Show me the contract! High Court decisions on who’s an employee and who’s a contractor

Consistent with its recent judgment on casual employment in Workpac v Rossato, the High Court of Australia has locked in the primacy of the contract in assessing whether a worker is an employee or an independent contractor.

Businesses familiar with the multi-factorial approach, under which all factors relating to (or the ‘totality’ of) a working relationship are assessed, need to appreciate there has been a change of emphasis in applying that test away from considering the reality of the relationship.  Contracts are key and it is important for businesses to review existing independent contractor arrangements and, where necessary, update contracts.

In the latest decisions handed down this month – CFMEU v Personnel Contracting Pty Ltd[1] (Personnel Contracting) and ZG Operations Australia Pty Ltd v Jamsek[2] (Jamsek) – the Court had to determine whether the relevant workers were employees or independent contractors.

The majority in both decisions held that, if a comprehensive written contract is in place, the test for determining whether a worker is an employee or an independent contractor turns on an assessment of the totality of the relationship having regard only to the rights and obligations in the contract and the circumstances surrounding the making of the contract.

In a significant departure from the longstanding existing practice of the courts, the High Court held that an assessment of how the relationship played out in practice (also known as post-contractual conduct) is irrelevant.  ‘Control’ of the work and the worker remain critical and ‘labels’ are of minimal significance.

Summary of Personnel Contracting

In Personnel Contracting, a labour hire business (Construct) placed workers with construction companies as ‘contractors’. Mr McCourt was a 22 year old British backpacker with a white card, limited construction industry experience and less than $100 of self-bought PPE.

McCourt and Construct entered into a contract described as an ‘Administrative Services Agreement’ (ASA) which provided that:

• McCourt was an independent contractor;
• Construct was responsible for paying McCourt;
• McCourt was obliged to cooperate in all respects with Construct and the host in the supply of labour in a safe, competent and diligent manner; and
• Construct could terminate McCourt’s engagement if he failed to obey Construct’s or the host’s directions.

McCourt was also contractually bound by a separate document to follow all worksite safety rules and procedures given by the host and to report incidents to the relevant representative of the host.  McCourt worked for two separate periods under the ASA, for host company Hanssen.

The High Court carefully examined the contract and found that the ASA provided such a degree of ‘control’ over McCourt’s work that he was an employee of Construct, despite the ‘contractor’ label. The Court overturned earlier findings that McCourt was a contractor. It is a big win for construction unions challenging this particular model of labour hire operations.

Summary of Jamsek

Jamsek involved two truck drivers, Mr Jamsek and Mr Whitby.  They were employed by a predecessor to ZG Operations between 1977 and late 1985/early 1986 (the Change Time), when the company advised them that they could not be guaranteed a job going forward if they did not agree to become independent contractors.

The two drivers then set up partnerships with their wives in 1986; split income for tax purposes; purchased trucks and allocated expenses and deductions through the partnerships.  They confirmed the new arrangements in a written contract with the company at a daily payment rate and worked this way for another 30 years with some minor changes along the way.

The drivers later claimed to be employees from 1986 onwards. The High Court disagreed, finding them to be legitimate contractors from the Change Time.

The Court said, “[g]iven that the genesis of the [1986] contract was the company’s refusal to continue to employ the respondents as drivers, and the respondents’ evident acceptance of that refusal, it is difficult to see how there could be any doubt that the respondents were thereafter no longer employees of the company“.[3]

Key principles arising from the High Court judgments

Importance of the contract: Contracts remain the starting point. Both cases involved working relationships that had been recorded in comprehensive written contracts.

Totality of relationship: Following the High Court decisions, it is still correct to approach the task of assessing whether a worker is an employee or a contractor by looking at the totality of the relationship.  This is to be done by considering the various indicia of employment that have been established through the case law over the years (for example, the right of control, the right of the worker to work for others, whether the worker has to wear a uniform and so forth).

However, where the agreement between the parties is recorded in a comprehensive contract, the indicia of employment should now only be assessed against the express terms of that contract and the circumstances surrounding the making of the contract, without:

• regard to post-contractual conduct (even if such conduct might show that the reality of the situation is different to the description of it provided in the contract); or
• any consideration that the principal/employer could have a higher degree of bargaining power than the worker.

Control: One indicia of employment which has always been and remains central to that analysis is that of ‘control’. The High Court clarified that this relates to the right to control the work of the worker at a higher level, not whether there is a right to control the minutiae of the worker’s day to day tasks.

For example, in Personnel Contracting, Construct had the right to control McCourt under the ASA to work in accordance with the host’s directions, and Construct could terminate the contract for non-compliance.  It did not matter that the host, rather than Construct, controlled the daily tasks undertaken by McCourt.

Beware of labels: The description of the working relationship (contractor or employment) is of minimal impact. Any description attributed to it by the parties is a statement of their opinion only.

What happens if the contract is not comprehensively written down?

The High Court decisions are only directly relevant if a comprehensive written contract is in place.

Even in that case, it remains open to a party to argue that:

• the written contract was not validly made or is a sham, and therefore it should be ignored;
• the written contract has been changed by waiver, or by variation based on the subsequent conduct of the parties (in which case the post-contractual conduct of the parties becomes relevant to determining the terms of the variation); or
• the contract should be set aside under equitable doctrines.

If, on the other hand, it is established that the contract is not wholly written, or not written at all, the assessment of post-contractual conduct assumes more relevance.

What does this mean for business?

The reality for many businesses is that ‘contracting’ arrangements often develop over many years without being recorded (or updated) in a single clear document. Regular readers of our blog will know that we are always in favour of a well-drafted contract, for a host of reasons.

The High Court has now reinforced the message that the express terms of the contract between the parties are key to working out how to characterise the relationship between the parties.  The terms of the contract form the bedrock of, and the parameters for, any assessment of the nature of that relationship.

Accordingly, it is important for businesses to ensure that their independent contractor relationships are correctly characterised in a comprehensive contract that accurately reflects the agreement between the parties.

For more information or assistance with these issues, please contact our Employment, Workplace Relations and Safety team.