Independent contractor or employee? The importance of the contract.

By 7 March 2022Workplace
Independent contractor or employee The importance of the contract.

On 9 February 2022, the High Court of Australia delivered two judgments that significantly change how workers are characterised as an independent contractor or employee.

In the decisions of Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations & Anor V Jamsek & Ors [2022] HCA 2 (Jamsek), the High Court highlighted the importance of contractual terms in characterising workplace relationships.

Historically, courts have used a multi-factor approach when determining whether the relationship was one of principal/contractor or employer/employee. However, in Personnel Consulting and Jamsek, the High Court outlined the following principles apply when characterising a relationship:

  • Where parties have comprehensively committed the terms of their relationship to a written contract, the efficacy of which is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute, the characterisation of that relationship as one of employment or otherwise must be based on the rights and obligations of the parties under that written contract.
  • These rights and obligations must be determined according to accepted contractual interpretation rules.
  • A broad analysis of the parties’ subsequent conduct is unnecessary and inappropriate unless there is a suggestion that the contract has been varied.

Personnel Contracting – The facts and the decision

Mr McCourt, a British backpacker had travelled to Australia on a Working Holiday visa. He entered into an agreement with Personnel Contracting (a labour-hire company), under which Mr McCourt was defined as a “self-employed contractor”.

Personnel Contracting assigned Mr McCourt to work on two construction sites. Mr McCourt performed basic labouring tasks under the supervision and direction of the client. There was no contract between Mr McCourt and Personnel Contracting’s client, however, there was a Labour Hire Agreement in place between Personnel Contracting and its client.

The CFMMEU and Mr McCourt commenced proceedings against Personnel Contracting seeking compensation and penalties under the Fair Work Act 2009 (Cth) (FW Act) on the basis Mr McCourt was an employee and not an independent contractor.

In applying a multi-factor approach, by reference to the terms of the agreement and the work practices imposed by Personnel Contracting and its client, the primary judge determined that Mr McCourt was an independent contractor. This decision was upheld on appeal by the Full Court of the Federal Court; however, on appeal the majority of the High Court found that Mr McCourt was an employee.

The High Court stated that the use of the multi-factor test to determine the character of the relationship is problematic, creating uncertainty for parties and for the courts, and can result in inconsistent outcomes.

Instead, the Court had primary regard for the terms of the contract between the parties. Under the contract, Personnel Contracting had the right to direct Mr McCourt where to work, and Mr McCourt promised Personnel Consulting that he would supply his labour to the client. In return, Mr McCourt was entitled to be paid by Personnel Contracting for the work he performed.

The fact that the parties chose the label “contractor” to describe Mr McCourt did not change the character of that relationship as set out in the agreement as one of employer and employee.

Jamsek – The facts and the decision

For 40 years, Mr Jamsek and Mr Whitby were engaged as truck drivers by ZG Operations. While Mr Jamsek and Mr Whitby were initially engaged as employees; in 1985 – 1986, they were advised that ZG Operations would only use their services if they purchased trucks and ‘became contractors’. Mr Jamsek and Mr Whitby agreed to the new arrangement, purchased trucks from ZG Operations and set up partnerships with their respective wives.

Each partnership entered into written contracts with ZG Operations for the provision of delivery services, paid the maintenance and operational costs of the trucks, invoiced ZG Operations for its delivery services, and was paid by ZG Operations for the provision of those services. Mr Jamsek and Mr Whitby’s partnerships with ZG Operations were terminated in 2017.

Mr Jamsek and Mr Whitby commenced proceedings seeking compensation for alleged breaches of the Fair Work Act, superannuation and long service leave legislation on the basis they were employees of ZG Operations; however, the Court concluded they were not employees of ZG Operations. On appeal, the Full Court of the Federal Court overturned the decision, finding they were employees. On appeal to the High Court, it was unanimously held that they were not employees of ZG Operations.

Consistent with the approach adopted in Personnel Contracting, the High Court held that where “parties have comprehensively committed the terms of their relationship to a written contract, the efficacy of which is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute, the characterisation of that relationship as one of employment or otherwise must proceed by reference to the rights and obligations of the parties under that contract.”

Importantly, when the parties entered into contracts in about 1985, the contracts between the partnerships and ZG Operations involved the provision by the partnerships of both the use of the trucks owned by the partnerships and the services of a driver to drive those trucks on the basis they were contracts for the carriage of goods. This relationship was found not to be an employment relationship.

Key Takeaways

These decisions emphasise the importance of written contracts when determining the true nature of the relationship between parties.

If you engage independent contractors, you should review your existing arrangements and agreement terms. Are you entering into new independent contracting arrangements? It is important that these contracts are drafted appropriately to reflect the parties’ intentions and arrangements.

If you need advice about employment versus independent contractor arrangements, our Brisbane & Toowoomba Employment Lawyer Suzanne Wishart at Murdoch Family Lawyers on 1300 068 736.

 

This publication has been carefully prepared, but it has been written in brief and general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.

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