Are You Employing an Employee or an Independent Contractor?

The High Court of Australia recently delivered two decisions which decisively hold that in order to determine whether a person is an employee or independent contractor it is necessary to look at the legal rights and obligations agreed under the relevant contract.

The approach is consistent with that of the High Court in its recent decision in WorkPac Pty Ltd v Rossato [2021] HCA 23 in relation to casual employment.'

These decisions move away from the previously accepted 'multi-factorial' test adopted in Australian courts over the past 30 years. In doing so, they provide greater certainty for companies who properly record their relationships with employees and independent contractors in written contracts.

Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022]

The first case - Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) – concerned Mr McCourt, a 22 year old British backpacker who had travelled to Australia on a working visa. He found work with labour hire company Construct and signed a contract where he was described as a 'self-employed contractor'. Mr McCourt was allocated to work on construction sites run by host builder, Hanssen worked on two construction sites across two periods performing labouring duties. Mr McCourt performed labouring tasks assigned to him by site supervisors employed by Hanssen. There was no contractual relationship between Mr McCourt and Hanssen (although there was a labour hire agreement between Construct and Hanssen). This type of arrangement has been known as an 'Odco' relationship, named after a previous Federal Court case.

After his engagement with Construct ended, Mr McCourt and the Construction Forestry, Maritime, Mining and Energy Union commenced proceedings against Construct and Hanssen in the Federal Court seeking compensation and penalties for alleged breaches of the Fair Work Act 2009 (Cth). The claim was that Mr McCourt alleged that he was an employee of Construct.

A primary judge and Full Court on appeal held that Mr McCourt was an independent contractor of Construct. In doing so – and although the Full Court recognised that this conclusion was not 'intuitively sound' – both courts applied a 'multi-factorial test' by considering the terms of the contract between Mr McCourt and Construct and conduct that occurred after the formation of the contract. Since at least 1986 (when the High Court handed down its decision in Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16), and again in 2001 (when the High Court handed down its decision in Hollis v Vabu (2001) 207 CLR 21), this 'multi-factorial test' has been the unusual approach applied by courts to determine a person's employment status.

In holding that Mr McCourt was, contrary to what was decided by the courts below, an employee of Construct, the majority of the High Court concluded that it is not necessary to conduct a 'wide-ranging' review of the parties' dealings (e.g., adopt a 'multi-factorial' approach) in this case. Instead, the majority of the High Court stated the proper approach was to turn to established principles of contract law in circumstances where the parties' rights and obligations were entirely contained within a written contract. In this respect, assuming the contract has not been varied or challenged for invalidity (e.g., a sham contract) or there has been other conduct waiving or stopping the contract, the characterisation of whether a person is an employee (or not) is determined by reference to a consideration of the legal rights and obligations of the parties under the contract that has been entered into.

Although different weight was given to these factors across separate judgments, persuasive in the circumstances of Mr McCourt's contract was that Construct:

·    determined how much Mr McCourt was paid;

·    paid Mr McCourt directly;

·    retained a 'right of control' over Mr McCourt that was 'fundamental' to its business as a labour hire agency providing workers to hosts; and

·    was able to terminate the engagement if he failed to obey the directions of it or Hanssen.

The High Court also made it unambiguously clear that it is irrelevant to this assessment:

·    how parties choose to label their relationship amongst themselves (whether that is 'employee', 'contractor' or something else) or their own understanding of the relationship noting that the parties opinions on a matter of law is irrelevant; and

·    whether a person is free to accept or reject offers of work or work for another company, as this is a common feature of casual employment.

ZG Operations Australia Pty Ltd v Jamsek

The second case – ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 – involved two truck drivers, Mr Jamsek and Mr Whitby, who were initially employed by ZG and in 1985 or 1986 entered into agreements with ZG to purchase their own trucks and 'become contractors'.

Mr Jamsek and Mr Whitby established partnerships with their wives. Both partnerships then entered into a contract with ZG and purchased trucks (for which it was responsible for the maintenance and other costs). Each partnership was paid by ZG for delivery services provided. Part of the revenue earned was used to meet the costs of operating the trucks. Net revenue was declared as part of partnership income and split between husband and wife. This is typically known as an 'owner-driver' arrangement.

Following the termination of the contracts between the partnerships and ZG in 2017, Mr Jamsek and Mr Whitby commenced proceedings in the Federal Court seeking payments of entitlements associated with employment. As with Personnel Contracting, these claims were premised on Mr Jamsek and Mr Whitby alleging they were employees of ZG.

At first instance, the primary judge concluded that Mr Jamsek and Mr Whitby were independent contractors. On appeal, the Full Court overturned this finding and concluded that Mr Jamsek and Mr Whitby were employees of ZG. In reaching this conclusion, the Full Court considered in turn the 'substance' and 'reality' of the relationship (including the disparity in bargaining power and how the parties had conducted themselves across a 40 year relationship) to be determinative.

In again overturning the Full Court, the High Court unanimously found that Mr Jamsek and Mr Whitby were independent contractors and not employees of ZG. As it set out in Personnel Contracting, the majority of the Court emphasised, it is necessary to consider the rights and obligations provided under the written contract (even if poorly drafted) to determine the correct characterisation of the relationship and the disparity in bargaining power cannot affect the meaning or effect of what the parties had agreed if the validity of the contract was not being challenged.

Although again different weight was provided to each factor, persuasive in the matter was that:

·    the contracts in place were between each of the partnerships and ZG;

·    the effect of the contracts was for each partnership to operate and maintain a truck for the delivery of ZG's goods and the partnerships were paid as such;

·    ZG was not able to exercise much control over the provision of those delivery services; and

·    although Mr Whitby and Mr Jamsek had set working hours, flexibility was built into the contracts for remuneration to increase as extra work was undertaken.

Having reached this conclusion, the High Court has remitted to the Full Court a question regarding whether Mr Jamsek and Mr Whitby were employees under the expanded definition in superannuation legislation.

Through these decisions, the High Court has comprehensively held that to establish whether a person is an employee or independent contractor it is necessary to give primacy to the

legal rights and obligations contained in the contract entered between those parties and not conduct that occurs after the contract was formed.

It will be important that companies review their written contracts with employees and independent contractors to ensure that the contracts correctly give effect to the arrangement the parties understood were being entered into when the contract was formed. It doesn’t matter how a relationship has been labelled between parties or how parties understand the characterisation of the relationship. This may be of concern to some.

However, now that the uncertainty of the 'multi-factorial' approach has ended, companies and their employees and independent contractors now have greater certainty that the relationship they entered via a well-drafted contract which accurately records their arrangement will not be found by a Court at a later time to in fact reflect a different relationship.