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The High Court of Australia (High Court) recently handed down two decisions which clarified the test for determining the character of the work relationship (i.e. contractor or employee).

In summary, where the parties have entered into a comprehensive written contract, the High Court stated that it will be the terms of the written contract (and the rights, duties and obligations of the parties established by that contract) that will determine a worker’s status as an employee or contractor. The focus will be on the terms of the contract, not the application of the multifactorial test (which has previously been relied on), to determine the true character of the work relationship.

The multifactorial test will still have a role to play in determining the true character of the work relationship where there is no written contract, or the contract is only partially in writing. The totality of the relationship between the parties, including a wide-ranging review of the work relationship, will then be considered, using the multifactorial test, to determine the true character of the relationship.

We outline at the end of this article practical steps that can be taken to continue with, or establish, a contractor work relationship.

Background

The two recent cases relating to whether workers are classified as employees or independent contractors can be summarised as follows:

Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd1 (Personnel Contracting) ZG Operations Australia Pty Ltd & Anor v Martin Jamsek & Ors2 (ZG Operations)
  • Mr McCourt was a back packer engaged by Personnel Contracting t/a Construct (Construct) as a construction worker. Construct was engaged to provide labour hire services to Hanssen, a construction company.
  • Mr McCourt was engaged by Construct under an administrative services agreement as a self-employed contractor.
  • The union (and Mr McCourt) claimed that Mr McCourt was in fact an employee of Construct for the period he was engaged by Construct to work for Hanssen.
  • The Full Court of the Federal Court of Australia previously concluded that Mr McCourt was a contractor, noting that a similar decision had been made before by the Industrial Relations Appeals Court of WA.
  • Outcome: The High Court found that Mr McCourt was an employee on the basis of the terms of his contract with Construct.
  • Mr Jamsek and Mr Whitby (the Drivers) were previously employed by the predecessor company to ZG Operations Australia Pty Ltd3 (Business) as truck drivers.
  • In or around 1985, the Drivers were advised by the Business that their employment was going to come to an end, and that they could purchase the trucks they drove from the Business and were then engaged as contactors to provide driving services.
  • The Drivers agreed to the new arrangements, purchased the trucks and developed legal partnerships to operate the business of providing driving services for the Business under contract.
  • The Full Court of the Federal Court of Australia previously concluded the Drivers were employees.
  • Outcome: The High Court found the Drivers were contractors.

 

What is the test for determining whether a worker is an employee or contractor?

Following the Personnel Contracting and ZG Operations decisions, the High Court has confirmed that in circumstances where the parties have entered into a comprehensive written agreement to govern the terms of their work relationship, the correct test to apply to assess whether the work relationship is one of employer/employee or principal/contractor is to analyse the terms of the written contract between the parties.

Specifically, where the parties have entered into a comprehensive written agreement, consideration will be given to the rights, duties and obligations of each party under the contract in order to determine the nature of the work relationship.4

The High Court highlighted the following two key factors in assessing the nature of a contractual relationship:

  • The extent of the right to exercise control that the party engaging the worker (the principal) has over the worker providing the services (e.g. control over what work is performed, how the work is performed, where it is performed, when it is performed, who it is performed by, etc). This is about the contractual authority of each party to exercise control, not how this control is actually exercised.5The greater right of the principal to control the worker providing the services, the more likely it is that this is a right that favours characterisation as an employee.6
  • Whether the worker engaged to provide the services can truly be said to be carrying on their own business distinct from the principal’s business.7

In considering the specific facts of Personnel Contracting and ZG Operations, the High Court also considered the following:

  • Whether the work performed by the worker is subservient to or dependent upon the principal’s business.8
  • Whether the parties derived the benefits of running their own business (e.g. tax benefits) under this arrangement.9
  • The circumstances surrounding the making of the contract, being the intent of the parties in entering into the contract.10
  • Whether the worker engaged to provide the services (being the party to the contract) is an individual or a legal entity.11

The High Court clearly stated that a label given to the worker providing the services (i.e. whether that person is called a contractor or an employee in a contract or in any other forum) has no relevance to the legal character of their relationship.12 The High Court also noted that a disparity in bargaining power at the time of the making of the contract does not shape the legal character of the contract.13

The High Court also made clear that the multi-factor test (which previously assessed the ‘reality’ of the relationship between the parties) still had a role to play in circumstances where the contract was not entirely in writing. In those circumstances, the ‘reality’ of the worker’s engagement and the totality of the relationship between the parties could be used to extrapolate or infer rights that the parties had under the partly written, partly oral (or in some cases wholly oral) contract and therefore determine whether the worker was an employee or independent contractor.14 This test could also be relevant in circumstances where there is a dispute about the validity of the terms of the engagement, or the contract is ineffective under general law or statute, or a sham, estoppel (i.e. where representations made or actions taken give rise to a legal basis to contest a person acting contrary to the representations previously provided or the actions previously taken) was alleged.

The High Court also rejected the previous endorsement by the lower courts of triangular labour hire arrangements (also known as ”Odco” style arrangements) as a means of guaranteeing an individual’s status as a contractor.15

What do businesses need to be aware of going forward?

Practical steps that may be taken by businesses wishing to continue with or establish contractor work relationships include:

  • Businesses who want certainty about the nature of the work relationship will need to ensure that the terms of the contract properly reflect arrangements for the services to be provided, and that the duties and obligations under the contract are clearly stated.
  • The wording of contracts to engage contractors will be critical to a business’ future prospects of defending a challenge to a worker’s status as a contractor (and any associated claims of underpayment).
  • When engaging workers intended to be contractors, a business should ensure that is has a level of control under the contract that reflects this relationship. The business should avoid giving itself a level of control that goes beyond what is necessary.
  • Care must be taken with the terms used in contracts about the business’ right to control the manner in which services are provided. The greater the right to control, the higher the risk of a finding of an employment relationship.
  • Businesses that fail to engage workers under comprehensive written contracts will be faced with the risk that the courts will assess the ‘reality’ of the relationship rather than the contract itself to determine whether a work relationship is an employer/employee or principal/contractor relationship.
  • It will be more difficult for contracts with legal entities (e.g. partnerships, companies) to later be found to be contracts of employment.
  • Give consideration as to how staff are engaged (e.g. as contractors or casual employees) to provide certain services in order to avoid having to change business models in the future, and also to avoid liabilities not budgeted for. Since these decisions were handed down, the labour hire firm at the centre of Personnel Contracting has announced that it will shift to engaging its workers as casual employees, and not seek to engage them as independent contractors.
 
 
1  [2022] HCA 1.
2  [2022] HCA 2.
3  There were a number of different companies involved in this relationship over the 40 year period these individuals were engaged. Given the identity of these entities has little to do with the decision in this matter, we have referred to them all as ZG Operations collectively.
4  Personnel Contracting at [59], [61], [79].
5  Personnel Contracting at [88].
6  Personnel Contracting at [73] – [78], [113].
7  Personnel Contracting at [113]
8  Personnel Contracting at [90]. At [113] Gageler and Gleeson JJ observe that this factor is merely just an extension of whether the engaged party are carrying on their own business distinct from the engaging party.
9  ZG Operations at [63].
10  ZG Operations at [61] – [62].
11  ZG Operations at [63].
12  Personnel at [58], [63].
13  ZG Operations at [62].
14  Personnel at [57].
15  Personnel at [85] – [87].

 

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