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Employee or independent contractor? A focus on the fine print

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In two significant employment law decisions the High Court has again confirmed the primacy of contractual terms in characterising workplace relationships.

On 9 February 2022, the High Court handed down its highly anticipated decisions in Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek).  Both decisions give much needed attention to the complex question of determining the true nature of workplace relationships. Specifically, whether an employment or independent contractor relationship exists.

The key takeaway from these decisions is that where parties have comprehensively and clearly set out the terms of their relationship in a written agreement, the characterisation of the relationship must be considered through that lens. There is no need to take an expansive approach. This reflects a shift away from the long-standing approach of considering the day-to-day reality of the contractual relationship with reference to the ‘multi-factorial test’ and the post-contractual conduct of the parties when characterising a relationship.   

Importantly though, the decisions make it clear that simply labelling the agreement as an “independent contractor agreement” or “employment agreement” is not enough – the rights and obligations established by the written agreement is what is determinative of the legal status of the relationship.

The outcome in Personnel Contracting and Jamsek is perhaps unsurprising given the High Court’s recent tendency to give primacy to the terms of the written agreement in place when characterising a permanent or casual employment relationship as highlighted by the High Court’s approach in Workplace Pty Ltd v Rossato [2021] HCA 23.

This article unpacks the decisions in Personnel Contracting and Jamsek and what they mean for employers and principals alike.

The decisions

The below table provides a high-level summary of the background to Personnel Contracting and Jamsek.

 

CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1

ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors [2022] HCA 2

Facts

  • Mr McCourt was a 22 year old British backpacker with limited work experience who travelled to Australia on a working holiday visa.

  • Mr McCourt entered into an Administrative Services Agreement (ASA) with the respondent trading as Construct, a labour-hire company. The ASA provided Mr McCourt was a “self-employed contractor”.

  • Construct assigned Mr McCourt to work on two construction sites run by Construct’s client, Hanssen Pty Ltd (Hanssen). Mr McCourt performed basic labouring tasks under the supervision and direction of Hanssen employees.

  • There was no contract between Mr McCourt and Hanssen, but there was a Labour Hire Agreement in place between Hanssen and Construct.
  • From 1977 to 2017, Mr Jamsek and Mr Whitby were engaged by the appellant (and the appellant’s predecessors) (referred to as the company) as truck drivers.

  • Mr Jamsek and Mr Whitby were initially engaged as employees of the company and drove trucks provided by the company.

  • However, in around 1985 - 1986, Mr Jamsek and Mr Whitby were advised that the company would only use their services if they purchased trucks themselves and entered into contracts to transport goods for the company. 

  • Mr Jamsek and Mr Whitby accepted this new arrangement, purchased trucks and set up partnerships with their respective wives to facilitate the arrangement. 

  • Each partnership entered into written contracts with the company for the provision of delivery services. 

  • Mr Whitby and Mr Jamsek’s partnerships with the company were terminated in 2017. 

Lower court proceedings

  • The CFMMEU and Mr McCourt commenced proceedings against Construct in the Federal Court seeking compensation and penalties pursuant to the Fair Work Act 2009 (Cth).

  • The crucial issue was whether Mr McCourt was an employee of Construct for the purposes of the Act. The primary judge (O’Callaghan J) held that Mr McCourt was an independent contractor.

  • The primary judge’s conclusion was upheld on appeal by the Full Court of the Federal Court (Allsop CJ, Jagot and Lee JJ).The primary reason for the Full Court’s decision was that the Western Australian Industrial Appeal Court had made the same decision in essentially the same dispute, and they could not conclude the decision was plainly wrong.[1]
  • Mr Jamsek and Mr Whitby sought declarations in the Federal Court in respect of certain entitlements they alleged they were owed on the basis they were employees of the company. 

  • The primary judge (Thawley J) concluded that, having regard to the totality of the parties’ relationship, Mr Jamsek and Mr Whitby were not employees of the company. 

  • The Full Court of the Federal Court (Perram, Wigney and Anderson JJ) overturned the primary judge’s decision, finding that, having regard to the “substance and reality” of the relationship determined by reference to the history of the parties’ dealings with each other and considering the “totality of the relationship” beyond the terms of the partnership contracts, Mr Whitby and Mr Jamsek were employees.

Personnel Contracting

Overturning the decision of the Full Federal Court, the majority of the High Court found that Mr McCourt was an employee of Construct.

First focusing on the primary judge and Full Court’s decision, the High Court commented that the use of the multifactorial test to determine the character of the relationship is problematic. The test creates considerable uncertainty for parties and for the courts and can result in inconsistent outcomes - especially when the test is applied in respect of the parties conduct over the whole course of their dealings.  Under this approach, the terms of the written contract are only “factors” to be considered along with other circumstances. 

Instead, the High Court considered the “own business/employer’s business” dichotomy provides a more useful (albeit, not perfect) framework to assessing the relationship as it focusses attention on aspects of the relationship generally defined by the contract. As the High Court expressed, this offers a more cogent basis to assess the distinction in workplace relationships because it bears directly on the nature of the engagement rather than relying on subjective judgement calls or mechanistic “ticking” against a multifactorial checklist.

In light of the above, the High Court outlined the following principles apply when characterising a relationship:

  • Where parties have comprehensively committed the terms of their relationship to a written contract, which is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute, the legal rights and obligations under that contract should be decisive of the character of the relationship. In other words, the characterisation of a relationship will be determined by reference to the rights and obligations of the parties under that contract.
  • This does not extend to attaching a “label” to describe the relationship which is inconsistent with the rights and duties otherwise in the written agreement.
  • If there is no suggestion that the contract has been varied, or that there has been conduct giving rise to an estoppel or waiver, a wide-ranging review of the parties' subsequent conduct is unnecessary and inappropriate.

Applying these principles to the facts, it was noted that under the ASA, Construct had the right to determine for whom Mr McCourt would work, and Mr McCourt promised Construct that he would co-operate in all respects in the supply of his labour to Hanssen. In return, Mr McCourt was entitled to be paid by Construct for the work he performed.

This right of control, and the ability to supply a compliant workforce, was considered by the High Court to be the key asset of Construct's business as a labour-hire agency.  These rights and obligations constituted a relationship between Construct and Mr McCourt of employer and employee.  That the parties chose the label "contractor" to describe Mr McCourt did not change the character of the relationship.

Jamsek

In Jamsek, the High Court was equally critical of the attention the Full Court gave to the manner in which the parties conducted themselves over the length of the relationship and rejected the suggestion that a proper characterisation of the totality of the relationship required consideration of how the parties’ contract played out in practice.

Rather, the High Court considered that in the absence of any suggestion that the day-to-day performance of the contract superseded or differed from the rights and duties established by Mr Jamsek and Mr Whitby’s partnership contracts, it was not necessary for the court to consider the day-to-day workings of the relationship spanning several decades.  Instead, the legal character of the relationship should be determined by reference to the contract.

Applying the principles developed in Personnel Contracting which gave primacy to the duties and obligations established by the written contract, the High Court overturned the Full Court’s decision and unanimously found that the truck drivers were independent contractors. 

In coming to this view, the High Court focused on the fact that the partnership contracts entered into between the company and Mr Jamsek and Mr Whitby clearly provided that Mr Jamsek and Mr Whitby would provide delivery services to the company using their trucks, pay the maintenance and operational costs of the trucks, obtain and maintain relevant insurance and invoice the company for its services.

In the High Court’s opinion, these factors made it clear that there was no employment relationship in existence, despite that, among other matters, on occasion Mr Jamsek and Mr Whitby wore uniforms or used equipment with the company’s logo and performed tasks beyond their core delivery services at the direction of the company.   

The matter was remitted to the Full Court for determination in accordance with the High Court’s reasoning.  This will include resolving a question as to the scope of the expanded definition of “employee” under the Superannuation Guarantee (Administration) Act 1992 (Cth).

What do these decisions mean for you?

Jamsek and Personnel Contracting provide a timely opportunity for organisations to review their existing arrangements with independent contractors. Specifically, to:

  • ensure there is a written agreement in place which clearly sets out both the nature of the relationship as well as the parties respective rights and obligations under it;
  • confirm the rights and obligations of the parties specified in the agreement accurately reflect the nature of the relationship. Simply labelling the agreement as an “independent contractor agreement” or relying on a clause which provides that the parties agree there is an independent contractor relationship in existence between the parties is not enough; and
  • consider how any potential mischaracterised relationships could impact obligations in respect of payroll tax, workers compensation insurance and compulsory superannuation contributions.

Where to from here?

In our view, these decisions provide greater clarity when determining the character of the relationships between each party - the rights and obligations in the written agreement will be key.

Potentially, the decisions also open the door for more relationships, including those in the gig-economy, to be contractually characterised as independent contractors, provided the rights and obligations of the parties specified in the agreement reflect a contractor rather than employment relationship.    

Ultimately though, time will tell as to the true impact of Jamsek and Personal Contracting, noting neither decision addressed what approach should be taken in the absence of a written agreement or where the validity of the written agreement was challenged (for whatever reason) and how the multi-factorial test should be applied in these circumstances.

Until these questions are resolved, Jamsek and Personnel Contracting make it clear that the devil is in the detail.

 

[1] Personnel Contracting Pty Ltd v Construction, Forestry, Mining and Energy Union of Workers [2004] WASCA 312.

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