It’s the contract, the whole contract and nothing but the contract: High Court affirms principal importance of contracts in determining nature of worker relationships
In two long-awaited decisions about the proper characterisation of workers, the High Court has found that whether an individual is an employee or a contractor is to be almost exclusively answered by the terms of the written contract.
The Court adopted the same approach it took in the recent Workpac v Rossato case focussing on the importance of the agreement entered into by the parties – and the way the relationship was described in that agreement. The Court confirmed that where the nature of the engagement is comprehensively contained within a written contract, the 'substance and reality' of the working relationship and how the parties later conducted themselves is irrelevant.
These decisions reflect a move away from examining the 'totality of the relationship' when seeking to determine whether a worker is an employee or independent contractor. The multi-factor balancing exercise, whereby the nature of the subsequent working relationship is the focus, has largely been rejected in favour of an orthodox approach to contractual analysis.
What is the impact of these decisions?
Entities can now have greater confidence when engaging workers as independent contractors. Provided the contracts clearly and appropriately include terms which are characteristic of a contractor relationship, the risk of an independent contractor subsequently being found to be an employee has been significantly reduced.
We expect the decision to have immediate consequences in the gig economy. The current appeal against a Fair Work Commission finding that a Deliveroo driver was an employee – which was put on hold until the High Court decisions were handed down – is likely to promptly resume and, we anticipate, deliver a finding that the driver was an independent contractor given the terms of his contract with Deliveroo.
When engaging workers:
- expressly record the terms and conditions of the engagement and the rights and obligations which constitute the relationship in a written contract from the outset – carefully drafted agreements will be critical
- merely attaching a superficial label to the relationship as one of 'contractor' will be insufficient if the agreement contains terms which are characteristic of an employment relationship
- ensure, if engaging the worker as an independent contractor, the contract minimises the level of control and direction the entity has over the worker’s performance of their services.
The Court was at pains to note that in both cases, there was no argument from the parties that the contracts were sham arrangements or there were varied agreements. In those situations, the Court will still look at the totality of the relationship – particularly where there is no written agreement.
The facts of the cases
CFMMEU v Personnel Contracting
Personnel Contracting is a Perth-based labour-hire company who engaged a labourer, Mr McCourt, to supply his labour to Hanssen Pty Ltd – one of Personnel Contracting’s clients. The relationship was overseen by an 'Administrative Services Agreement' which described Mr McCourt as a 'self-employed contractor', despite him being an unskilled, British backpacker on a working holiday visa and who did not operate his own business. Mr McCourt and the Union commenced proceedings under the Fair Work Act, asserting he had not been paid – as he should have been – as an employee covered by the Building and Construction General On-site Award 2010.
ZG Operations v Jamsek
In this case, ZG Operations sought to overturn a full Federal Court ruling that two truck drivers, engaged as independent contractors for more than 20 years, were in fact employees. The two truck drivers were initially employees of ZG Operations. In 1986, the truck drivers were told their jobs could not be guaranteed if they did not agree to become independent contractors. The truck drivers set up a partnership with each of their spouses, bought new trucks, and entered into contracts with ZG Operations as contractors. When their engagements ended in 2017, they commenced proceedings for pay, leave and superannuation entitlements on the basis they should have been characterised as employees.
In determining the nature of the respective relationships in both cases, the Court dedicated considerable time to examining the established principles of contract law. In reaching its findings, the Court focused on the rights and duties of the parties found in the contracts, rather than what has historically been a broader focus on the conduct of the parties, the totality of the relationship and the impression of the arrangement.
Although Mr McCourt in CFMMEU v Personnel Contracting was labelled a 'contractor' in the services agreement, the majority saw this as being irrelevant to the characterisation of the relationship. Ultimately, it found that as the contract provided Personnel Contracting with a right of control and direction over Mr McCourt’s work, he was more appropriately considered an employee. Personnel Contracting could determine for which client Mr McCourt would work and he was obliged to cooperate with Personnel Contracting.
In ZG Operations v Jamsek, the truck drivers were found to be independent contractors even though, as a matter of reality, they devoted all of their time to working for ZG Operations (over many years), at various times wore company uniforms and from time to time had a tarpaulin installed with the company logo and, for about the last five years of the engagement, performed some other work besides deliveries. The Court found that the superior bargaining power of ZG Operations had no bearing on the characterisation of the workers. It found the origin of the contract was a clear acceptance from the workers that they would transition from employees to contractors, they had created a partnership to give effect to the arrangement and they had made a significant investment in purchasing the trucks to carry out the services.
This isn’t the end of the road for these particular matters. Given the High Court found that Mr McCourt was an employee in the Personnel Contracting case, it has referred the claim back to the Federal Court to determine his claim that Personnel Contracting breached the Award and the Fair Work Act by not paying him his entitlements. And the High Court did not deal with the claim from the truck drivers that they were 'deemed employees' for the purposes of superannuation legislation. That question will now be determined by the Federal Court.
The approach taken by the High Court emphasises the need for clearly articulated and well-drafted contracts. The absence of a contract will mean a Court will need to examine the 'totality of the relationship' which could very well result in unfavourable (and uncertain) results for organisations. Maddocks can assist you with drafting your employment and contractor agreements with clarity and certainty to reflect the position articulated by the Court.
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