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It’s no secret that determining the fine line between “employee” and “independent contractor” causes businesses in Australia headaches. Two recent High Court decisions, heard and handed down together in February 2022, have provided increased certainty and shifted the landscape for engaging contractors moving forward.

This article considers the impact of ZG Operations & Anor v Jamsek [2022] HCA 2 (Jamsek) and CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting), and the “where to from here” for businesses in Australia.

What did the High Court find?

The High Court has found, critically, that in determining whether a person is an employee or independent contractor the contract is “key”. This finding should provide comfort for businesses whose contracts are in order, subject to some continuing unknowns and pitfalls to watch out for.

While the “multifactorial” test at law remains largely the same, the approach of the High Court to applying this test has significantly shifted.

Before the High Court decisions, courts would look to all of the circumstances of a person’s engagement in determining their status as either an employee or contractor. In other words, the previously held position was that the courts would take into account the manner in which the parties conduct their relationship after the contract is signed.

This is no longer the case. In the words of the majority decision in Jamsek, “how the parties’ contract played out in practice” is no longer, in most cases, relevant to determining the nature of the relationship. Rather, conduct after the contract is only relevant to (depending on the circumstances) identifying what the contractual terms are (where the contract isn’t wholly recorded in writing) or, where pleaded, challenging the enforceability of the contract under the “sham contracting” provisions of the Fair Work Act.

There may also, of course, be circumstances in which a written contract is subsequently varied by conduct, or where later conduct gives rise to an estoppel or waiver (i.e. the parties may evidence a new “bargain” by way of their conduct). However, in the circumstances of the Jamsek and Personnel Contracting decisions, none of these considerations arose.

That said, the High Court emphasised that the parties’ description of their relationship in the contract is not determinative of the actual legal relationship. In other words, it remains the case that contractual provisions stating the relationship is not intended as one of employment will not, of themselves, provide complete protection. For this reason, it is important to more closely examine the key factors that gave rise to findings in each of the decisions.

Jamsek – bargains were struck between partnerships and ZG Lighting

In Jamsek, the Court found that 2 partnership agreements entered into between a company (ZG Lighting) and partnerships for delivery services by truck did not give rise to an employment relationship between ZG Lighting and the drivers of the trucks.

In doing so, the High Court overturned a finding by the Full Federal Court that had otherwise found the drivers were employees, in “substance and reality” (having regard to all of the circumstances, including the exercise of superior bargaining power by ZG Lighting in entering into the contracts).

The majority in Jamsek had significant regard to the nature of the parties to the contracts, and the nature of legal rights and obligations created by those contracts.

The majority noted that the partnerships, as the contracting parties:

Received income for the work performed by the truck drivers, which was declared as income of the partnership and split between the partners (in each case, the truck driver and each of their wives).
Paid for the running costs and other expenses associated with the trucks (such as insurance).
Invoiced ZG Lighting.

The majority found that there was no basis to find the partnerships were not conducting a business of their own. Notwithstanding this, and in an important reminder to business, the majority noted that its decision does not change the position that “disparities in bargaining power may…give rise to injustices that call for a legal remedy”. However, in this case, there was no argument by the partnerships or the truck drivers that the partnerships were “shams”; nor any claim to challenge the validity of the contracts that had been entered into.

Personnel Contracting - Mr McCourt was Construct’s employee

In Personnel Contracting, the Court found that a backpacker (Mr McCourt) engaged by a labour hire company (Construct) was an employee and not an independent contractor.

Mr McCourt worked for Construct’s client, a construction company (Hassen), performing labouring work on construction sites under what is often known as a “triangular” on-hire arrangement.

The Court found Mr McCourt was an employee, despite him having entered into a written contract describing him as a “self-employed contractor”, on the basis that other contractual terms pointed towards an employment relationship.

The majority in Personnel Contracting focussed on the following key points:

Mr McCourt was paid by the hour, and Construct determined how much he would be paid.
Construct had significant rights of control over the manner in which Mr McCourt performed work in that he agreed for the duration of the assignment to work in accordance with Hassen’s directions.

Critically for employers in the labour hire space, the majority noted that “Construct retained a right of control over Mr McCourt that was fundamental to its business as a labour hire agency. There would be no reason for the existence of such obligations if Construct were not in the business of labour hire, but rather in the business of ‘introducing’ suppliers of labour to builders and leaving those parties to sort their own affairs”. In other words, it is no longer open for labour hire providers to argue as a “complete shield” that in labour hire arrangements the client, and not the labour hire provider as the putative employer, directs a person’s work.

Where to from here?

The High Court decisions are welcome news for businesses across Australia, in terms of certainty in engaging independent contractors. We recommend that all businesses take the opportunity to comprehensively review their existing independent contractor agreements/arrangements, to ensure:

Written contracts are in place at all times – there is, particularly off the back of the High Court decisions, significant risk in proceeding by way of an oral (or partly oral) contract. Documentation, as always, is paramount.
The contracts adequately and fulsomely reflect the relationship and clearly state how they can be varied (by written agreement only!) – there is a risk of subsequent conduct being considered relevant where the contract doesn’t “cover the scope” of the agreement.

In addition, we recommend fulsome scoping prior to entry into a relationship to determine the most appropriate engagement structure. To do otherwise only gives rise to risk, as evidenced by the Personnel Contracting case with Construct now facing the threat of backpay claims the union estimates could total $60 million for wrongly labelled independent contractors.

Need assistance?

The Workplace can assist businesses large and small in assessing the risks involved with different models of engaging workers. At The Workplace, we take a practical and commercial approach to people issues and can help you work through what works for you. To find out more, please contact us on 02 8999 3300.

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