The thorny issue of whether an individual is an employee or contractor is of great significance and getting the classification wrong can mean the imposition of significant monetary penalties and liability for outstanding wages, taxes and other benefits. However, knowing with some certainty whether a person is an independent contractor or not is not clear-cut. In fact, this issue has occupied much of the Court’s time over the years and been the subject of considerable judicial consideration.
Until last week, the position regarding the determination of whether an individual was an employee or contractor turned on a multi-faceted test, whereby the courts would examine the actual course of conduct of the parties and all the surrounding circumstances to determine the issue, giving significant weight to factors such as the control exercised by the principal over the individual, whether the individual was able to work for others, how they conducted themselves in practice and so forth. This approach appears to have been implicitly accepted by the federal legislature as the Fair Work Act 2009 (Cth) makes specific provisions regarding sham contracting, and states explicitly that the label given to a relationship will not be determinative of the relationship, if in fact the true course of conduct between the parties is one of employment.
The High Court, last Wednesday appears to have jettisoned this extensive body of law, handing down two significant decisions that revise the approach to be taken by courts when determining whether a person is an employee or independent contractor.
In the decisions of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd  HCA 1 (“Personnel Contracting”) and ZG Operations Australia Pty Ltd v Jamsek  HCA 2 (“Jamsek”) (together the “Decisions”), the High Court determined that the terms of any written contract between a principal and an individual that provides services to that principal are the crucial, and in fact the starting point in considering the legal character of the relationship.
Independent contractor arrangements have become an increasingly present feature of Australian industrial relations, as an alternative form of labour to the traditional employer-employee relationship. While employees are expected to perform work during set hours, under the direction and control of the employer, on an ongoing basis (with some exceptions), independent contractors are generally engaged to perform specific tasks, and typically have a high level of control over how and when the work is performed.
Over the years, the courts have heard countless arguments between individuals and companies as to whether an individual is a contractor or employee of the business. Independent contractor arrangements can be very appealing to businesses, as contractors do not enjoy the same entitlements as employees, such as entitlements to paid leave, superannuation contributions, and the ability to bring an unfair dismissal claim and other employment related claims at the cessation of employment. This has led to instances of “sham” contracting, where a business inappropriately engages an individual as a contractor, when the true nature of the relationship is that of employer-employee.
Previously, the courts applied a “multi-factor” test when determining whether a worker was an employee or a contractor. The multi-factor test takes into consideration the terms of any written agreement in place, but this is not the sole or determinative consideration under this approach, and the courts would additionally consider the ‘substance and reality’ of the relationship. Factors commonly considered by courts in such proceedings include, but are not limited to:
- the degree of control the company has over the worker;
- the existence, and terms, of a written contract between the parties;
- the degree of flexibility or control the worker has over how and when they perform the work (including whether the worker can delegate the work to be performed by someone else);
- the extent of the worker’s integration into the business (for example, whether the worker wears a company uniform);
- the manner in which the worker is paid; and
- how the parties characterise the relationship.
The application of the multi-factor test is often a complex task, as no one factor is considered to be decisive. In turn, this has caused a high degree of uncertainty for businesses that entering such arrangements may expose the business to significant claims for backdated entitlements and pecuniary penalties in the event the worker is incorrectly classified as an independent contractor.
In the first of the Decisions, the High Court considered whether a contractor arrangement between Daniel McCourt and Personnel Contracting ought to properly be defined as an employment relationship.
Mr McCourt was engaged by Personnel Contracting, a labour hire agency, to perform services as a labourer on two construction sites for Hanssen Pty Ltd (“Hanssen”) for periods in 2016 and 2017. Such tripartite arrangements, in which a worker is engaged by a labour hire agency to perform work for a third party to whom the worker has no legal relationship, are often referred to as the “Odco” model of labour hire.
Mr McCourt, through the CFMMEU, commenced proceedings against Personnel Contracting in the Federal Court, alleging that Mr McCourt was, in fact, an employee of the company, and seeking compensation and penalties for alleged breaches of the Fair Work Act 2009 (Cth).
Mr McCourt’s claim was rejected by the trial judge, who held that he had been correctly classified as an independent contractor. On appeal, the Full Bench of the Federal Court maintained this finding, albeit reluctantly. In the reasons for judgment, the Court was critical of the complexity and inconsistency of the multi-factor test, particularly with reference to “Odco”-style contracts. However the Court felt bound to follow past precedent which found these Odco style contracts to be one of independent contractor rather than employment.
On appeal, the High Court overturned the Full Bench decision, finding that Mr McCourt was, in fact, an employee of Personnel Contracting.
The majority of the High Court placed a strong emphasis on the terms of the written agreement between the parties. According to Kiefel CJ, Keane and Edelman JJ:
“where the parties have comprehensively committed the terms of their relationship to a written contract the validity of which is not in dispute, the characterisation of their relationship as one of employment or otherwise proceeds by reference to the rights and obligations of the parties under that contract. Where no party seeks to challenge the efficacy of the contract as the charter of the parties’ rights and duties, on the basis that it is either a sham or otherwise ineffective under the general law or statute, there is no occasion to seek to determine the character of the parties’ relationship by a wide ranging review of the entire history of the parties’ dealings. Such a review is neither necessary nor appropriate because the task of the court is to enforce the parties’ rights and obligations, not to form a view as to what a fair adjustment of the parties’ rights might require.”
In essence, the majority of the High Court considered it unnecessary to embark upon a broad examination of the relationship in this case, given the existence of a valid and detailed written contract between the parties. The Court held that the starting point of any examination of this issue is the contract agreed between the parties and what the contract itself provides. If in practice the contract provides for its execution in a manner that is more akin to a relationship of employment, then the true nature of the relationship will be one of employment and vice-a-versa. This approach that upholds the primacy of the written contract is consistent with the High Court’s recent decision in relation to casual employees, which we have previously examined.
The majority’s departure from the multi-factor approach was not agreed by Gageler and Gleeson JJ, who were of the view that the traditional multi-facet approach be adopted.
Practically, in this matter the majority of the High Court found that although the contract was labelled an independent contractor agreement, when performed in accordance with its terms, it actually provided for employment relationship. In this regard, the Court found that the actual terms of the contract provided for extensive control over the manner in which the employee performed the work and as such it could not be said that the contract was one of independence.
The second of the Decisions concerned similar arguments brought by two truck drivers, Mr Jamsek and Mr Whitby, that they were in fact employees of ZG Operations Australia Pty Ltd (“ZG Operations”), and had been improperly classified as contractors by the company in breach of the Fair Work Act 2009 (Cth).
Both drivers had provided labour to ZG Operations and its predecessor companies (collectively referred to as “the Company”) for an extensive period of time, spanning nearly 40 years. The drivers were originally engaged in 1986, at which time the Company informed them they could not be guaranteed a job unless they agreed to become independent contractors.
The drivers agreed, and entered into contracting relationships that involved the purchase of the trucks previously owned by the Company. Relevantly, these contracts (and further contracts signed in 1993, 1998 and 2001) were executed between the Company and partnerships established by Mr Jamsek and Mr Whitby and their respective spouses, as opposed to being with the drivers directly. For the entire period from 1986 to 2017, save for intermittent periods of leave, the drivers performed work exclusively for the Company across consistent hours.
The drivers’ claims in the Federal Court were dismissed by the primary judge, who found that they were indeed independent contractors of the Company upon application of the multi-factor test.
The drivers appealed to the Full Bench of the Federal Court, which upheld the appeal and found that they were, in fact, employees of the Company. The Full Bench paid particular attention to the ‘substance and reality’ of the relationship, noting that the drivers “devoted their working lives” to the Company, and finding that the Company had a significant degree of control over how the work was performed. The Full Bench further gave consideration to the imbalance of bargaining power between the Company and the drivers at the time the contractor agreements were signed.
On appeal, the High Court overturned the Full Bench decision, and found that the drivers were independent contractors.
As was the case in Personnel Contracting, the majority of the High Court emphasised the primacy of the written contract in determining the true nature of the parties’ relationship. The High Court majority decision specifically criticised the full federal Court’s attention to the manner in which the parties conducted themselves over the decades of their relationship.
Of particular significance, according to the majority, were the actions taken in connection with the 1986 contracts – the setting up of the partnerships, and the purchase of the vehicles – that demonstrated a clear intention to establish principal-contractor relationships. The majority did not consider it relevant that the Company had a superior bargaining position at the time the contracts were entered into. The Court placed primacy on the bargain struck between the parties and the fact that the terms of that bargain made it plain it was one of independent contractor not employment.
Significantly, the Court recognised that the bargaining imbalance may have lead to unfair outcomes but stated that there are other remedies to address this issue, namely sham contracting. However, as no suggestion was made that the contract was a sham, this could not be considered.
Practical Lessons for Employers
The Decisions represent a substantial departure from the previous test used when determining whether a worker is an independent contractor or employee, and will provide businesses with greater certainty when engaging contractors moving forward.
Now more than ever, it is essential for businesses to ensure that any independent contractor it engages is clearly bound by a comprehensive, clearly drafted and properly executed written contract. In light of the Decisions, we strongly recommend businesses take the following steps:
- Review existing contracts to ensure the business’ intentions are adequately reflected, and minimise the risk of sham contracting claims;
- Ensure that all contractor arrangements are bound by comprehensive written agreements that clearly define the terms and conditions of the engagement;
- Review and update contract precedents to ensure these documents contain appropriate terms and accurately reflect the principal/contractor relationship.
If you wish to discuss any aspect of this client alert or require specialist advice or assistance in relation to this article, please do not hesitate to contact us.
This alert is not intended to constitute, and should not be treated as, legal advice.