Contractor or Employee: High Court Shifts Focus to the Terms of the Written Contract

The crux of these decisions was a finding by the High Court that where there is a written agreement in place between the parties, the validity of which is not challenged for reason of being a sham or otherwise, the question of whether a worker is an independent contractor or an employee is to be answered by reference to the rights and duties contained in that written agreement. Importantly, it was held that in these circumstances, it is not appropriate to apply the “multifactorial test”, which Courts have been using for some time to determine the practical realities of the relationship between the parties.

The two cases are summarised below.

ZG Operations Australia Pty Ltd & Anor v Martin Jamsek & Ors¹

Facts

Between 1977 and 2017, Mr Jamsek and Mr Whitby were engaged as truck drivers by ZG Operations Australia Pty Ltd (ZG Operations). The workers were initially engaged as employees, but in 1986, ZG Operations insisted that it could no longer employ the workers and would only continue to use their services if they agreed to be engaged as independent contractors. Mr Jamsek and Mr Whitby agreed, and they both established a partnership with their spouses and entered into contracts titled “Contract Carriers Arrangement” with the company. The partnerships purchased trucks from ZG Operations, made deliveries as requested by ZG Operations and invoiced ZG Operations for the delivery services provided. When ZG Operations terminated the contracts in 2017, the workers commenced proceedings alleging that they were employees and were therefore owed superannuation, leave and other employee-related entitlements.

Procedural History

In the first instance, the primary judge held that Mr Jamsek and Mr Whitby were independent contractors of ZG Operations. Upon appeal to the Full Court of the Federal Court of Australia, this decision was overturned, and the workers were deemed to be employees. In both decisions, the multifactorial test was used to characterise the relationships.

The High Court’s Decision

The High Court held that in circumstances where a written contract comprehensively regulates the relationship between the parties, the validity of which is not challenged by a sham or otherwise, the characterisation of that relationship is to be determined by reference to the rights and duties created by the written contract. This approach is similar to the one taken in CFMMEU v Personnel Contracting which is the second case discussed below.

As the workers did not contend that the written contracts were a sham, nor did they challenge the validity of them, the High Court determined that the contracts made it clear that Mr Jamsek and Mr Whitby would no longer be employees of ZG Operations. The fact that ZG Operations had superior bargaining power did not alter the validity of the contracts. With respect to the terms of the written contracts, the High Court found it was clear from these terms that Mr Jamsek and Mr Whitby were conducting businesses of their own, utilising the partnership structure of their businesses to enjoy the advantages of splitting the income generated with their fellow spouses/partners. For these reasons, the workers were found to be independent contractors of ZG Operations.

Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (CFMMEU v Personnel Contracting)²

Facts

In 2016, Personnel Contracting Pty Ltd (Personnel Contracting), a labour-hire company based in Perth, engaged Mr McCourt to perform construction work at various project sites operated by Hanssen Pty Ltd (Hanssen), a major client of Personnel Contracting. Mr McCourt was a 22-year-old British backpacker with limited prior experience as a bricklayer and in hospitality. The Administrative Services Agreement (ASA) that governed the relationship between the parties described Mr McCourt as a ‘self-employed contractor’. Personnel Contracting ceased to provide work to Mr McCourt from about 30 June 2017.

Mr McCourt and CFMMEU commenced proceedings against Personnel Contracting, claiming that Mr McCourt was an employee of Personnel Contracting and therefore should have been paid in accordance with the Building and Construction General On-site Award 2010.

Procedural History

In the first instance, the primary judge used the multifactorial test to resolve the question of whether Mr McCourt was an employee or an independent contractor. His Honour observed that since the relationship between Mr McCourt and Personnel Contracting embodied both employment and independent contracting characteristics, the description of Mr McCourt in the ASA as a contractor was decisive. Accordingly, his Honour held that Mr McCourt was an independent contractor, and this conclusion was upheld by the Full Court of the Federal Court of Australia upon appeal.

The High Court’s Decision

Having regard to the rights and duties created by the ASA, the validity of which was not challenged by Mr McCourt as a sham or otherwise, the majority of the High Court determined that Mr McCourt was an employee of Personnel Contracting. This is because Mr McCourt could not have been operating his own business, as it was Personnel Contracting that was entitled to fix Mr McCourt’s remuneration for his work, to act as Mr McCourt’s paymaster, and to terminate Mr McCourt’s engagement if he failed to comply with the directions of Personnel Contracting or Hanssen. It follows that Personnel Contracting had a right of control over Mr McCourt. It did not matter that Hanssen directed Mr McCourt’s daily tasks, nor did it matter that the relationship was labelled under the ASA as an independent contracting relationship. Hence, the majority determined that the rights and duties under the ASA evidenced that Mr McCourt was engaged by Personnel Contracting as an employee.

Key Takeaways

These decisions provide some clarity as to the circumstances where a court or tribunal will undo the contractual arrangements entered into between a principal and a contractor and find that an employment relationship exists instead. They provide some assurance to businesses who engage independent contractors using carefully drafted written agreements and act according to such agreements. To this end, the decisions highlight the importance of businesses having in place robust agreements with their independent contractors which reflect, so far as is practicable, the key characteristics of genuine independent contracting relationships, such as the exercise of control by the contractor and the carrying on of an independent business by the contractor.

If you have any questions as to what these decisions mean for you and your business, or if you require any advice or assistance generally concerning independent contractor or employee arrangements, please do not hesitate to contact Addisons’ employment law team.