"Employee or contractor": Is status determined by the contract or the parties' conduct?

Key takeaways for employers and principals

The decision may give more certainty to businesses who engage legitimate independent contractors via a thorough contractor management process and robust contractor agreements (and who act consistently with those written arrangements) that a court will not subsequently undo their arrangements.

The High Court decisions highlight the fundamental importance of ensuring that independent contractor agreements are carefully drafted to reflect a broad range of factors indicating a genuine independent contractor relationship, but in particular:

• control by the contractor (rather than the principal) of how, where and when work is performed; and
• the contractor performing the work as part of an independent enterprise, rather than in a manner which is subordinate to the principal’s business.

The requirement for robust contractual terms means that organisations entering into an independent contractor relationship should consider:

• contracting with incorporated contractors or partnerships in preference to individuals;
• ensuring that the contractor has a significant level of control over how, where and when the work is performed, provided they meet appropriate deadlines and quality standards;
• providing the contractor a contractual right to delegate the performance of the work to its employees or subcontractors (which can be subject to approval by the principal);
• paying the contractor in a manner which enables the contractor to make a profit if they perform efficiently, or a loss if they do not, such as a fixed fee for particular outcomes, rather than time based rates;
• ensuring the contractor provides all tools and equipment necessary for the performance of the services; and
• not engaging contractors to perform work which is substantially similar to work performed by existing employees. There are significant penalties for dismissing an employee and re-engaging them to perform the same work as a contractor.

Organisations need to be mindful that simply applying a label of contractor will not be sufficient to give rise to an independent contractor relationship if all the factors point in the way of employment.

Organisations also need to act consistently with the terms of the written contract, so as not to give rise to arguments about variation or waiver of its terms.

Parties who have entered into Odco style arrangements (tripartite labour hire arrangements) will need to take stock of these arrangements and consider whether these workers are in fact employees.

Organisations also need to be mindful of “employee” deeming provisions in legislation such as the Superannuation Guarantee (Administration) Act 1992 (Cth), workers compensation and payroll tax. The High Court has remitted back to the Full Court the question whether ZG Operations is liable to pay superannuation to the Drivers under s12(3) of the Superannuation Guarantee Act. Hopefully this enables the Full Court to revisit the issues in Dental Corporation v Moffet (see our update here).

CFMMEU v Personnel Contracting

CFMMEU v Personnel Contracting concerned a 22-year-old English backpacker on a working holiday visa who entered a contract with a labour hire company Personnel Contracting Pty Ltd, trading as Construct (Construct). The contract referred to Mr McCourt as a contractor, and provided that Construct would liaise with its clients to identify and facilitate opportunities for Mr McCourt to supply his labour to those clients, and then pay Mr McCourt for the work he undertook for a client.

Construct offered Mr McCourt work at a Hanssen construction site (under a Labour Hire Agreement between Construct and Hanssen), where he performed basic labouring tasks such as taking out bins, cleaning workspaces and moving materials. He was paid an hourly rate.

The Construction, Forestry, Maritime, Mining and Energy Union (CFMMEU), on behalf of Mr McCourt, argued he was a casual employee of Construct, not an independent contractor, and was entitled to casual employee rates and benefits under the applicable Award.

At both first instance and on appeal, the Federal Court held that Mr McCourt was an independent contractor and not an employee.

The primary judge and the Full Court considered they were bound by Personnel Contracting Pty Ltd v Forestry, Mining and Energy Union of Workers (Personnel No 1)¹, in which the Western Australian Industrial Appeals Court held that labourers engaged under a tripartite contractor structure materially identical to Mr McCourt’s (often referred to as “Odco-style” arrangements) were independent contractors, not employees.

The Full Court considered that Personnel No 1 was not plainly wrong and was binding. As such, in the absence of Mr McCourt’s contract being a sham, the same conclusion must follow – that is, that Mr McCourt was an independent contractor.

The CFMMEU and Mr McCourt appealed to the High Court.

The High Court decisions

Six of the seven High Court justices granted the appeal, setting aside the earlier decisions of the Federal Court, and finding that Mr McCourt was an employee of Construct.

However, the Court was split 5-2 with respect to the means by which the characterisation of a relationship should be undertaken by the courts.

The majority² held that where the parties have comprehensively committed the terms of their relationship to a written contract, the characterisation of that relationship as one of employment or otherwise must proceed by reference to the rights and duties of the parties under that contract at the time it was entered into, without regard to the subsequent conduct of the parties. The minority (Justices Gageler and Gleeson) considered that a Court is able to consider the manner of performance of the contract by the parties.

Chief Justice Kiefel and Justices Keane and Edelman were critical of the multifactorial approach, under which courts assess the totality of the parties’ relationship by considering a broad range of factors, and stated that:

• the multifactorial approach, was “apt to generate considerable uncertainty”, which was “exacerbated where it is contended that the test is to be applied in respect of the parties' conduct over the whole course of their dealings with each other”;
• where it must be undertaken, the multifactorial assessment should not proceed “as if the court is running down items on a checklist in order to determine a balance of ticks and crosses”, as the factors are not all of equal weight in the characterisation of the relationship; and
• while the central question is always whether or not a person is an employee, enquiring into whether the person does the work as part of their own business or as part of the business of the putative employer is a useful way to proceed (ie the “own business / employer’s business” dichotomy).

Chief Justice Kiefel and Justices Keane and Edelman held that Personnel No 1 and the Odco cases³ (which established that triangular labour-hire arrangements did not create relationships of employment) were wrong. In their view, these decisions wrongly attributed decisive significance to the parties’ description of their relationship, rather than the objective state of affairs arising from the contract. However Steward J, and Gageler and Gleeson JJ upheld the correctness of Building Workers Industrial Union of Australia v Odco Pty Ltd, with Justices Gageler and Gleeson distinguishing the Odco case from the arrangements in the present case (for example, the contract in the Odco case was not for hourly labour but for a job or work done).

In the case of Mr McCourt, the majority focussed on two primary factors that led to the result that Mr McCourt was an employee:

1. Under the contract between Construct and Mr McCourt the overall right to control the work of Mr McCourt (rather than the detail of the actual exercise of control) rested with Construct, including its right to control the provision of Mr McCourt’s labour to its customers; and
2. Mr McCourt’s obligation to work for Construct's customer, and his entitlement to be paid for that work was central to Construct’s business of supplying labour to builders, such that it was clear under the contract that Mr McCourt's work was dependent upon, and subservient to, Construct's business.

ZG Operations v Jamsek

ZG Operations v Jamsek concerned two truck drivers, Mr Jamsek and Mr Whitby (Drivers) who were employed as drivers by ZG Operations’ predecessor company in 1977. In 1985, their employer informed them that the company could not guarantee their job going forward if they did not agree to become contractors.

The Drivers set up partnerships with their respective spouses, which purchased new trucks and entered into contracts titled “Contract Carriers Arrangement” with the company. The Drivers were responsible for maintaining their vehicles, but installed tarpaulins on their trucks bearing the company’s logo and wore company uniforms. Upon changes in the ownership of the company’s business, new uniforms and logos were provided to the Drivers to reflect the new business names.

In 2017, ZG terminated relationships with the Drivers. The Drivers commenced legal action seeking various employee entitlements, including leave payments, overtime, redundancy, and superannuation.

The Federal Court at first instance⁴ held that the Drivers were, based on the totality of the relationships, independent contractor partnerships running their own businesses.

On appeal⁵, the Full Court of the Federal Court overturned the decision at first instance, finding that the Drivers were employees of ZG.

The Full Court applied the multi factor test, and concluded that the drivers were employees because:

• there was a significant disparity in bargaining power between the Drivers and the company;
• while the provision of vehicles by the Drivers was an important consideration, the Drivers had little option but to buy the vehicles and enter into the arrangements proposed in order to continue working for the company;
• the contractual ability to work for third parties was theoretical rather than real;
• there was no guarantee of continuity of work in the event of a sale of the Drivers’ businesses and, as the Drivers never undertook delivery work for other persons, a sale of their vehicles would not have generated goodwill.

The High Court decisions

The High Court unanimously granted the appeal, setting aside the Full Court’s decision, and held that the Drivers were not employees of ZG.

Chief Justice Kiefel and Justices Keane and Edelman stated that the Full Court erred by:

• devoting significant attention to the manner in which the parties actually conducted themselves over the decades of their relationship, instead of considering the rights and duties of the parties under the contract at the time it was entered into; and
• considering that the disparity in bargaining power between the parties affected the contract pursuant to which the partnerships were engaged, such that the reality of the relationship was one of employment.

In finding that the Drivers were not employees of ZG, Chief Justice Kiefel and Justices Keane and Edelman noted that the reality of the situation was that the partnerships, and not the drivers individually, owned and operated the trucks. The partnerships contracted with the company and invoiced the company for delivery services provided by the operation of the trucks.

The partnerships earned income from the company, incurred expenses associated with the ownership and operation of the trucks, and took advantage of tax benefits of the structure. Put simply, the Drivers were conducting a business of their own as partners who enjoyed the advantages of splitting the income generated by the business with their fellow partners. Both in Australia and in England, similar arrangements have been found to be independent contractor relationships and there was no reason to reach a different conclusion.

Justices Gordon and Steward reached the same conclusion.

Justices Gageler and Gleeson also held that the Drivers were not employees, having regard (consistent with their view in CFMMEU v Personnel Contracting) to the conduct of the parties in the performance of the contract, and the fact that the drivers were obliged to and did maintain a truck and the partnerships had contracted to do the work.

If you would like to discuss any of the above or require any advice or assistance as to independent contractor or employee arrangements, please do not hesitate to contact:

• David Cross – david.cross@nortonrosefulbright.com
• Jason Noakes – jason.noakes@nortonrosefulbright.com
• Ali Shields – alexandra.shields@nortonrosefulbright.com
• Martin Osborne – martin.osborne@nortonrosefulbright.com