11 Feb INDEPENDENT CONTRACTORS VS EMPLOYEES: HIGH COURT LOOKS TO THE CONTRACT

Two highly anticipated decisions considering whether workers were employees or independent contractors have been handed down by the High Court in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (“Personnel Contracting”) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (“ZG Operations”).

The decisions provide much needed clarity on the test of whether an individual is an employee or independent contractor.

Background and Earlier Decisions

Personnel Contracting

• The worker in question was engaged under the terms of an “Administrative Services Agreement” with Construct, a labour hire organisation.

• Construct would offer the worker an opportunity to provide labour to third-party building companies.

• Building companies oversaw the workers day-to-day work and directly paid Construct for the work provided.  Construct would then pay the worker.

• The primary judge and, on appeal, the Full Court of the Federal Court of Australia, determined that the worker was an independent contractor, having regard to the long-standing “multi-factorial” employee/independent contractor test.

ZG Operations

• The two workers in question had been engaged as truck drivers with a single company for 40 years (which underwent changes in ownership during that time).

• The workers were initially engaged as employees, but agreed to enter into arrangements to become independent contractors, by forming partnerships and entering into new contracts, while also purchasing their own trucks to carry goods.

• When the working relationship ended, a dispute arose about whether the workers were independent contractors or employees, and if they were owed employee entitlements, including superannuation and long service leave.

• The primary judge’s decision that the workers were independent contractors, was overturned by the Full Court of the Federal Court, which found that the “substance and reality” of the relationship was that the workers were employees.

High Court decisions on appeal

The High Court upheld both appeals and found the worker in Personnel Contracting was an employee and the workers in ZG Operations were independent contractors.

In determining if the relationships were one of independent contractor or employee, the High Court focused on the terms of the contracts.

The High Court found that the terms of the contract gave rise to the relationship.  

The majority judgements in Personnel Contracting, considered the importance of the contract in determining the nature of the relationship. Kiefel CJ, Keane and Edelman JJ in particular noted that without submissions that a contract is a sham, is ineffective under general law or statute, has been varied or otherwise displaced by conduct of the parties, there is no occasion to look outside of the terms of the contract and review the subsequent conduct of the parties in order to determine whether an employment relationship exists.

Rather, the primary consideration is the rights and obligations under the contract and are determined by the established principles of contractual interpretation.  The majority cautioned against using subjective judgement or simply mechanically ticking off a list.

The unanimous judgment in ZG Operations reflected the reasoning set out in Personnel Contracting, that is, focus should be placed on the contract to determine the relationship in the absence of any questions over the validity of the contract.

Practical tips for employers

The High Court’s ruling simplifies the assessment for determining whether a person is an independent contractor or employee in circumstances where the character of the relationship between the parties can be determined by reference to the terms of the contract.

Employers should, however, still ensure they do not simply rely on labelling the contract as one of independent contractor or employee as determinative of the relationship.  The majority in Personnel Contracting found that while the worker’s contract described him as a contractor, he was actually an employee of Construct given the nature of the rights and obligations between the parties under the contract.

Getting this wrong can result in costly back payment claims and financial penalties.   

To ensure your contracts are drafted to ensure the relationship is correctly defined, please contact the team at HR Law.  We can conduct a full review of your current contracts, prepare new contracts and/or advise you on any specific questions you may have.