Employee vs contractor – High Court crucial clarification provides guidance for employers

The High Court has confirmed the primacy of contractual terms and the importance of contractual interpretation in two crucial decisions handed down on 9 February 2022 regarding the distinction between employees and independent contractors.

• In Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1, the High Court held that a construction worker was an employee of a labour hire company.
• In ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2, the High Court held that two truck drivers were independent contractors despite over 40 years of exclusive service to the principal, ZG Operations.

These decisions demonstrate that the High Court continues to affirm the primacy of contractual terms in determining employment and contractor relationships and classifications. The decisions highlight the importance for employers in drafting written contracts for both independent contractors and employees.

CFMMEU v Personnel Contracting

Background

Personnel Contracting (trading as ‘Construct’), a Perth based labour hire company, engaged workers to supply labour to building clients. Construct provided services to Hanssen Pty Ltd pursuant to a labour hire agreement for the provision of self-employed contractors by Construct at Hanssen sites. Construct’s workers were paid on a daily hire basis, for which Construct invoiced Hanssen on a weekly basis.

Mr McCourt was a 22-year-old British backpacker on a working holiday visa. Mr McCourt contacted Construct and attended an interview on 25 July 2016. At his interview, Mr McCourt advised Construct that he was ready to start work immediately and that he owned his own hard hat, steel-capped boots and hi-vis clothing. Mr McCourt was subsequently offered a role and signed an Administrative Services Agreement (ASA) with Construct. The ASA described Mr McCourt as a ‘self-employed contractor’.

On 26 July 2016, Construct contacted Mr McCourt and offered him work at Hanssen’s project site. Mr McCourt was supervised by a Hanssen leading hand and there was no contractual arrangement between Hanssen and Mr McCourt.

Mr McCourt performed work on Hanssen’s projects between 27 July 2016 and 6 November 2016 and between 14 March 2017 and 30 June 2017. On 30 June 2017, Mr McCourt was directed by Construct to stop work on the Hanssen project sites and he did not receive any further work from Construct.

Federal Court proceedings – Mr McCourt considered an independent contractor

Mr McCourt commenced proceedings against Construct claiming compensation and penalties under sections 545, 546 and 547 of the Fair Work Act 2009 (Cth) (FWA). Mr McCourt claimed that he was not an independent contractor and that Construct had failed to pay him entitlements as an employee under the Building and Construction General On-Site Award 2010.

At first instance, the primary Federal Court judge, Justice O’Callaghan, applied a multifactorial approach (control, operation of own business, integration in Construct’s business, provision of tools and equipment and terms of the contract) to the question of whether Mr McCourt was an employee of Construct for the purposes of the FWA. Justice O’Callaghan held that Mr McCourt was a contractor of Construct and considered the following factors as decisive:

• the description of Mr McCourt as a ‘self-employed contractor’
• requirements set out in the ASA that Mr McCourt not hold himself out as an employee of Construct.

The CFMMEU appealed the decision to the Full Federal Court. The Full Federal Court upheld the Federal Court’s decision. The Full Federal Court also applied a multifactorial approach in determining that Mr McCourt was a contractor of Construct and, therefore, not an employee. However, it was noted that the Full Federal Court’s decision was made on the basis that it was bound by the decision of a Western Australian Industrial Appeal Court decision involving an identical dispute between Construct and self-employed contractors 16 years ago, which otherwise would have led to the Full Federal Court finding that Mr McCourt was an employee.

High Court overturns Federal Court ruling

The CFMMEU appealed the Full Federal Court’s decision to the High Court. The High Court unanimously overturned the Full Federal Court’s decision and held that Mr McCourt was an employee of Construct.

The High Court found that the multifactorial test approach taken by both the Federal Court and the Full Federal Court was problematic as it is impressionistic and can lead to inconsistency and considerable uncertainty.

In reviewing relevant authorities, the High Court considered that the multifactorial test approach evolved since Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 and Hollis v Vabu Pty Ltd (2001) 207 CLR 21 had led to a departure from key authorities in determining the characterisation of a relationship by reference to the rights and obligations committed to writing by the parties in a contract. The High Court stipulated that, in neither Stevens nor Hollis did this Court suggest that, where one person has done work for another pursuant to a comprehensive written contract, the court must perform a multifactorial balancing exercise whereby the history of all the dealings between the parties is to be exhaustively reviewed, even though no party disputes the validity of the contract.

Critically, both Stevens and Hollis dealt with disputes where there was either no written contract, or the contract was partly written and partly oral. This position taken by the High Court was advanced from its decision in WorkPac Pty Ltd v Rossato [2021] HCA 23.

The High Court suggested that considering ‘the totality of the relationship between the parties’ was not misplaced, but that it must be concerned with the rights and duties established by the written contract and the contractual obligations of the parties. However, importantly, that is not to say that the ‘label’ the parties chose to describe the relationship with is determinative of the characterisation – that is for the court to determine as a matter of law.

In examining the terms of the ASA, the High Court found the following:

• Mr McCourt was not carrying on a business on his own account and Construct retained a right of control over Mr McCourt, which was fundamental to Construct’s business as a labour-hire agency.
• Construct was entitled to determine for whom Mr McCourt would work and, once assigned, Mr McCourt was required to cooperate in the supply of his labour to the client.
• Mr McCourt worked subject to the control of Construct under the ASA and had no right to exercise any control over what work he was to perform or how it was carried out.
• The description of Mr McCourt as a ‘self-employed contractor’ was not determinative and did not change the character of the relationship created by the express terms of the ASA.

Accordingly, the High Court allowed the appeal and held that it was impossible to conclude that Mr McCourt was not dependent upon, and subservient to, Construct’s business and that he clearly performed a contract of service as Construct’s employee.

ZG Operation v Jamsek

Background

Mr Jamsek and Mr Whitby (the drivers) were employed by former entities of ZG Operations Australia Pty Ltd as truck drivers. The drivers were initially engaged as employees and drove trucks provided by ZG Operations. In 1985 or 1986, ZG Operations insisted that it could no longer employ the drivers and that their services would only be used if they purchased their trucks and entered into contracts to carry goods for ZG Operations.

The drivers subsequently set up partnerships with their respective wives, purchased the trucks and signed written agreements with ZG Operations. After this date, the drivers made deliveries at the request of ZG Operations and invoiced ZG Operations once the delivery was completed. These agreements remained on foot until 20 January 2017, when the contracts were terminated by ZG Operations.

Federal Court proceedings – Mr Jamsek and Mr Whitby considered employees

The drivers subsequently commenced proceedings for statutory entitlements they claimed to be owed as employees under the FWA, the Superannuation Guarantee (Administration) Act 1992 (Cth) and the Long Service Leave Act 1955 (NSW).

At first instance, the primary Federal Court judge, Justice Thawley, concluded that drivers were independent contractors.

The Full Federal Court overturned the primary judge’s decision and held that the drivers were employees of ZG Operations. The Full Federal Court considered the ‘totality of the relationship’ between the parties and paid particular attention to the way the parties had conducted themselves since 1986. Further, the Court held that the disparity in bargaining power between the parties influenced the ability for it to be considered a contract for services provided by the respective partnerships and accordingly each should be considered an employment relationship.

High Court overturns Federal Court ruling – drivers were not employees

The High Court allowed the appeal and heard it together with CFMMEU v Personnel Contracting.

As in CFMMEU v Personnel Contracting, the High Court considered the character of the relationship between the parties by reference to the rights and duties created by the written contract, which comprehensively regulated the relationship. The High Court held that ZG Operations having superior bargaining power at the time of creation of the contract did not alter the meaning or effect of the contract.

The High Court held that, as the terms of the relationship had been committed to a written contract and the efficacy of that contract had not been challenged as a sham, the characterisation of that relationship must be with reference to the rights and obligations of the parties under the contract.

The High Court held that the Full Federal Court erred in considering the totality of the relationship and substance of the bargaining power between the parties for the reasons stated in CFMEU v Personnel Contracting and in Workpac Pty Ltd v Rossato.

After 1986, the contract between ZG Operations and the drivers’ partnerships provided that the drivers’ partnerships would own and operate the trucks, which would transport ZG Operations’ goods. The relationship between the parties only continued on ZG Operations’ insistence of a contract for carriage of goods and its refusal to continue to employ the drivers.

In examining the written contract, the High Court determined that the reality of the situation was that the drivers’ partnerships, and not the drivers individually, owned and operated the trucks and that the drivers were conducting businesses of their own as partners. The partnerships contracted with ZG Operations for the delivery services provided by the operation of the trucks. The partnerships earned income, incurred expenses associated with the ownership and operation of the trucks and took advantage of tax benefits of the structure.

Accordingly, the High Court unanimously overturned the Federal Court decision and held that the drivers, through their partnerships, carried on the business of providing delivery services for ZG Operations under a contract for services and were not employees.

Conclusion

The High Court has highlighted the important distinction courts are required follow in applying contractual interpretation principles in assessing employment and contractor relationships.

Employers must ensure that written independent contractor agreements are drafted to accurately reflect the rights and obligations of the parties to demonstrate an independent contractor relationship. Simply describing a worker as a ‘contractor’ will not be sufficient to substantiate an independent contractor relationship. The whole of the terms of the contract will need to be considered to determine whether it creates a relationship of employment or a contract for services.

If you require assistance with discussing your business structure and operations and preparing written contractor agreements, please contact a member of our Workplace Relations and Safety team or a member of our Tax team.