High Court confirms contractor v employee distinctionFebruary 14, 2022
In two much-anticipated decisions that explored the distinction between independent contractor v employee, the High Court has last week handed down its judgments in the matters of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd  HCA 1 and ZG Operations & Anor V Jamsek & Ors  HCA 2.
In both cases, the High Court overturned the preceding decisions of the Full Federal Court, placing greater emphasis on the contractual documents in place between the parties to determine the nature of their relationship.
Who is a contractor?
According to established employment common law concepts, an “employee” is a person who is engaged on a “contract of service.” Such a contract may be express or implied, oral or written and may be regulated by an industrial award or agreement. By contrast, an “independent contractor” is a person (or organisation) engaged by way of a “contract for service”. Companies that incorrectly represent such a relationship can be exposed to immense risk, including underpayments, breach of applicable modern awards or enterprise agreements, and sham contracting under the Fair Work Act 2009 (Cth), all of which can attract thousands of dollars in penalties.
Despite being the subject of numerous cases before various courts and tribunals over time, the legal distinction between the relationship of employer and employee and the relationship between principal and contractor is often difficult to assess. It remains that these distinctions turn on the unique facts of each particular case, after considering the true nature of the relationship on a case-by-case basis, on a ‘muti-indicia’ basis.
Some of the relevant factors include, but are not limited to:
- the intention of the parties;
- the method and level of control over the worker (and by the worker);
- arrangements for payment and taxation;
- whether the contractors operate a business or are entrepreneurial in nature;
- how the worker is presented to the public;
- the provision of resources and tools;
- whether the worker can delegate the work to another (or whether personal service is required); and
- the nature of the services performed by the worker.
CFMEU v Personnel Contracting
A British backpacker, Mr McCourt, was engaged by a labour hire company to work for one of its construction clients, signing paperwork that described him as a “self-employed contractor”. There was no contract between McCourt and the client.
McCourt performed work for that client over the next year across multiple projects, and the CFMEU subsequently commenced proceedings against the labour hire company on the basis that he was actually an employee.
The primary judge relied heavily on the description of McCourt in the paperwork as a “contractor” in making a finding that he was the same, treating it as a decisive factor in the multi-indicia test on the basis that the other factors balanced out. This was then confirmed by the Full Court of the Federal Court – although somewhat reluctantly, as their hands were tied by the outcome of a previous decision involving “essentially the same dispute” between two labourers and the same company, which they were bound by precedent to follow if they could not find the 16-year-old case was “plainly wrong” (which they could not).
This finding was challenged by Mr McCourt and taken to the High Court.
High Court Decision
The High Court expressly recognised that the multi-indicia test is “apt to generate considerable uncertainty, both for parties and for the courts”, particularly if it must be applied to each party’s conduct across the whole duration of their relationship. To this end, it noted that not all of the factors hold equal weight, and that the question of whether an individual is conducting his or her own independent business or serving the business of the employer should be one of the key considerations in determining whether they are a contractor or an employee, as a “more cogent and coherent basis for the time-honoured distinction…than merely forming an impressionistic and subjective judgment or engaging in the mechanistic counting of ticks on a multifactorial checklist.”
Additionally, the High Court was willing to give more emphasis to the terms of the document between McCourt and the labour hire company, because for any case where the parties had comprehensively reflected their relationship in a written contract (and there is no challenge to its validity, such as on the basis that it is a sham), then “there is no reason why the legal rights and obligations so established should not be decisive of the character of the relationship…there is every reason why they should.” It found that the terms of a contract could define a relationship, other than where subsequent conduct could be shown to have varied its terms. However, it was careful to note that while it is not the role of the courts to infringe on parties’ legitimate rights to define their own rights and duties, this does not mean that the parties can label their own relationship as something inconsistent with those rights and duties. As such, calling an individual a ‘contractor’ will have no effect if the contract is one of employment. The character of a relationship cannot be changed by “the label chosen by the parties, whether as a “tie-breaker” or otherwise.”
On this basis, while the multi-indicia test was still relevantly applied, it was considered through the lens of what the contractual terms required of the parties, and ultimately the High Court found that the contractual terms reflected that of an employer-employee relationship, including that McCourt had no control over what work he performed and how, and that he could not be said to be “in business on his own account” but rather had promised to perform work for the benefit of the labour hire company. As such, McCourt was an employee.
ZG Operations v Jamsek
The Jamsek case has a long history, beginning back in 1977 when two individuals (Jamsek and Whitby) were first employed by a company to drive trucks. Approximately a decade later, the company advised that it would not be continuing their employment, and that it would only continue to engage them if the individuals purchased their trucks and entered into a contracting arrangement. This was done by establishing partnerships between each of the men and their wives, and for the next 30 years, they invoiced the company for the delivery services they provided exclusively to that company, despite the driving duties ultimately remaining similar to those they performed during their time as employees.
Following the termination of this arrangement in 2017, Jamsek and Whitby commenced proceedings against the company on the basis that their time as ‘contractors’ was actually employment, and that they were owed employment entitlements such as minimum wages and leave entitlements.
After identifying that the individuals had been driving trucks exclusively for the business consistently for 40 hours per week and on conditions and rates established by the business, the Federal Court (and subsequently the Full Court of the Federal Court) in 2020 found that when considering the 30+ year ‘contracting’ relationship in “totality”, it was actually one of full-time employment, primarily based on the fact that “in practical terms, [the individuals] had no goodwill and no possibility of acquiring it”. Jamsek and Whitby did not have any customers or clients of their own, and had essentially acted as representatives of the business, which provided their sole income. As the Court stated, “the absence of goodwill in an employee’s business is a potential indicator that the goodwill is possessed by the employer and hence that the business being conducted is the employer’s business.” Furthermore, the individuals had no real independence or control in respect of key aspects of the relationship, including their hours, remuneration and duties.
It was also relevant for the Federal Court that Mr Jamsek and Mr Whitby had been engaged as employees of the business prior to being engaged on an alleged contracting basis, such that “little else changed”. Additionally, as Jamsek and Whitby were supplied with a uniform and drove trucks which bore the business’ logo such that they were presented to the public as representatives of the company, the individuals had been essentially “compelled” to agree to the terms of the contract as a result of being threatened with a loss of income, and the contract referenced ‘annual leave’, the Court was conclusive in its finding that they were employees.
This finding was challenged by the company and taken to the High Court.
High Court decision
When considering the appeal, the High Court found that the Full Court of the Federal Court had erred in devoting “significant attention” to how the parties had conducted themselves over the decades-long relationship, and that the imbalance in bargaining power between the individuals and the company meant that the contract between them should be given less weight.
In contrast, the High Court said that there was no suggestion or claim of any sham contracting conduct on behalf of the company which would have influenced the contract entered into, and that the “lengthy and devoted nature of the working relationship” should not mean disregarding the agreement which had been reached for a contracting arrangement (rather than employment). It also rejected the argument about a lack of goodwill, finding that there was nothing to prevent any of the parties from generating their own goodwill, regardless of the low value it might bring, and that there are many legitimate businesses that do not have customer goodwill at all.
The High Court overturned the Federal Court’s decision, recognising the arrangement as one of principal-contractor. This was largely due to the contracts between the parties expressly contemplating a business relationship in a case where there was “no suggestion that any aspect of the day-to-day performance of the contract superseded the rights and duties established by the contract.”
It should be noted that the High Court determined, consistent with the views expressed by the parties, that the separate but related question, whether the contractors were entitled to superannuation, should be remitted to the Federal Court.
While the outcome of the two decisions was different – with McCourt found to be an employee and Jamsek and Whitby found to be contractors – there are several consistent threads running through the cases that will help to shape our understanding on the distinction of contractors v employees.
The High Court’s decisions essentially confirm that if contracting parties have comprehensively committed the terms of their relationship to a written contract, the efficacy of which is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute, the assessment of whether that relationship is one of employment or under a contractor agreement must proceed by reference to the rights and obligations of the parties under that contract. However, any attempts by those parties to ‘label’ the relationship as one or the other, will be irrelevant.
Furthermore, while the multi-indicia test stands, it must be considered from the context of the contractual terms rather than the parties’ conduct alone (unless that conduct operates to vary the contractual terms), it is not always necessary to consider the parties’ entire conduct throughout the duration of their relationship, and not all of the factors have equal weight.
These decisions represent a slight shift to this area of law, which could potentially have far-reaching consequences on engagement models both past and present. While there is still no absolute certainty in the engagement of contractors, it can reasonably be said that the importance of a comprehensive contract has now been increased with these two cases, noting that the contract could still be challenged on equitable grounds, such as where it is unfair or unconscionable, and as such, it does provide some much-needed relief for parties navigating the often-subtle differences between the engagement of employees and contractors.
With these cases setting a precedent for the importance of clearly recording the terms of a relationship in written contractual form, we recommend any business which engages contractors to ensure that its written agreements are comprehensive, up-to-date, and accurately reflect the intentions of the parties as to the relationship between them (not just in language, but in effect).
Furthermore, if your company engages contractors in the absence of written contractor agreements, you face considerable risk where this clear indication of intention is unable to be relied upon to defend against any claims that those contractors are actually employees. We strongly recommend seeking legal advice and support for how best to protect your business moving forward.
If you have any questions about any of the issues raised in this article, please contact the team at FCB on 02 99225188 or at email@example.com.