June 25, 2022

McKenzielee Blog

Wicked Clever House Experts

Employee or Independent Contractor? The paramount importance of the written contract in determining the relationship between parties is now firmly established.

6 min read

The long awaited decisions of 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) were handed down by the High Court of Australia (Court) on 9 February 2022.

Although resulting in dramatically different outcomes, the Court held in both cases that, “where 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 characterisation of that relationship as one of employment or otherwise must proceed by reference to the rights and obligations of the parties under that written contract. These rights and obligations are to be ascertained in accordance with established principles of contractual interpretation. Absent a 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.”

These decisions complete the Court’s gradual refining of the multifactorial test that the Court established in Stevens v Brodribb Sawmilling Company Proprietary Limited; Gray v Brodribb Sawmilling Company Proprietary Limited (1986) 160 CLR 16 (Stevens) and confirmed in Hollis v Vabu Pty Ltd [2001] HCA 44 (Vabu). In Stevens and Vabu, the Court set out and refined that multiple factors or “indicia” that were to be identified and then weighed up in determining whether the true nature of the relationship between parties was one of principal/contractor or employer/employee.

The decisions in Personnel Consulting and Jamsek further refine this approach by directing that courts should only make use of the multi-factorial test, if the contractual terms between the parties are unclear on their face or have resulted from a sham arrangement or another breach of law.

Personnel Contracting – the details and the decision

Mr McCourt was a 22 year old British backpacker who had travelled to Australia on a working holiday visa. He sought work from Personnel Contracting, a labour hire company. Personnel Contracting offered Mr McCourt a role and entered into an agreement with him under which Mr McCourt was designated a “self-employed contractor”.

Personnel Contracting assigned Mr McCourt to work on two construction sites run by its client, where he performed basic labouring tasks under the supervision and direction of supervisors employed by the client. The relationship between Personnel Consulting and its client was governed by a labour hire agreement.

There was no direct contract between Mr McCourt and the client. Mr McCourt commenced proceedings against Personnel Contracting in the Federal Court of Australia seeking compensation and penalties under the Fair Work Act 2009 (Cth) (Act). The threshold issue was whether Mr McCourt was an employee of Personnel Consulting for the purposes of the Act. Lower courts applied a “multifactorial” approach, by reference to the terms of the agreement between Personnel Contracting and Mr McCourt and the work practices imposed by each of Personnel Contracting and its client.

In holding that Personnel Contracting was Mr McCourt’s employer, the Court had primary regard for the terms of the contract between the parties. Under the contract, Personnel Contracting had the right to direct Mr McCourt’s place of work, and Mr McCourt promised Personnel Consulting that he would cooperate in the supply of his labour to the client. In return, Mr McCourt was entitled to be paid by Personnel Contracting for the work he performed.

That the parties chose the label “contractor” to describe Mr McCourt did not change the character of that relationship which was properly one of employer and employee.

Jamsek – the details and the decision

Between 1977 and 2017, Mr Jamsek and Mr Whitby were engaged as truck drivers by a business run by ZG Operations. Initially engaged as employees, in about 1985, ZG Operations offered Mr Jamsek and Mr Whitby the opportunity to “become contractors” and purchase their own trucks. Mr Jamsek and Mr Whitby agreed to the new arrangement and set up partnerships with their respective wives.

Each partnership executed written contracts with ZG Operations for the provision of delivery services, purchased trucks from ZG Operations, paid the maintenance and operational costs of those trucks, invoiced ZG Operations for its delivery services, and was paid by ZG Operations for the provision of those services. Income from the work performed for ZG Operations was declared as partnership income for the purposes of income tax and split between each of Mr Jamsek and Mr Whitby and their wives.

Mr Jamsek and Mr Whitby commenced proceedings in the Federal Court of Australia seeking declarations in respect of certain entitlements alleged to be owed to them pursuant to the Act as well as under superannuation and long service leave legislation. Mr Jamsek and Mr Whitby claimed to be owed those entitlements because they were employees of ZG Operations.

Lower courts were at odds over the correct characterisation of Mr Jamsek and Mr Whitby’s engagements with ZG Operations. On appeal to the Court, it was unanimously held that Mr Jamsek and Mr Whitby were not employees of ZG Operations.

A majority of the Court held, consistent with the approach adopted in Personnel Contracting, that where 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 characterisation of that relationship as one of employment or otherwise must proceed by reference to the rights and obligations of the parties under that contract.

After about 1985, the contracting parties were the partnerships and ZG Operations. The contracts between the partnerships and ZG Operations involved the provision by the partnerships of both the use of the trucks owned by the partnerships and the services of a driver to drive those trucks. The partnerships became independent contractors to ZG Operations because of ZG Operation’s refusal to continue to employ the drivers and its insistence that the only relationship between Mr Jamsek and Mr Whitby and ZG Operations be a contract for the carriage of goods. This relationship was found not to be an employment relationship.

What do these decisions mean for your business and what do you need to do?

Jamsek and Personnel Consulting have confirmed the primacy of the contract in determining the true relationship between contractual parties. However, the Court has been clear in its application of the principle that what the parties call themselves in the contract, and the title of the contract, are not as important as the contractual terms reflecting a true principal/contractor relationship. That is, a contract that designates an individual as a contractor may be held to not be a true contractor relationship if the terms of the contract do not reflect what is accepted as indicative of a contractor relationship on a multi-factorial review. The courts will only review the day to day indicia to the extent that the contract between the parties is not clear.

Whilst the Court decisions provide greater certainty for companies engaging contractors, companies should be conducting a thorough audit of their contractor arrangements to ensure that the written contractor agreements entered into with contractors are drafted such that they correctly reflect the relationship between the parties and that the relationship itself can truly be characterised as one of principal and contractor.

Companies engaging labour hire companies to provide contract labour should ensure that the labour hire company is correctly classifying and contracting with its workers. In circumstances where a labour hire company is entering into sham contracting arrangements with unskilled workers, there is a risk that companies engaging workers through those labour hire company may be accessories for the purpose of the Act and subject to penalties associated with the labour hire company’s breaches.

This article was written by Erica Hartley, Partner and Danielle Flint, Special Counsel. In preparing this update, particular use was made of the judgment summaries of the Jamsek and Personnel Contracting decisions published by the High Court of Australia.

Employee or Independent Contractor? The paramount importance of the written contract in determining the relationship between parties is now firmly established.

Copyright © mckenzieleeblog.com | Newsphere by AF themes.