Independent contractor or employee? The High Court rules on the distinction
Two landmark decisions in the High Court of Australia were handed down last week, signalling a major shift away from the ‘multifactor test’ to the primacy of the contract terms, when determining whether a worker is an independent contractor or employee.
The Court found that where parties had entered into a valid and comprehensive written contract, the focus should be on the rights and duties established by that written contract, rather than the subsequent conduct of the parties, when assessing the legal characterisation of the relationship.
Decision One – Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1
In Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMMEU v Personnel Contracting), the question before the Court was whether a British backpacker, Mr McCourt, was an employee or independent contractor of labour-hire company, Personnel Contracting trading as Construct. The proceedings brought by the CFMMEU on behalf of McCourt alleged that McCourt was an employee of Personnel Contracting. McCourt had signed an Administrative Services Agreement (ASA) with Personnel Contracting, which described him as “self-employed” (i.e. an independent contractor).
Under the ASA, Personnel Contracting had the right to determine who McCourt would work for and McCourt promised Personnel Contracting that he would co-operate in all respects in the supply of his labour. The Court also took into consideration that the key asset of Personnel Contracting’s business was to supply labour.
The Court said Personnel Contracting’s claim that it was "simply a finder of labour" ignored the "complex suite of rights and obligations" under its ASA. The effect of the rights and duties created by the ASA was that McCourt was an employee of Personnel Contracting and the mere label of McCourt as a “contractor” under the ASA was not determinative of their legal relationship.
In finding that McCourt was an employee of Personnel Contracting, the Court stated that:
“…where the terms of the parties' relationship are comprehensively committed to a written contract, the validity of which is not challenged as a sham nor the terms of which otherwise varied, waived or the subject of an estoppel, there is no reason why the legal rights and obligations so established should not be decisive of the character of the relationship.”
It was also found that an analysis of the parties’ conduct after entering the contract was inappropriate, unless there was a suggestion that the contract had been varied, which did not apply in this case.
Decision Two – ZG Operation & Anor v Jamsek & Ors [2022] HCA 2
On the same day, the High Court also handed down its ruling in ZG Operation & Anor v Jamsek & Ors [2022] HCA 2, where it relied on the rationale in CFMMEU v Personnel Contracting, concluding that two truck drivers engaged by a company were not employees but independent contractors.
Mr Jamsek and Mr Whitby were initially engaged as employees of the company and drove trucks provided by the company. In 1985 or 1986, the company advised it would no longer employ the drivers, but would continue to use their services if they purchased the trucks and entered into contracts to carry goods for the company. Jamsek and Whitby subsequently formed partnerships with their respective wives, and the partnerships each entered into a written contract with the company under which Jamsek and Whitby were owner-drivers engaged as independent contractors. The agreements were terminated in 2017 and the drivers brought proceedings seeking payment of employee entitlements.
Consistent with the approach adopted in CFMMEU v Personnel Contracting, the Court looked to the terms of the written contracts between the partnerships and the company to find that Jamsek and Whitby were independent contractors.
The Court again emphasised it was unnecessary to undertake “the task of raking over the day‑to‑day workings of a relationship spanning several decades” and focused on the terms of the contract identifying that the partnerships owned the trucks and were to provide the services of a driver.
Key Takeaways for Employers
Whilst the cases provide some certainty about the approach the Courts will adopt when determining whether a worker is an independent contractor or employee, the cases also highlight the serious legal and commercial ramifications which can arise from mischaracterising workers.
Beneficially for organisations, the Court focussed on the written terms of the applicable contract in determining whether the workers were employees or contractors. Ensuring your written employment contracts and contractor agreements are carefully and accurately drafted is more critical than ever.
Businesses should:
review their current independent contractor and employment agreements;
ensure contracts are issued prior to or at the commencement of any employment or engagement of an employee or contractor, which clearly sets out the rights and duties of the parties and the legal relationship between the parties; and
assess the suitability of current engagements.
