The question of whether a worker is an employee or a contractor is sometimes unclear, but can have significant legal and financial consequences.
In two recent decisions, the High Court has reframed how to determine whether a worker is an independent contractor or employee.
The courts apply a ‘multifactorial test’ to the question, which involves a court assessing whether the worker (who has usually already been treated as an independent contractor) is in fact a contractor or whether they are, legally speaking, an employee. This is assessed by considering the totality of the relationship of the parties. In doing so, a court considers a range of factors, such as the level of control the principal has over the worker, whether the worker is only providing labour or their own equipment, whether the worker can delegate work to others, whether they can work for other businesses, their method of remuneration, their hours of work, the allocation of risk and how the parties classified the relationship.
The High Court in CFMMEU v Personnel Contracting Pty Ltd (‘Personnel Contracting’) and ZG Operations Australia Pty Ltd v Jamsek (‘Jamsek’) affirmed the multifactorial test but made three significant alterations to the usual approach:
- Firstly, the High Court said that the relevant time at which to assess the relationship is the time at which the parties enter the relationship. In Jamsek, in particular, the Court was critical of approaching the question by looking at the entirety of the relationship between the parties across time. The High Court said that such an approach was a departure from the ordinary principals of contract law, which require the terms of a contract to be a ssessed at the time that it was entered into. The High Court was evidently concerned that taking a holistic approach across time was anachronistic, because it makes it difficult to determine ahead of time the nature of the relationship.
- Secondly, the High Court said that where the parties had comprehensively committed the terms of the arrangement to a written contract (which has not been subsequently varied), the written contract will generally be determinative unless the contract can be shown to have been a sham. (Read our article on sham contacting.)
- Thirdly, in Jamsek, the High Court said that it was not relevant that the parties had different bargaining strengths, provided that the arrangement entered into was a genuine arrangement (i.e. not a sham).
The application of these principals resulted in two different outcomes in these cases:
1. Jamsek involved workers who had originally been employed as truck drivers, but were subsequently advised by the employer that it would no longer employ them. Instead, they were offered roles (through their partnership entities) as independent contractors on the condition that they purchased and supplied their own trucks. They agreed to this arrangement and it continued for many years.
In this case, the High Court said that at the time the contractor relationship was entered into, it was a genuine contractor relationship. The fact that the arrangement had continued for many years did not alter the nature of the relationship, nor was it relevant that, at the time, that the workers had less negotiating power than the company engaging them. The arrangement was a genuine commercial arrangement and the Court did not need to look any further than the terms of the written contract.
2. Personnel Contracting involved Personnel Contracting engaging a worker and placing the worker with a host company as part of a labour hire arrangement. Personnel Contracting had a written contract with the worker, which called the worker a ‘Contractor’. However, the High Court found that the actual written terms of the contract, notwithstanding the label, were those of an employment relationship. In particular, the contract required the worker to provide his labour as directed by Personnel Contracting and the host company, meaning that contractually the worker was completely under the control of Personnel Contracting in the performance of his duties.
Businesses that engage independent contractors can take comfort that the High Court has taken an orthodox contractual approach to the question of whether a worker is a contractor or employee. However, the cases do highlight the importance of ensuring that the arrangement is properly recorded in a comprehensive written contract, and that the contract accurately reflects the arrangement of the parties, including accurately labelling the relationship as a contractor or employment relationship.
Further, it remains essential to ensure that any contractor relationship is not a sham established to avoid a business’s obligation as an employer. Sham contracting is prohibited under the Fair Work Act 2009 (Cth) and can attract civil penalties.
It is also important to remember that businesses may have obligations for their contractors under superannuation and workers compensation legislation, notwithstanding that their workers are genuine contractors not employees.
Following the High Court’s decisions, we recommend reviewing your written independent contractor agreements to ensure that they are comprehensive, accurate and tailored to the particular work that your contractors are completing. Having a comprehensive, accurate and tailored contract should provide significant protection in the event of a future claim.
How Sharrock Pitman Legal can help?
As the recent High Court decision has shown, it is important for employers and their HR team to accurately distinguish between a contractor relationship and an employee engagement, and fulfil allobligations to both.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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Samuel Ellemor is a Senior Associate at Sharrock Pitman Legal practising in Employment Law, Commercial Law, and Charities & Not-for-Profit Law. For further information, contact Samuel on his direct line (03) 8561 3316.