In its first two decisions of 2022 the High Court has delivered a watershed moment for the Australian employment and industrial relations landscape. In Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 the High Court determined appeals which concerned whether the workers were properly characterised as independent contractors or employees. The decisions upheld the primacy of the terms of the written agreement as a determinative factor in distinguishing between an independent contractor and an employee.
Revisiting the ‘multi-factorial’ test
Up until now, 20 years of legal authorities had held that a ‘multi-factorial’ approach was required to determine whether a person was engaged as an independent contractor or an employee[1]. In 2001, the High Court decided in Hollis v Vabu Pty Ltd [2001] HCA 44 that regard must be had to the totality of the relationship between the parties, including their actual work practices, and not merely the terms of their contract. Under the old approach, a number of relevant indicia were taken into account to determine the nature of the relationship including:
- Personal serviceg. capacity to delegate own work versus work performed solely for employer.
- Representationg. carrying out work as a principal versus representative.
- Controle. the manner work is performed as opposed the actual exercise of control.
- Mode of remunerationg. withholding PAYG, super contributions, receipt of paid leave entitlements, or rendering invoices for payment.
- Running own businesse. working a business of one’s own account.
Under the multi-factorial test, the characterisation in the contract i.e. the parties’ own characterisation of their relationship as expressed in the terms of their contracts, is not determinative, however, where the application of the multi-factorial approach is finely balanced, then the parties’ agreed characterisation of their relationship may tip the scales.
Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1
In CFMMEU v Personnel Contracting, a 22-year-old backpacker was engaged by a Labour Hire Company (Personnel Contracting) as a “self-employed” contractor to work at a construction site operated by Hanssen Pty Ltd (Hanssen). There was no contract between the worker and Hanssen.
The CFMMEU commenced proceedings in the Federal Court alleging that the worker was in fact an employee and sought compensation for underpayment of wages, annual leave and recovery other employee entitlements. At first instance, the primary judge determined that the worker was an independent contractor by applying the ‘multi-factorial’ test. While there were many indicia favouring that of an employee, the ultimate tie-breaker was the contract between the worker and Personnel Contracting which expressly defined the relationship as an independent contractor. The Full Court reaffirmed the primary judge’s decision, despite its criticism of the ‘confusing’ multi-factorial approach which had been endorsed by the courts up to that point.
High Court’s Decision
The High Court overturned the Federal Court’s decision and held that the worker was in fact an employee and not an independent contractor. According to the majority, the terms of the contract between the worker and Personnel Contracting clearly contemplated an employment relationship.
Despite being labelled as an independent contractor, the court did not consider this to be determinative of the relationship. Rather, the effect of the rights and duties created by the labour hire agreement, including the right of control exercised by Personnel Contracting over the work, and the obligation to follow the direction of Personnel Contracting or one of their clients, determined that the worker was an employee.
“While there may be cases where the rights and duties of the parties are not found exclusively within a written contract, this was not such a case. In cases such as the present, where the terms of the parties’ relationship are comprehensively committed to a written contract, the validity of which is not challenged as a sham nor the terms of which otherwise varied, waived or the subject of an estoppel, there is no reason why the legal rights and obligations so established should not be decisive of the character of the relationship.”[2]
ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2
In ZG Operations Australia Pty Ltd v Jamsek, Mr Jamsek and Mr Whitby worked as truck drivers for ZG Operations, initially as employees from 1977 until 1985. In 1986, Mr Jamsek and Mr Whitby decided to set up partnerships with their wives and entered into respective independent contractor agreements with ZG Operations. The written contract clearly defined the scope of the independent contractor arrangement. The partnership would supply their own trucks, pay the trucks’ running costs and insurance, and render invoices on completion of work.
The agreements with ZG Operations were terminated in 2017. Mr Jamsek and Mr Whitby subsequently commenced proceedings in the Federal Court seeking compensation for entitlements alleged to be owed to them as employees of ZG operations, including minimum wages, annual leave and long service leave. Furthermore, income from the work performed for ZG Operations was declared as partnership income for the purposes of income tax and split between each respondent and his wife.
At first instance, the primary judge held that Mr Jamsek and Mr Whitby were not employees, but were independent contractors. The Full Court of the Federal Court overturned that decision and held that Mr Jamsek and Mr Whitby were employees and had been throughout the whole 35 years of their work. The Full Court upheld the “substance and reality” of the relationship which was incompatible with an independent contractor. Critically, the court decided that they did not have a sufficient degree of control and autonomy necessary to characterise them as independent contractors.
High Court’s Decision
On appeal by the company, the High Court disagreed with the Full Court’s ruling and in a unanimous decision held that Mr Jamsek and Mr Whitby were not employees. The High Court applied the same approach as in CFMMEU v Personnel Contracting by giving primacy to the contractual terms. Since the creation of the partnership, the parties had clearly entered into a principal/contractor relationship.
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 context in which the first contract was entered into involved the company’s refusal to continue to employ the drivers and the company’s insistence that the only relationship between the drivers and the company be a contract for the carriage of goods. This relationship was not a relationship of employment.
Lessons for Employers
These landmark cases are a marked departure from the established characterisation of an employee versus contractor, which favoured the substance and totality of the relationship.
The primacy given to the rights and obligations created by a written agreement, restores some certainty to business who choose to engage workers as contractors. However, there is no doubt that the decisions will likely have significant implications for many workers, particularly in the gig economy, where the terms of the contract usually reflect the disparity in bargaining power.
In light of the decisions, employers should carefully revisit the terms of their existing contractor arrangements to ensure the terms adequately reflect the nature of the relationship. A label that the worker is an ‘independent contractor’ is not enough. A failure to adequately reflect how the parties actually conduct themselves, leaves the written contract open to interpretation and to challenge that a contract is arguably a sham, contained other terms or was varied by the parties’ conduct.
If the contract is not entirely in writing, then the subsequent conduct of the parties is necessary to ascertain the nature of the arrangement.
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[1] Stevens v Brodribb [1986] HCA 1; 160 CLR 16.
[2] Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 at [43] per Kiefel CJ, Keane & Edelman JJ.
Article prepared by: Sarah Cappello, Partner, Joey Tass, Senior Associate, and Margaret Gotsopoulos, Lawyer.
