Two important High Court decisions have emphasised the importance of having clear contractual terms when characterising workplace relationships as being that of a contractor. The cases further highlight the need for employers to ensure that contracting arrangements are genuinely that of an independent contractor in practice and not of an employment relationship.
Below we review the two cases which highlight that Courts will determine the nature of an individual’s working relationship in line with the written terms of the agreement and the rights and obligations of the parties under that contract, as well as the nature of the engagement in practice.
Case 1 – ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2
The Jamsek case concerned two truck drivers who were engaged by ZG Operations Australia to deliver their goods. Although each of the truck drivers had previously been employed by ZG Operations Australia directly, they both began providing services to ZG through a partnership in the mid-1980s. This change occurred at the suggestion of ZG Operations Australia.
The engagement arrangements between ZG Operations Australia and the partnerships were updated over the years with new agreements issued. In each case the truck drivers, through their respective partnership:
- Entered into an agreement with ZG Operations Australia to deliver their products;
- Purchased a truck to be used in the deliveries;
- Were responsible for all running costs and other expenses associated with the trucks, including insurances, with relevant deductions claimed by the partnerships for tax purposes;
- Declared the net revenue received from ZG Operations Australia as partnership income; and
- Split the income received from ZG Operations Australia for the deliveries with their spouses.
After the agreement was terminated in 2017, the two truck drivers initiated proceedings in the Federal Court of Australia claiming they were actually employees of ZG Operations Australia for the entire period and sought entitlements that were owed to them as employees under the Fair Work Act 2009 (Cth). The truck drivers further sought entitlements under applicable superannuation and long service leave legislation.
The first judge found the truck drivers to be independent contractors, however this decision was overturned on appeal to the Full Federal Court which found that the truck drivers were employees. On further appeal, the High Court found that the truck drivers were not employees but were members of a partnership which provided a delivery goods service to ZG.
In making its findings, the High Court emphasised that:
- It was the partnerships, not the individual truck drivers, who owned and operated the trucks and contracted with ZG Operations Australia;
- it was the partnerships who:
- invoiced and received payments from ZG Operations Australia,
- incurred expenses associated with the ownership and operation of the trucks and
- which took advantage of the tax benefits associated with this operational structure;
- the obligation under an agreement to undertake the carriage of goods “as reasonably directed” did not confer a power of control by ZG Operations Australia over the truck drivers but rather enabled ZG Operations Australia to give directions to make deliveries. It did not provide ZG Operations Australia with power as to how the deliveries should be made.
Case 2 – CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1
The Personnel Contracting Case involved a 22 year old British backpacker, Mr McCourt, who performed labouring work for Personnel Contracting in 2016.
Mr McCourt signed an Administrative Services Agreement with Personnel Contracting in which his engagement was described as being a “self-employed contractor”. This Services Agreement prescribed that Mr McCourt:
- was to attend the host employer’s site at nominated times to supply his labour;
- was to supply his own hard hat and boots, but that all other equipment was supplied;
- was subject to the supervision and direction of the host employer’s employees while on the host employer’s site; and
- was to provide invoices to Personnel for the work completed and Personnel would pay him accordingly
The separate Labour Hire Agreement between the host employer and Personnel stated that the workers placed by Personnel would be “independent contractors” and the pay rates were determined between these parties.
In June 2017, Mr McCourt was told by Personnel that he was to cease work at the host employer’s site and was not provided with any further work from Personnel. Proceedings were commenced in the Federal Court, with orders for compensation sought on the basis that Mr McCourt was an employee of Personnel but had not been paid his entitlements as an employee. The first judge held that Mr McCourt was an independent contractor and an appeal to the Full Federal Court was dismissed. However the High Court found that Mr McCourt was an employee of Personnel.
In making its findings, the High Court emphasised that there was no reason the rights and obligations contained in the written agreement between the parties should not be decisive of the character of the relationship, given the terms of the parties’ relationship were comprehensively embodied in a written contract of which the validity was not challenged. The High Court considered that a ‘label’ such as “independent contractor” was not determinative, or relevant, to how the rights and obligations contained in the Services Agreement were characterised.
The Court further found that:
- Mr McCourt was not carrying on his own business
- that the core of Mr McCourt’s obligations under the Services Agreement was to undertake work as directed by Personnel or the host employer.
Due to the terms of the Services Agreement, Personnel was considered to be a labour hire business, having authorisation to determine Mr McCourt’s pay rate, provide him with payment for his work and terminate his engagement if he failed to obey its directions, or those of the host employer.
By determining which host employer Mr McCourt was referred to undertake work, Personnel was both exercising and commercialising its right to control what work Mr McCourt would undertake and how he would do it.
The above High Court decisions reinforce that the starting point in determining how a relationship is characterised is by reference to the written terms of an agreement and the rights and obligations embodied in it. Provided that the validity of the contract itself is not in dispute, there is no need to apply an expansive approach in determining the reality of a relationship with reference to post-contractual conduct. However it is essential that contractor agreements specify clearly and accurately the legal rights and obligations of the parties so the nature of the nature of the engagement is characterised correctly.
Organisations who do engage contractors are encouraged to consider and review their existing contractor arrangements and documentation to ensure they are suitable. Consideration should be given to whether the terms of contractor agreements adequately reflect:
- the nature of the relationship in practice; and
- a true independent contracting relationship (with reference to factors such as control, delegation, ability to work for other businesses and provision of equipment);
and whether the contracts contain appropriate offset provisions and other protective indemnities.
Despite these two High Court decisions, when engaging individuals on a contractor basis, businesses do need to ensure that a person is not engaged as a contractor when the relationship is genuinely that of employer/employee for the purposes of avoiding paying entitlements such as super, leave and workers compensation. Such arrangements would be deemed to be sham contracting and be a breach of the Fair Work Act 2009 with serious penalties for contraventions. Under the Sham Contracting provisions of the Fair Work Act 2009, an employer cannot;
- misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement;
- dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor;
- make a knowingly false statement to persuade or influence an employee to become an independent contractor.
The engagement of contractors is a commercial matter, and the ultimate decider as to whether a person is an employee or a contractor is the Fair Work Ombudsman, the ATO and the Courts. We recommend advice be sought from your legal or business advisor prior to entering into a contracting relationship. In the event that you engage an individual as an employee, rather than a contractor, HR Advice Online can advise regarding the appropriate terms and conditions for their engagement. Should you require support regarding any HR matter, please contact the team at HR Advice Online at advice@hradev.connexionpoint.com.au.au or on 1300 720 004.
Information in HR Advice Online guides and blog posts is meant purely for educational discussion of human resources issues. It contains only general information about human resources matters and due to factors, such as government legislation changes, may not be up to date at the time of reading. It is not legal advice and should not be treated as such.
