear understanding that the arrangements finish when the job is done, no-one really controls anyone.  If there are complex processes involved when either party wishes to cease working, then this indicates that people are trying to control each other.

In most developed economies, it's almost impossible for employers to sack employees without the initiation of "unfair dismissal" processes that are promoted through the unfair dismissal conventions of the International Labor Organisation.  Termination of an employee by an employer used to be straightforward.  But now the process of ending employment at the employer's request can be complex and messy.

As an independent person, you work from job to job or contract to contract.  You accept that when the job or contract finishes, the work ends.  You don't consider that you have a job for life or even want a job for life.  Clients come and clients go, and this is accepted as a normal part of life.  You are likely to be confident that you can move on to another job.

Eighteen:  Documentation and terms of the contract.  No matter what written documents may say, the courts will take notice of the documents only to the extent that conduct matches the written statements.  If a written document states that you are an independent contractor, but your actions are those of a typical employee, or the other party behaves like a controlling employer and you acquiesce, then you could be found in law to be an employee.

With employment, documents use language such as "employ, employer, employment", etc.  Because of the use of the word "contract", it is easy to be confused into believing that it refers to a commercial contract when in fact it refers to an employment contract.

Most employee documents are found in industrial relations instruments, often controlled by unions and tribunals, but not by employees.  Employees often have difficulty finding the written contract, as industrial legislation and regulations are actually part of your contract even though you don't know the detail.  Your contract can be changed by tribunals without even consulting you.  Or the tribunals can prevent you changing your employment contract as you would like.

For an independent contractor, documents will have a distinct commercial look and use commercial terms such as "contract", "engage", "client", "user", "contractor", "independent contractor".  Independent contractor documents should be in the possession of independent contractors.  People own and control their documents.  Changes to written documents occur only with the agreement of both parties.  The documents can and should be easily understood.

Nineteen:  Integration.  This test is rarely used in Australia, but is frequently used in the USA, the UK and other countries.  It inquires whether a person is "part and parcel" of an organisation.

When employed, you work "in" an organisation and need to promote yourself inside the organisation in order to move up the promotional ladder.  You don't need or want to advertise yourself outside the organisation -- unless, of course, you intend to leave and are looking for other employment.  You are a corporate player.  Someone else, or the system, organises your career.

When independent, you actively market or sell yourself.  You live from job to job and are always mindful of the need to advertise your services.  Sometimes a job can last a long time, but that does not mean that you have given up your independence.  You actively control your career.

* * *

The foregoing tests cover most that a court may choose to apply.  No single test is more important than any other, and no test is conclusive on its own.  The tests are like a swinging pendulum:  one test may swing strongly towards employment, while another may swing towards independent contracting.  The judges charged with making a decision have to come to a balanced conclusion from the facts before them.

None of this is theoretical.  It is all highly practical.  The judges are looking for the truth in the relationship that will indicate into which legal contract framework the relationship fits.  One is a relationship of control and inequality.  The other is a relationship of self-control and equality.

The practical nature of the investigations, and the real-life understanding of "employment", is revealed in legal cases.

Stevens v. Brodribb Sawmilling Company ⁽⁵⁾

Stevens v. Brodribb is the leading Australian case identifying common-law employment.  The legal judgment drew heavily on the history of English common law.  The judgment is a good example of common-law employment applying in most common law-based legal systems across the globe.  The key statement from Stevens and Brodribb provides a good summary of the common-law test.  "A prominent factor in determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter.  It has been held, however that the importance of control lies not so much in its actual exercise although clearly that is relevant, as in the right of the employer to exercise it." ⁽⁶⁾

The facts of the case were as follows.  Brodribb Pty Ltd was a company operating a sawmill during the mid-1980s.  Logging was carried out by Mr Stevens (and others), who drove a truck, and Mr Gray, who operated a bulldozer used to load the logs onto trucks.  In an incident, Mr Gray was negligent in loading the logs onto Mr Stevens' truck and Stevens was injured.  Stevens sued Brodribb Pty Ltd on the basis that it was vicariously liable for the acts of Gray.  The essence of employment vicariousness is that, because an employee does not control himself, the employer is responsible for the employee's actions.  In this case, Mr Stevens claimed that Gray was an employee of Brodribb Pty Ltd and therefore Brodribb Pty Ltd (the sawmill) should pay compensation for Stevens' injuries.

The court found, however, that both Stevens and Gray were independent contractors and so Brodribb was not liable for Stevens' injuries.  The court considered the fact that both Stevens and Gray owned and maintained their own equipment, that although they were required to deliver two loads per day they could set their own hours, payment was calculated on volume, no guarantee of work was given, both men were left entirely free to exercise their own skill and judgement, and there was a right of delegation.  As a consequence of a finding of no employment, the court held that Mr Gray was responsible for his own negligence and blame could not be transferred to Brodribb Pty Ltd.

In this leading case, the courts conducted a detailed assessment based on a full array of "swinging pendulums".  In their decision, the judges made the point that no one indicator was dominant and that no hard-and-fast rules governed the way the tests should be interpreted.  Importantly, the judgment depended on the full matrix of tests and the totality of the relationship.  In addition, the case highlighted the need for the common law to keep pace with a changing society.  "The relationship is a dynamic one which needs to be accommodated to a variety of different and changing social economic circumstances." ⁽⁷⁾

Mayne Nickless ⁽⁸⁾

Mayne Nickless Pty Ltd was a large, listed, Australia-wide transport company that engaged numerous transport drivers, some as employees, others as independent contractors.  In 1998, one of its contract drivers, Mr Sammartino, was dismissed.  Soon after, Mr Sammartino lodged an unfair dismissal application.  Before the application could be considered, the courts had to determine whether Mr Sammartino was an employee or, as was claimed by Mayne Nickless, a contract driver.  If he was an employee, the unfair dismissal application could proceed;  if a contractor, the labour courts would not have jurisdiction and the application would fail.

On the employer versus contractor definition alone, the case was exhaustive.  It was first heard by a single commissioner in the Australian Industrial Relations Commission.  Mr Sammartino lost at this point because the commissioner found that he was not an employee.  Mr Sammartino appealed to the Full Bench of the Industrial Relations Commission (IRC), where three commissioners heard his appeal.  The Commission referred the case to a higher court, namely, the Full Bench of the Federal Court of Australia (with three judges sitting).  After resolving some points of law unrelated to employment, the Federal Court ordered the Full Bench of the IRC to rule on the application.  As always seems to be the case, the legal expenses were large.

In giving instructions to the IRC on the conduct of the case, the Federal Court stated an important principle of common-law process:  "... the decision maker [the IRC] must make findings of fact and determine whether the facts as found establish whether the person is an employee or not.  No exercise of discretion is involved." In other words, a common-law investigation looks at the real-life behaviour of the parties involved.  The accepted common-law tests are clear and known and must be applied in a consistent manner.  This is not to deny that judges may differ in their reading of the circumstances brought before them, but the tests to be applied are clear.  This statement by the courts refutes the claim by some commentators that the common-law test for employment is not clear.

At the end of this exhaustive examination, the IRC found that Mr Sammartino was in fact an employee and could seek unfair dismissal relief.  In effect, the IRC found that, in spite of what Mayne Nickless thought it was doing, its attempt to engage people as independent contractors had failed.  Mayne Nickless had not operated within the managerial and behavioural parameters necessary for any genuine independent contractor arrangement with Mr Sammartino.

The facts of Mr Sammartino's engagement as tendered in evidence were as follows.  Mr Sammartino had started working for Mayne Nickless in 1986 as a casual employee driver, and went full-time in 1987.  He was promoted to his own run in 1989, at which time Mayne Nickless considered Mr Sammartino became an independent contractor.  From 1989, Mr Sammartino was engaged as a "contract carrier" under the terms of an unregistered industrial agreement with the Transport Workers Union of Australia.  A term of the agreement stated that Mr Sammartino was an independent contractor.  Mr Sammartino had not signed the contract but had provided Mayne Nickless with invoices on which he was paid.  Mr Sammartino provided his own vehicle but stated in evidence that he had always considered himself an employee.  Mayne Nickless had provided the union with a list of independent drivers who had full-time contracts with the company.

Based on the evidence of Mr Sammartino, Mayne Nickless managers, and documents supplied, Mr Sammartino's engagement strongly reflected the terms and processes contained in the industrial instrument which Mayne Nickless had with the Transport Workers Union (TWU) and which also covered Mayne Nickless's employees.  The agreement covered the timing of holidays, rostering issues, changes to and timing of changes to pay rates, and requirements to belong to the TWU superannuation fund.  Warnings on work standards in Mr Sammartino's case were handled in exactly the same way as they were handled with employees.  Mayne Nickless had entered an agreement with the union to cover conditions for "contractors" after Mayne Nickless had conducted detailed negotiations with the TWU.  Mr Sammartino's engagement was considered permanent by Mayne Nickless.  Mr Sammartino was paid and taxed as an individual person.  Mr Sammartino supplied his own vehicle, but so did employees of Mayne Nickless.  Allocation of runs was at the sole discretion of Mayne Nickless.  The contract that Mr Sammartino had not signed, but which was allegedly in place, was the industrial instrument that Mayne Nickless had created and signed with the union.  The TWU-Mayne Nickless agreement was collectively agreed to by the TWU members and was not an individual contract arrangement.  The agreement drew on terms from the industry-based labour award that applied to employees.  Mr Sammartino stated that Mayne Nickless had told him he was entitled to all the terms under the employee-type award.  Further, in 1990, the union had notified Mayne Nickless in writing that it considered that the contracts with contract couriers were of the employer-employee type.  All of these facts created significant pointers towards employment.

For example, several pages of the judgment discussed the pay rates.  "On balance we conclude that ... Mr Sammartino was not independent in relation to any significant aspect of the remuneration package applied to him.  The package was collectively negotiated.  The labour rate was derived from award equivalent or perhaps over-award arrangements ..." ⁽⁹⁾

In addition, the contractual obligation was personal to Mr Sammartino.  "He had restricted opportunities to substitute his own work performance ..." ⁽¹⁰⁾  If Mr Sammartino lost his driver's licence, a replacement driver must be accompanied by Mr Sammartino at all times, further indicating that the obligation was attached to Mr Sammartino.  In addition, the judgment found that Mr Sammartino's capacity to work for any other client was effectively restricted and prevented.  This all indicated the removal of Mr Sammartino's capacity to control his own work;  as such, he was an employee.

Other aspects, however, indicated independent contracting.  Mr Sammartino had to supply his own vehicle and keep it in the livery of Mayne Nickless.  He had to meet operating expenses and to upgrade to a new vehicle every five years.  The provision of the vehicle constituted 38 per cent of the payments to him.  In commenting, the Commission said, "We consider the obligation to provide and maintain a vehicle ... is an important indication that Mr Sammartino's contract was a contract for services [independent contracting]". ⁽¹¹⁾

But Mr Sammartino operated as an individual and was not incorporated.  The Commission stated that, in its experience, in industrial relations matters in the transport industry "A requirement by principal contractors for owner-drivers to incorporate has become relatively common". ⁽¹²⁾

On balance, the Commission found that Mr Sammartino was in fact an employee.  The behaviours that indicated independent contracting were outweighed by the fact that he was treated little differently from employees of Mayne Nickless.  Mayne Nickless may have called Mr Sammartino a contractor, but its managerial behaviour indicated that Mayne Nickless really wanted an employee, and Mr Sammartino thought he was an employee and acted as an employee.

Vabu Pty Ltd trading as Crisis Couriers and Australian Taxation Office 1996 ⁽¹³⁾

The Crisis Couriers case provides a good comparison with the Mayne Nickless case because of the similarities in industries and operations.  Both companies were in the transport business and competed with each other.  They were structured along similar lines;  they both required their drivers to provide their own vehicles and sought to have independent-contractor relationships with the drivers.  Both cases were tested in the Australian common-law system.  Mayne Nickless failed and Crisis Couriers succeeded.  The difference between the two cases lay in the detail of the management of their independent contractor systems.  Comparing the cases demonstrates how the common-law test of employment versus independent contracting hinges on a balanced assessment of the full set of behaviours to determine whether the workers own or do not own the "right to control" themselves.

Crisis Couriers is a courier business in Sydney.  Its bicycle couriers deliver parcels and documents in and around the Sydney CBD office blocks.  The colourfully clad couriers can be seen every day weaving in and out of traffic and pedestrians, standing beside suit-clad business persons riding the elevators of skyscrapers, or standing in groups beside idle bicycles waiting for the next radioed assignment.  Their courier colleagues can be sighted in the business districts of most major cities of the world.  The company began in 1980 and, by 1993, Crisis Couriers was paying about $A2 million a year to about 80 couriers, including bicycle, motorbike, car and van couriers.

In Australia, employers are required to make compulsory superannuation/retirement payments for employees.  The scheme is administered by the Australian Taxation Office (ATO) under the authority of tax legislation that ties the ATO's powers to enforce compulsory superannuation to employment relationships.  Crisis Couriers believed that its couriers were independent contractors and hence not subject to the compulsory superannuation provisions of the Tax Act.  It believed that it paid the couriers for results and that the individual couriers looked after their own superannuation.

In 1996, the ATO took Crisis Couriers to the Supreme Court of New South Wales to enforce superannuation payments.  The task of the court was to decide the legal status of the couriers, which would determine whether or not the Act could be applied to the company.  The case assumed importance in the transport industry in Australia because most private transport companies engage couriers and drivers under similar arrangements to Crisis Couriers.  The first ruling under a single judge was appealed to the Full Bench of the court;  two judges found the couriers to be independent contractors and one judge found them to be employees.  Crisis Couriers won.  As in all Australian cases, the "right to control" tests as identified in Stevens v. Brodribb, were applied by the court.

Three couriers gave evidence before the court.  Two drove vans and one a motor bike.  When first engaged, the couriers were interviewed by the company and given three documents to sign covering conditions and rules of work.  The contracts required that the couriers be neat and tidy at all times, wear the company uniform, replace vehicles as required, observe starting times and work prescribed hours, not use foul language, accept work as given by the company, accept re-routing, and take no more time than was permitted.  These elements certainly could indicate employment because Crisis Couriers sought to ensure certain behaviours from the couriers.  But the court stated that "However, a man may supervise others without becoming their employer". ⁽¹⁴⁾  In other words, supervision does not necessarily equal control.

The court ruled that independent contracting existed substantially on the basis that the couriers supplied their own vehicles (car, vans, motorbikes) and bore the costs of running them.  The company supplied uniforms and radios but the couriers' business expenses were considerable.  The couriers had to supply their own street directories, telephone books, trolleys, ropes and blankets.  The couriers did not receive a set wage or salary but were paid for the successful deliveries they made.  Crisis Couriers allowed the couriers to use a company or trust.  The court stated "each courier conducts his own operation, permitting himself for his own economic advantage to be supervised by the company". ⁽¹⁵⁾

There were many similarities to the Mayne Nickless case, but also important differences.  The transport couriers association to which Crisis Couriers belonged had entered an industrial agreement with the Transport Workers Union but, unlike Mayne Nickless, the couriers with Crisis Couriers had individually signed contracts with the company.  Further, the terms of the contracts were not drawn from any union agreement but were independently drafted.  Were the union to argue that its agreement with the industry association covered contractors, the counter-argument was that the terms of the industrial agreement could not apply to Crisis Couriers because the power of the industrial agreement was dependent on the Australian Industrial Relations Act, which could cover only employees.

Hollis v. Vabu (Crisis Couriers) Pty Ltd (2001) ⁽¹⁶⁾

Hollis v. Vabu of 2001 was an Australian High Court case that followed the earlier 1996 case of Vabu v. Federal Commissioner of Taxation.  On the surface, the two cases involving the same company and same procedures produced "opposite" results.  The detail reveals more.

Hollis v Vabu (Crisis Couriers) is a most interesting and critical common-law test case.  On the surface, it appears to overturn the previous and near-identical test case of Vabu v. ATO.  It was a second case involving the same company.  When the decision of this case became known, many commentators claimed that it proved that the common-law tests for employment did not work and were completely inconsistent.  The commentators argued that if two test cases examining (apparently) the same company operations produced totally opposite results then the tests used were flawed.  What was actually demonstrated, however, was that every case is individual and specific to the circumstances.  Further, it showed that the criteria for assessment which the courts use are consistent.  Finally, interpretation of the criteria can indeed vary significantly given specific circumstances, and considerable debate can occur between the judges on interpretation.

The original (1996) Crisis Couriers superannuation case involved an application from the Australian Taxation Office alleging that Crisis Couriers owed superannuation on the payments it made to its courier drivers.  The key to the decision was the fact that the van driver couriers provided and maintained their own vehicles.  This was considered a decisive factor shifting the balance of evidence to independent contracting.

The Crisis Couriers/Hollis case (2001) involved the same company but different circumstances.  A bicycle courier wearing a "Crisis Couriers" jacket had knocked over and injured a pedestrian and had ridden off without giving personal identification.  The pedestrian was suing Crisis Couriers for damages on the basis that the unidentified bicycle rider was an employee of Crisis Couriers and consequently Crisis Couriers was "vicariously" liable for the "employee's" actions.  The High Court conducted a similar investigation to the 1996 case and, on examining near-identical operational procedures, found that the unidentified bicycle rider was an employee of Crisis Couriers.

The High Court, however, was careful to be highly specific in this seemingly contradictory decision.  The Court limited the finding of employment specifically to the unidentified bicycle courier who had knocked over the pedestrian.  The court was careful not to comment on other Crisis Couriers bicycle, motorcycle, or van driver couriers.  The court finding of employment was based on a view that there was a big difference between a courier providing and maintaining a motor vehicle and doing the same with a bicycle.  On the balance of evidence, providing a bicycle was a much less significant pointer to independent contracting than providing a car.

The decision was controversial.  Three of the five judges found that employment existed.  One judge found that no employment existed, but that the bicycle courier was an "agent" of Crisis Couriers and that Crisis Couriers was still liable.  One judge totally disagreed and found that there was no substantial difference between the way the couriers operated -- that is, whether they were car couriers or bicycle couriers -- and found that the bicycle courier was an independent contractor.

The Crisis Couriers cases are particularly important because they highlight the fact that in order to ensure that independent contractor status is solid, it is essential that daily operational procedures and the behaviour of parties consistently conform to independent contractor criteria.  What the case also proves is that a single body of tests used to investigate the existence of employment can lead to the different findings even in similar circumstances.  In fact, the nuances of specific behaviours can lead judges to come to different conclusions.

The two Crisis Couriers judgments differed because of differences of view on matters of small operational detail.

UK IR 35

In the United Kingdom, the right of the tax office to collect income and welfare taxes is legislatively tied to common-law employment:  if control employment does not exist in a working relationship, the UK tax office does not have the legal authority to collect the tax.  Because tax authorities prefer to collect tax at the point of payment, they seek to give themselves the authority to decide what is or is not employment.  Even if people seek to avoid the employment relationship for purposes totally unrelated to tax, the tax authorities will seek to enforce employment to safeguard their taxing powers.  This has created great confusion because when tax authorities have lost court cases on common-law grounds, they then go to great lengths to try to redefine "employment" in a way that suits their tax collection purposes.  In so doing they frequently breach common-law principles, create injustice and severely distort the economic behaviour of taxpayers.  This has been strongly demonstrated in the United Kingdom in a case that highlights the common-law principles involved.

In 2001, the powers of the UK Internal Revenue Service (IR) to declare a person to be or not to be an employee were challenged.  The case involved tax issues but also significant consideration of what it meant to be an employee.  The problem and the court case had their origins in the information technology (IT) sector, where it has become commonplace world-wide for workers to prefer to be independent contractors rather than employees -- a major factor driving the industry's spectacular productivity growth and high remuneration levels.  The UK government had passed legislation, known as IR35, that enabled the IR to determine whether workers were in an "employee like" working relationship, even if they were independent contractors at common law.  In effect, the IR was empowered in this respect to bypass the common law and the courts.  The affront to justice is enormous but it's a common tactic being used by taxing authorities and other regulators around the world.  It was this bypassing of common-law judicial process that the Professional Contractors Group, a UK association of IT contractors, sought to challenge.  The case was heard before a single judge in the UK High Court in 2000-1. ⁽¹⁷⁾

The case went though the normal process in which the ways in which IT independent contractors conducted their businesses were considered.  In the judgment, the evidence showed that IT industry contractors chose to work where and when they wanted.  Further, clients had difficulty negotiating long-term contracts with IT contractors, and in any case the on-off nature of the work militated against long-term arrangements.  In addition, skilled IT people actively marketed themselves to find the best work and financial rewards.  The evidence showed that IT firms did not "control" IT workers, and that IT workers avoided the ties and disadvantages associated with employment, preferring the flexibility of being free agents.  Most contractors had established their own companies to ensure their contractor status;  of this the judge said "A company gives the service contractor control of his own destiny". ⁽¹⁸⁾  Each of the behaviours evidenced in the case strongly indicated that the workers engaged were not employees.  The choice of working this way was, in this instance, almost entirely that of the IT workers themselves, who resisted pressure on them from large IT companies to become employees.

The judgment powerfully demonstrated the advantages of working as a professional independent contractor rather than as an employee.  The contractors argued that if they were forced to be employees they would "receive less remuneration than if they were their own masters". ⁽¹⁹⁾  The judge made the point that the difference between the IT people who considered themselves contractors and the way the tax authorities thought of them was more "a question of a different approach and a different mindset".  The evidence indicated that the tax authorities were locked into the mindset of employment and could not comprehend independent contracting.  This difference of mindset is perhaps the most important difference between employment and independent contracting.  Contractors see themselves as business people making their own decisions.  By contrast, employees see themselves as cogs in a machine with other people making decisions for them.  The tax authorities could not conceive of individuals working for large companies yet making decisions for themselves.  In truth, it's a cultural problem for tax authorities because they engage their own staff on strict controlling employment terms.  Further, the tax authorities have a vested interest in finding employment, because it is over employment that their legislative authority holds sway.

The judge indicated that contractors clearly and consciously gave up the benefits of being employees.  "[The contractor] does not have automatic entitlement as against the client to all the benefits of being an employee (such as maternity pay or sick pay or statutory holidays or unemployment benefit ...)" ⁽²⁰⁾  Against this, the contractor received much greater remuneration.  In effect, the issue of holiday and other entitlements is not one of economic benefit but of who has control over the entitlements.  Employees have "entitlement" remuneration withheld from them so that employers can decide when employees take holidays and other leave.  Contractors are fully remunerated and determine when they take holidays and other leave.  This sometimes is probably inconvenient for the companies that engage IT contractors, but is one of the advantages of independent contracting to the contractors themselves.

The case also demonstrated the economic nature of independent contracting.  The judge stated, "the service contractor, through his service company, is in competition with large companies, or even with small companies". ⁽²¹⁾  In other words, the IT contractors accepted and sought competition with each other.  By contrast, employees were protected by their employers from competition both external to the firm and within the firm.  The economic mark of a contractor is the desire to be competitive.  In the tax dispute, the point at issue for the IT contractors and strongly argued by counsel for the Professional Contractors Group was that the treatment of independent IT contractors as employees by the IR unfairly reduced their capacity to be competitive, particularly against large firms.  Thought of in another way, employment is an anti-competitive practice that favours large firms by shielding them from new but smaller competitors.  By imposing employment on contractors, the UK IR has become a protector of big business from the entrepreneurial drive of individual UK citizens.  This sort of action is inevitably harmful to the public interest, a point of no interest to the IR, which simply wants to maximise its powers and its revenues.

A further indicator of employment was the issue of loyalty.  Employees are supposed to be loyal to their employers, whereas contractors are loyal to themselves.  The judge commented that contracting involved "an important contrast to the duty of fidelity ordinarily owed by an employee" [to an employer]. ⁽²²⁾  "Fidelity" involves the idea of adherence to obligations:  employees are expected to be willing to fulfil the obligations imposed by the employment contract.  In effect, it is a psychological process whereby the employer's authority relies on employees willingly making themselves subservient to the controlling authority of the employer.  Independent contractors do not have, nor do they want, a "duty of fidelity".  As noted earlier, both employees and independent contractors incur obligations and it is true that contractors need to "keep faith" with their clients.  But the nature of the obligations is quite different.  Once a commercial contract has been fulfilled, the independent contractor is relieved of any further obligation to his client;  indeed, he may next offer his services to a rival client.  But an employee has a duty to his employer which is ongoing and open-ended.

A key indicator of non-employment is that the person doing the work can substitute another person to do that work.  In the case of IT contractors, the evidence showed that substitution did occur but usually only with the approval of the client.  The judge did not, however, see the need for client approval as necessarily an indicator of employment.  "... it would not be right to make an absolute statement ... that the need to obtain the client's permission necessarily negates the existence of a right to substitution, and/or points to employment". ⁽²³⁾

The final issue of interest was the evidence that a person could move in and out of employment and contracting on a regular basis.  In fact, this proved to be a regular occurrence in the IT area.  It proved quite normal for people to be working on several different projects at the same time;  in some cases they could be employees in some projects and independent contractors in others.  Everything hinged on the nature of each individual contract, and no broad sweeping conclusions could be drawn.

The UK IR case demonstrated the consistency of approach across nations to the tests which the common-law courts use in investigating the existence of employment, that is, a specific type of contract in which the human relationships give one person control over another.  In this case, the court upheld the common-law principles in the face of a tax authority that wanted to change those principles.

Williams ⁽²⁴⁾

Not everyone is either employed or an independent contractor.  People can and are still engaged in paid work under arrangements that are a throwback to medieval times.  The case of Mr Williams is an interesting example.  Mr G. Williams was a member of the Royal Australian Air Force based in Darwin.  In March 2000, he was dismissed from the RAAF on medical grounds and sought unfair dismissal compensation.  Under Australian legislation, unfair dismissal action is available only to employees.  Mr Williams could make application for unfair dismissal only if he was an employee.

The initial question in the case was whether the Australian unfair dismissal laws applied only to employees.  In its finding the IRC said, "It has never been suggested that the expression employee, either in the Act or in any of its precursors going back to 1904, means anything other than employee at common law". ⁽²⁵⁾  The outcome was that the tribunal found that the Industrial Relations Act that allowed relief for unfair dismissal applied only to common-law employees.  Non-employees were not entitled to unfair dismissal relief -- in Australia, at least.  This same interpretation could be expected from the courts in other English-based legal systems and is reflected in International Labour Organisation conventions.

The engagement of Mr Williams was investigated and he was found not to be an employee.  But nor was he an independent contractor.  In fact, the Court found that he was in an engagement contract that involved even greater loss of the right to self-control than employment.  Williams was found to be a "servant of the Crown".  People who work in the armed services, police and other government institutions are often found not to be employees.  These "servants of the Crown" are instruments of the state itself.  They are supposed to be subject to greater control than employees because they exercise the full and awesome power of the state that it can exercise over individuals.  Therefore, the state exercises complete control over its servants and is able to dismiss them at will.

People who work as servants of the state and other legal arrangements are not the specific focus in this book.  What the Williams and UK IR35 cases demonstrate is how necessary it is to be careful and precise in the use of the word "employment", because the word has a highly specific meaning at law, involving a specific set of behaviours and control processes.  The Employment Demon 33

COMMON-LAW EMPLOYMENT AS DEFINED IN THE U.S.A.

As in the UK and Australia, employment in the USA is defined by common law.  The courts look for evidence that the alleged "employee" is subject to a right of control exercised by an alleged "employer".

For example, US federal legislation governs employee health care, disability and other benefits under the Employee Retirement Income Security Act of 1974. ⁽²⁶⁾  "Employment" is the key definitional issue for the reach of the Act, and in several test cases the US courts have identified the common-law test as being consideration of "the hiring party's right to control the manner and means by which the product is accomplished". ⁽²⁷⁾  No one factor is decisive and the outcome depends on a balanced assessment of the facts.

Microsoft USA

One of the most high-profile cases that caused a detailed investigation of the common-law employment test in the USA was that brought against the giant Microsoft Corporation in 1999. ⁽²⁸⁾  The case involved a class action against Microsoft by some 15,000 temp agency workers who had worked for Microsoft over various periods since 1987.  Microsoft had an "employee" stock purchase plan that was not made available to the temp agency workers.  The wording of the Microsoft stock purchase plan was clear in its intention to restrict stock option benefits to "employees".  In a class action, the temp agency workers sought to prove that they were in fact employees of Microsoft and hence entitled to access the stock purchase plan.  Given the high share price of Microsoft, the potential liability to Microsoft stood at $US20 million.

In May 1999, the US Court of Appeals held that the temps were "presumptively" employees and entitled to retrospective benefits from the stock purchase plan.  The Microsoft decision hinged, first, on the definition of employment and second, on whether or not the court determined that the nature of the contractual relationship between the temp workers and Microsoft fitted within the definitions of the stock purchase plan.  On the common-law employment issue, the courts applied the tried-and-tested matrix of tests discussed above.  The temps were found to be employees and Microsoft became liable for a large payout.

Barnhart USA

The Microsoft case can be compared with earlier US cases in which people were found not to be employees.  In Barnhart v. New York Life Insurance Company, ⁽²⁹⁾ the court found that the behaviour of Mr Barnhart and the insurance company was consistent with their written agreement that Barnhart was an independent contractor.  In evidence, it was found that "Barnhart was free to operate his business as he saw fit, was paid on a commission-only basis, claimed to be self-employed on his tax returns and was free to sell competitors' products". ⁽³⁰⁾

What Microsoft, Barnhart and other key cases in the US demonstrate is the high level of consistency between countries and judges across jurisdictions in their application of the common-law meaning of employment as an issue of control.  There may be differences in the mix of tests applied to individual cases and in the interpretation of behaviours evidenced in the tests, but the tests themselves are highly consistent.  Further, it doesn't matter what the parties to a contract call their contract or what written contracts say:  the key issue is the behaviour of the parties.  The terminology used by parties is merely one of the behavioural factors under consideration.

U.S.A. TAXING POWER AND COMMON-LAW EMPLOYMENT

This becomes critical, for example, with US taxing issues.  US Federal Income Tax law is tied to common-law employment for the "at source" income tax deduction powers exercised by Internal Revenue Service (IRS) officers.  The IRS may not deduct tax from a worker at the point of earning unless the worker is a common-law employee.  IRS agents are instructed on the assessment processes they must undertake when seeking to enforce their powers.  As in the UK, and in the past in Australia, tax officials are given powers to decide the common-law status of persons for the purposes of tax.  In fact, this is an exercise that should be the exclusive preserve of the courts.  Tax officials have a vested interest in the outcome of an investigation, and no matter how hard the IRS may proclaim the genuineness and integrity of its processes, they are neither qualified nor impartial.  As occurs in other countries, US businesses are exposed to action by the IRS if they do not pay "employment" taxes on individuals they consider to be independent contractors.  If the IRS investigates and seeks to declare the contractors to be employees, the company is liable for substantial back taxes.  The only defence is to seek to appeal the IRS decision in the courts, a process that often costs more than the back taxes owed.  In these instances, the state-sanctioned, privileged and financially intimidatory position of the IRS effectively forces acquiescence by IRS-targeted companies, and potentially breaches the individual civil rights of people who wish to be independent contractors.  More discussion of this occurs in the chapter on tax.

At least the IRS has compiled a set of common-law employment tests that its tax inspectors must use when seeking to apply the tax code.  Although the IRS's role as determining agent is objectionable, the tests (fortunately) are accurate reflections of the common-law tests as evidenced in Microsoft, Barnhart and other leading cases.  The core issue continues to be whether the alleged employer has the right to control the alleged employee.

The IRS's constructed tests are set out below;  positive responses to the questions indicate control and thus employment. ⁽³¹⁾

• Is a worker required to comply with another person's instructions as to when, where and how work is to be done?
• Has the person who wants the services trained the worker?
• Is the worker personally required to give their services?
• Does the person who wants the services determine the method by which the work is accomplished?
• Does the person who wants the services hire, supervise and pay the worker?
• Is there a continuing relationship between the worker and requirer?
• Are the hours of work set by the person who requires the services?
• Is full-time work required such that the worker is restricted in his or her ability to work for other persons?
• Is the worker prevented from following his or her own pattern of work?
• Is the worker required to submit written or oral reports on his or her work?
• Is the worker paid by the hour, week or month?
• Does the business pay the worker's travelling expenses?
• Does the requirer of services provide the worker's tools and materials?
• Has the worker not made any financial investment in the place or process of work?  Does the worker not have any share in the loss or profits of the worker's efforts?
• Is the worker prevented from working for other persons?
• Does the engager have the right to fire the worker?
• Can the worker terminate the relationship without suffering penalty?

This list is consistent with common-law tests applied in other English-based, common-law countries, and takes up 17 of the 22 possible tests examined earlier.  As with all common-law tests, under the IRS, no one test is definitive, but the courts consider the balance of the total picture as applied to each case.

HOW GLOBAL ARE THESE TESTS?

But how universal is the definition of employment?  Are there big differences between countries, regions and legal systems?

Since 1996, the International Labour Organisation has being wrestling with a precise understanding of employment to identify the exact scope of labour regulation.  The ILO has had three major conferences on the issue since 1996 and another conference is being held in 2006.  In preparation for the 2006 conference, the ILO studied the laws which define employment in 60 countries with a diverse range of legal backgrounds and regional locations.  In the report released in 2005, the ILO found that there is a common thread across the globe to understanding the definition of employment:

What is surprising is the amount of convergence between the legal systems of different countries in the way they deal with this [distinguishing employment] and other aspects of the employment relationship, even between countries with different legal traditions or those in different parts of the world ... Irrespective of the definition used, the concept of a worker in an employment relationship has to be seen in contrast to that of a self-employed or non-dependent worker ... ⁽³²⁾

The report described the term "worker" as a generic term that can mean employee or self-employed.

The report looked at common-law countries and found similar terms and definitions being used.  Countries it cited, for example, included Kenya, Nigeria, Lesotho, Indonesia, Ireland, New Zealand, Cambodia, China, Malaysia, Australia and Pakistan.  These countries used terms such as "to serve an employer", "contract of service", "contract of employment" and so on.  These terms and understandings are consistent with the explanation provided in this chapter.

The report also looked at legal definitions used in a range of non-common law countries.  These included Argentina, El Salvador, Chile, Colombia, Costa Rica, Nicaragua, Venezuela, France, Benin, Burkina Faso, Democratic Republic of Congo, Gabon, Niger, Rwanda, Portugal, Morocco, Bahrain, Qatar, Angola, Botswana, Slovenia, Mexico and Nicaragua.  The defining terms from these countries included "dependency", "subordination", "permanent dependency", "delegated direction", "conditions of subordination", "direction", "supervision", "control", "orders" and "for the employer's account".  These terms used in non-common-law countries all point to an idea of employment being that as described in this chapter and which is the central thesis of this book.

FACING A HARD FACT

How then, should the idea of employment be understood and why this interest in discovering the true nature of the employment relationship?

Unfortunately, the word "employment" is used in everyday language to denote every form of work-for-pay relationship.  The word is used without reference to its precise and accurate meaning.  As a result, it is often used incorrectly.  The consequence is that this very broad usage creates misunderstanding of the vitally important issues about our own conduct when we work, the very nature and operations of business in society, and the functioning and regulation of economies.  The misunderstanding causes serious distortions in each of these areas, distortions which will be examined throughout the remainder of this book.

We have to recognise and accept that "employment" is a specific type of contract, which, like all contracts, is the legal expression of particular human behaviours and intentions.  Under employment, two persons enter a contract whose very essence is that only one party -- the employer -- can control the terms of the contract.  The employee has only limited power to control the contract terms and hence cannot exercise legal self-control.  And this "control" under contract is not some legal technicality removed from human actions.

Employment is an identifiable process in which we demonstrably choose either consciously or by default to give up our capacity to exercise full control over our own actions in return for money.  It is fair to say that few people are consciously aware of this fact.  Certainly, few people talk about it in these terms.  Those few people who do talk about employment as a control process find themselves subject to severe criticism and rejection.  So there is silence.  And most people would find the idea of employment as control abhorrent and reject it.  But the additional truth is that rather than clearly confront the fact of what employment is, we have as individuals and societies chosen instead to pretend that employment is not control but something else.  However, that something else is never defined.  The purpose of this book is not to ignore the truth of employment but rather to confront it and understand it.

In its crudest understanding, when we enter employment we sell our souls, maybe just a little bit, but we sell them nonetheless.  Other people buy them.  It is a process by which some parts of our psychological and physical being are delivered to other persons who exercise psychological and physical control over them.  This is the human experience of employment and we need to confront it.

This first chapter has had one purpose:  to look at the facts of what employment is by studying its clear legal contract form.  The rest of this book looks at how we have, as societies, responded to employment, how we have chosen to regulate it and accommodate it and how this regulation has worked both for and against successful human interaction.

But to understand employment even more deeply, it will help if we understand the reverse of employment, namely, independent contracting.  That is the task of the next chapter.

---

ENDNOTES

1.  In Peter Krass (ed.), The Book of Business Wisdom, John Wiley & Sons Inc., USA 1997, 299.

2.  Walter K Olson, The Excuse Factory, Martin Kessler Books, USA, 32.

3.  International Labour Organisation Website:  www.ilo.org

4.  Odco Pty Ltd and Building Workers' Industrial Union of Australia.  No VG 151 of 1988.  Federal Court of Australia.

5.  Stevens v. Brodribb Sawmilling Company (1986) 160 CLR 16.

6.  T Sammartino and Mayne Nickless Express t/a Wards Skyroad.  Australian Industrial Relations Commission. Dec 555/00 S Print s6212, at 57.

7.  Loc. cit.

8.  Loc. cit.

9.  Ibid. at 93.

10.  Ibid. at 96.

11.  Ibid. at 95.

12.  Ibid. at 102.

13.  Vabu Pty Limited v. Commissioner of Taxation.  New South Wales Court of Appeal.  CA 40206/95.

14.  Ibid at 14.

15.  Ibid at 50.

16.  Hollis v. Vabu Pty Ltd [2001] HCA 44 9 August 2001.  High Court of Australia.

17.  Queen, IR and PGA High Court Case No CO/2302/00, April 2001. [IR 35].

18.  Ibid. at 3.

19.  Ibid. at 19.

20.  Ibid. at 50.

21.  Ibid. at 30.

22.  Ibid. at 48ii.

23.  Ibid. at 49.

24.  Williams v. Australian Defence Force.  Australian Industrial Relations Commission.  Print T2042 17/10/00.

25.  Ibid. at 9.

26.  Employee Retirement Income Security Act 1974.  http://caselaw.1p.findlaw.com/scripts/title_search.pl?keyword=Employee+Retirement+Income+Security+Act+1974&title=uscodes.

27.  Ibid. at (1a).

28.  Vizcaino v. Microsoft Corp., 173 F.3d 713 (9th Cir.1999) (Microsoft III).  See:  http://library.findlaw.com/1999/jun/i/127430.html

29.  Barnhart v. New York Life Ins Co, 141 F.3d 1310,1312-13 (9th Cir 1998).

30.  Ibid.

31.  IRS website:  http://www.irs.gov/business/small/article/0,,id=99921,00.html

32.  International Labour Office, The employment relationship, International Labour Conference, 95th Session, 2006.  Report v(1) ILO, Geneva, printed 2005.