Employee or Contractor – The High Court simplifies the approach to determining the status of a worker
On 9 February 2022, the High Court of Australia handed down two highly anticipated decisions: Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd  HCA 1 (‘Personnel’); and ZG Operations & Anor v Jamsek & Ors  HCA 2 (‘Jamsek’).
The decisions confirm that where the parties have committed the terms of their relationship to writing (and where the contract is otherwise unchallenged – that is, the arrangement is not purported to be a sham or otherwise ineffective at law), that the question of whether a worker is an employee or contractor, is to be considered through the principles of contract interpretation.
The High Court’s ruling reinforces the importance of comprehensively committing the duties and obligations within the parties’ relationship to a written contract, and properly describing those duties and obligations within that contract.
The High Court’s decision displaces the courts traditional approach of applying a multifactorial test (being a wide-ranging review of the parties relationship and how it operates) to assess the true nature of the relationship.
This approach is consistent with the High Court’s decision, WorkPac Pty Ltd v Rossato (2021) 95 ALJR 681 (‘Rossato’), where the High Court also favoured an assessment of the express terms of the written employment contract over the subsequent conduct of the parties.
Background to both cases
The Personnel case involved a 22-year-old British backpacker working in Australia on a holiday work visa with limited previous work experience (‘Mr McCourt’). Mr McCourt obtained a construction white card, purchased a hard hat, steel cap boots and high viz clothing. Mr McCourt then attended an interview with Personnel and was subsequently engaged. Mr McCourt was required to sign an Administrative Services Agreement (‘Agreement’) which described that he was a “self-employed contractor” and that Personnel was not liable to pay him employment related leave or statutory entitlements. Mr McCourt was paid an hourly rate for the hours that he worked and invoiced Personnel weekly.
Personnel then assigned Mr McCourt to Hanssen, a building contractor client with which Personnel had a labour hire agreement. Hanssen was responsible for the general supervision of Mr McCourt, however there was no contract between Hanssen and Mr McCourt. Mr McCourt served two short assignments during 2016 and 2017. After the last assignment, the CFMMEU (on behalf of Mr McCourt), claimed that Mr McCourt was an employee and was owed entitlements in accordance with the Building & Construction General On-site Building Award 2010.
After applying the traditional multifactorial test, the Primary Judge held that Mr McCourt was an independent contractor. The judge noted that the relevant factors pointed “in opposite directions” and were “reasonably evenly balanced”, but ultimately relied heavily on the fact that Mr McCourt was described as a “Contractor” in the written agreement. On that basis, the proceedings were dismissed.
The Primary Judge’s conclusion was upheld on appeal. The Full Federal Court when handing down their decision, noted that had it not been for a decision of the Western Australian Industrial Appeal Court (‘WA Decision’) involving “essentially the same dispute between the same parties”, their Honours would have held that Mr McCourt was an employee of Personnel, because the idea that Mr McCourt was an independent contractor was “somewhat less than intuitively sound”.
The High Court upheld the appeal, and by majority held that Mr McCourt was an employee of Personnel. The reasoning for this decision, is explained below.
The Jamsek case involved two truck drivers, Mr Jamsek and Mr Whitby, who were originally engaged as employees of a lighting company from around 1977. At the end of 1985 all five of the company’s truck drivers were offered the opportunity to “become contractors” on a “take it or leave it basis”. All truck drivers agreed. Mr Jamsek and Mr Whitby set up partnerships (with their wives). They executed written contracts with the company for the provision of “delivery services” and purchased four-tonne trucks from the company.
The partnerships invoiced the company, and the company paid the partnerships for the delivery services. The partnership’s income was declared for the purpose of income tax and split between each truck driver and their wife. The revenue generated by the partnerships was used to pay truck expenses and business operations costs.
After the engagements were terminated in 2017, Mr Jamsek and Mr Whitby commenced legal proceedings in the Federal Court, seeking a declaration that they were owed statutory employee entitlements.
The Primary Judge dismissed the proceedings after determining that the truck drivers were independent contractors. On appeal to the Full Federal Court, the court upheld the appeal, finding that the truck drivers were employees of the company based on an assessment of the “totality of the relationship”. The Full Federal Court also reasoned that the “disparity in bargaining power between the parties affected the contract pursuant to which the partnerships were engaged, so that the “reality” of the relationship between the company and each respondent was one of employment”.
The High Court upheld the subsequent appeal, and unanimously found that Mr Jamsek and Mr Whitby were independent contractors.
The High Court’s new approach
Both cases were heard and determined together, with Personnel being the primary judgment. The following is an extract from Personnel outlining the High Court’s new approach to determining whether a worker is an employee or contractor:
“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.”
Personnel Case – Reasoning for decision
The High Court considered at length previous decisions of the Courts and the application of the multifactorial test that often produced inconsistent outcomes. The High Court stated that the role of the Court is to “promote certainty”:
“It is the task of the courts to promote certainty with respect to a relationship of such fundamental importance. Especially this is so where the parties have taken legitimate steps to avoid uncertainty in their relationship. The parties’ legitimate freedom to agree upon the rights and duties which constitute their relationship should not be misunderstood. It does not extend to attaching a “label” to describe their relationship which is inconsistent with the rights and duties otherwise set forth”.
The High court confirmed that the WA Decision followed by the lower Courts, was “wrongly decided” as the decision placed too much significance on the description of the relationship.
The High Court, through an assessment of the rights and obligations under the signed Agreement, held that Mr McCourt was an employee because:
- The Agreement confirmed a promise by Mr McCourt to Personnel to work as “directed” by Personnel (and its clients), and in return Mr McCourt would be paid in the performance of that promise.
- “The right to control the provision of Mr McCourt’s labour was an essential asset” of Personnel’s, as a labour hire business.
- Under the Agreement, Personnel “was entitled to determine for whom Mr McCourt would work”.
- Under clause 4 of the Agreement obliged Mr McCourt to “[c]operate in all respects with [Personnel] and the builder in the supply of labour to the Builder”.
- The right to control was apparent by the fact that, if Mr McCourt breached clause 4 of the Agreement, Personnel (not Hanssen) was entitled to terminate the Agreement.
- The overall effect of the Agreement meant that Mr McCourt was to “serve” in Personnel’s business.
- It was “impossible” to conclude that Mr McCourt was in business on his own account.
Jamsek Case – Reasoning for decision
The High Court confirmed that previous Courts erroneously devoted “significant attention” to the “manner in which the parties actually conducted themselves over the decades of their relationship”. Significantly, the High Court clarified that the Full Federal Court had wrongly reasoned that the “disparity in the bargaining power” between the parties had affected the contract so much so that the “reality” of the relationship was one of employment.
The High Court also canvassed two factors that have been historically considered as part of assessing whether a worker is an employee or contractor:
- where an independent contractor is supplied with a uniform bearing the company logo, displays or wears the company logo; and
- where an independent contractor carries out tasks outside the terms of engagement.
On the first point, the High Court considered the importance placed on this factor by the lower Courts and found that there was no evidence that Mr Jamsek or Mr Whitby were directed by the company to display or wear its company branding. The High Court stated that the willingness of the truck drivers to “display the company’s branding on their trucks is quite consistent with a sensible, self-interested response of an independent contractor to legitimate commercial pressure from its best customer”.
On the second point, the High Court found it unremarkable that the drivers were occasionally asked by warehouse staff to carry out tasks such as scanning and distributing run sheets, cleaning up behind the warehouse during stocktake, using their trucks to assist in the relocations of the factory or warehouse and collecting and returning empty pallets to the warehouse. In this respect, the High Court acknowledged that the drivers were “paid their usual rate” and that they were not “directed to do so”.
Ultimately, the High Court rejected the Full Federal Court’s approach in assessing “the totality of the relationship” beyond the terms of the written contract.
The High Court confirmed that the longevity of the parties’ relationship and the partnership’s exclusive dealings with the company, was not a basis to disregard “the effect of the agreement between the partnerships and the company”. The High Court assessed the duties and obligations confirmed within the respective partnership agreements (of which there were multiple versions) and concluded that Mr Jamsek and Mr Whitby were independent contractors because:
- The partnerships contracted to the company to provide “carriage services by truck” that included both labour (by the active members of the partnership) and equipment.
- The partnerships were subject to significant expense and risk.
- The partnerships operated a business.
- The partnerships purchased/leased additional vehicles (at their own discretion).
- Mr Whitby’s partnership in 2010 purchased a ute (without consultation with the company) and later offered and provided the company with a new small delivery service.
- The contract did not exclude the possibility of the partnerships engaging alternate drivers with the company’s approval (required to ensure the safe transport of the company’s goods).
The High Court noted that when Mr Whitby’s partnership was dissolved in 2012, he then supplied transportation / courier services, as a sole trader using his own ABN. The High Court was satisfied that Mr Whitby, as a sole trader, was carrying on a business, based on the declarations made and deductions claimed in his tax returns.
The High Court gave little weight to the fact that the Agreement restricted the partnership to sell the trucks (business), with the right to provide delivery services to the company, concluding that it “did not prevent the generation of goodwill The High Court reasoned that the partnership’s had the option to introduce a purchaser to the company, and that it would then be open for a purchaser to determine if there is any “sufficient value” in such an introduction in exchange for the payment of a “substantial sum”, and that this would depend on the market itself. The High Court also considered that there are businesses that simply “do not generate goodwill”.
In contrast to Personnel, the High Court considered that the wording “undertake carriage as reasonably directed”, was not indicative of control but rather created an obligation as to what carriage was to be undertaken as opposed to “how it was to be carried out”.
The High Court acknowledged that the argument that a driver falling within the expanded definition of “employee” under the Superannuation Guarantee Act 1992 (Cth) was “not insubstantial”. Accordingly, the High Court ordered that the matter be remitted to the Full Federal Court for determination following a likely joinder of the Commissioner of Taxation.
As a result of these High Court decisions, the means of assessing whether a worker is an employee or contractor is now simplified in circumstances where the parties have comprehensively committed the terms of the relationship to a written contract (and where the terms of the Contract are otherwise unchallenged, for example, on the basis that they are a sham or otherwise ineffective at law).
The clear take away from the High Court’s recent decisions is that properly drafted independent contractor agreements (and this includes employment contracts) are essential. Independent contractor agreements should reflect the terms of a genuine independent contractor arrangement, and not simply label the arrangement as independent contracting, but then impose ‘employment like’ terms.
Aitken Legal suggests that now is the time for businesses to take the time to review their independent contractor arrangements and seek advice if they have concerns about those arrangements. If you require advice or assistance, please contact one of Aitken Legal’s specialist employment lawyers.
Disclaimer: The information contained this article is general and intended as a guide only. Professional advice should be sought before applying any of the information to particular circumstances. While every reasonable care has been taken in the preparation of this update, Aitken Legal does not accept liability for any errors it may contain. Liability limited by a scheme approved under professional standards legislation.