Employee or Independent Contractor?
Decisions taken by the High Court in February 2022 in relation to (1) ZG OPERATIONS & ANOR v JAMSEK & ORS & (2) CFMEU & ANOR v PERSONNEL CONTRACTING PTY LTD may make it prudent for many businesses to review their existing contract arrangements with independent contractors in order to mitigate any risk of future claims for entitlements pursuant to the Fair Work Act, the Superannuation Guarantee Act and the Long Service Leave Act.
In both cases, the High Court ruled that the terms of the relationship as laid down in a written contract between both parties were key to determining whether that relationship is one of employment or otherwise.
The Jamsek Case
In the case of Jamsek, two truck drivers (Mr Jamsek and Mr Whitby) were initially engaged as employees of ZG Operations and drove the company’s trucks. However, in the mid-1980s, the company offered them the opportunity to “become contractors” and purchase their own trucks. Jamsek & Whitby agreed to the new arrangement and set up partnerships with their respective wives. Each partnership executed written contracts with the company for the provision of delivery services.
Some 30 years later, Jamsek & Whitby claimed in the Federal Court to be owed entitlements under the Fair Work Act, the Superannuation Guarantee Act and the Long Service Leave Act on the basis that they were employees of the company. The primary judge concluded that the respondents were not employees, and instead were independent contractors. The Full Court overturned that decision and held that, having regard to the “substance and reality” of the relationship over 30 years, the respondents were employees.
In February, the High Court unanimously held that Jamsek & Whitby were not employees on the basis that they had committed to the terms of their relationship via a written contract, and that the characterisation of that relationship under the contract was that of principal and independent contractors.
In other words, the actual terms of the written contract at the time the parties enter the relationship (or vary the terms) are determinative of the question of whether the relationship between the parties is one of employment or principal/independent contractor. The approach that had been favoured by the Full Court of the Federal Court, of weighing up the circumstances across the course of the relationship and post-engagement conduct of each party to determine the nature of the relationship of the parties, has been rejected.
You can read a summary of the High Court judgement here.
The Personnel Contracting Case
In the case of Personnel Contracting, the High Court applied the same reasoning – but in very different circumstances.
Personnel Contracting , trading as Construct, hired a 22 year old British backpacker, Daniel McCourt, as an independent contractor undertaking building labourer duties. He was assigned to work at a construction site run by Hanssen Pty Ltd through a contract for services between Hanssen and Construct (with no contract between Hanssen and Mr McCourt).
In this so-called “Odco” labour hire arrangement, a labour hire agency engages workers as independent contractors, hiring them out to third parties. In such cases the worker is not considered an employee of either party.
In the case brought by the CFMEU, it was alleged that as Mr McCourt had no intention of running his own business and worked under supervision and control, he was a casual employee of Construct (and was therefore entitled to benefits under the relevant Award and the Fair Work Act).
At first instance, the Federal Court determined that Mr McCourt was an independent contractor. Applying earlier precedent cases on this issue, the Judge determined that the fact the written contract between Construct and Mr McCourt identified Mr McCourt as an independent contractor was the “tie-breaker”.
On appeal, the FCFCA upheld the primary judgment, again placing particular weight on the written contract between the parties reflecting an independent contractor arrangement.
However, the High Court found that Mr McCourt was an employee at law, overturning the decision of the FCFCA. A key fact was that under the contract, Construct had significant control over the work of Mr McCourt – including for whom he could work and the type of work he would be required to do. Mr McCourt could not be said to be carrying on business on his own account, rather, he was engaged by Construct to serve Construct in its business.
You can read a summary of the High Court judgement here.
What do these decisions mean for organisations?
- Well drafted written contracts with independent contractors will be paramount in managing the risk that independent contractors may be deemed as employees.
- The label given to the relationship within any written contract terms may be given short thrift by a court. Instead, a court will look to the contract terms to determine the actual rights and obligations that have been agreed to by the parties, and from that assessment determine the nature of the relationship.
- Careful consideration of the structure of the relationship is still important. This includes concepts such as how payments are made, who can make decisions about when and how the work is performed, who provides the tools of trade, and who bears the risk.
- Any variations to the arrangement between two parties should be effected by way of an updated written contract or written variation to the original contract.
- It will be easier for a principal to maintain the assertion of an independent contractor relationship where some or all of the following apply:
- significant tools of trade are supplied by the independent contractor (eg trucks);
- there is an interposed legal entity controlled by the individual (corporate entity, partnership etc);
- there is a clear written contract with the right mix of terms to indicate the nature of the relationship.
What should businesses do now?
A business should:
- ensure that the terms of an existing independent contractor relationship are documented in a properly drafted agreement, which excludes (where reasonably possible) any terms that may support a finding that the relationship of the parties is one of employment;
- when engaging an independent contractor, a highly effective risk management strategy is to ensure that the independent contractor is engaged through a corporate entity or legal structure (such as a partnership). At the very least, a business should require the independent contractor to have an Australian Business Number (ABN);
- when considering the engagement of an independent contractor, such as a consultant providing mostly or exclusively labour, carefully consider the nature of the remuneration structure, who can make decisions about the work to be performed by the independent contractor, and who provides tools of trade.
For more information and expert advice, ask to speak to a lawyer at Ezra Legal on (08) 8231 6100 or email admin@ezralegal.com.au
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Julian Roffe
Practice Manager
Ezra Legal
