Are your contractors, contractors?

by | Feb 15, 2022 | Employment Law and Workplace Relations Blog

Last week, the High Court handed down two highly anticipated decisions confirming the approach to be taken when assessing whether a relationship is one of employment, or independent contract. We analyse these two decisions and what it means for the state of the law in Australia and the effects on employers and principals going forward.

Has the test to determine an employment relationship over that of an independent contractor changed?

Prior authorities, such as Hollis v Vabu[1] and Stevens v Broadribb[2], applied a “multifactorial” approach to determine whether a person is an employee or a contractor.

The High Court’s recent decisions do not depart from this line of authority but instead focuses attention on the contractual agreement between the parties.

In CFMEU v Personnel Contracting, the High Court expressly considered this and found that:

In neither Stevens nor Hollis did this Court suggest that, where one person has done work for another pursuant to a comprehensive written contract, the court must perform a multifactorial balancing exercise whereby the history of all the dealings between the parties is to be exhaustively reviewed even though no party disputes the validity of the contract.

Whilst the High Court previously referred to the need to consider the “totality of the relationship” (thereby giving rise to the multifactorial test), this “was not an invitation to broaden the inquiry beyond the contractual rights and duties of the parties”.

In particular, the High Court noted that in neither Stevens or Hollis was the contractual relationship comprehensively committed to a written contract.

CFMEU v Personnel Contracting Pty Ltd

In this case, the alleged contractor (Mr McCourt) was found to be an employee, despite an Administrative Services Agreement (Agreement) describing him as a self-employed contractor. However, a close analysis of the Agreement demonstrated that in fact, its terms were more aligned with an employment relationship.  We explain this further below.

Realities of the working relationship

Mr McCourt was engaged by Personnel Contracting Pty Ltd (trading as Construct), a labour hire company that engages workers to provide labour to building clients, and performed work solely for Construct’s major client, Hanssen Pty Ltd (Hanssen) for a number of months on two separate occasions in 2016 and 2017.

At the time of engagement, McCourt entered into a number of documents, including the Agreement which described him as a “self-employed contractor”.

The CFMEU and Mr McCourt brought action against Construct alleging that Construct had breached the Fair Work Act 2009 (Cth) (FW Act), by failing to pay Mr McCourt in accordance with the Building and Construction General On-Site Award 2010 as an employee of Construct.

Mr McCourt:

  • worked exclusively for Hanssen;
  • was subject to supervision and direction by Hanssen;
  • was provided and required to comply with Hanssen’s site rules and induction;
  • apart from drawing his attention to health and safety issues in his work, received no direction from Construct in the performance of his work;
  • was paid by the hour; and
  • was described as engaging in basic labouring tasks such as taking out bins, cleaning workspaces and moving materials rather than a “entrepreneur or a skilled artisan” and was told “what to do and how to do it”.

The Agreement

The Agreement contained a recognition by Mr McCourt that he was self-employed, did not require Construct to guarantee work of any type or duration and may engage in negotiations with the builder for a higher rate of payment.

Further, the parties agreed that Construct was not liable to pay Mr McCourt any amounts in respect of employee entitlements, such as annual leave, personal leave and long service leave.

The High Court’s consideration of contracts of employment

The High Court considered the law regarding employment relationships and contracts of employment and noted that:

  • an employment relationship is not always defined exclusively by a contract between the parties, and may be affected by statutory provisions and by awards made under statutes (such as modern awards under the FW Act);
  • the way in which a relationship plays on “on the ground” may be relevant for specific statutory purposes;
  • a contract of employment may be partly oral and partly in writing, and/or subsequent agreements between the parties may result in a variation to the terms of the original contract or result in an estoppel or waiver;
  • however, this was not such a case and “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 rights and obligations so established should not be decisive of the character of the relationship(our emphasis); and
  • where a party does not seek to challenge the efficacy of the contract (whether because it is a sham or is otherwise invalid at law), “there is no occasion to seek to determine the character of the parties’ relationship by a wide-ranging review of the entire history of the parties dealings. Such a review is neither necessary nor appropriate because the task of the Court is to enforce the parties rights and obligations, not to form a view as to what a fair adjustment of the parties’ rights might require”. 

Findings

In this case, the fact that the parties described Mr McCourt as a contractor was of no significance – it was clear from the terms of the Agreement that Mr McCourt was engaged by Construct to serve it in Construct’s business.

The promise by Mr McCourt to work for Construct’s client, and his entitlement to be paid for that work, was “at the core of Construct’s business” as a labour hire provider, and the right to control the provision of Mr McCourt’s labour was an essential asset of that business.

Therefore, in those circumstances, it was “impossible” to conclude something other than that Mr McCourt’s work was dependent on, and subservient to, Construct’s business. Accordingly, Mr McCourt was Construct’s employee.

ZG Operations Australia Pty Ltd v Jamsek

In this case, two truck drivers were engaged by ZG Operations Australia Pty Ltd (ZG) and its predecessors over a period of 40 years (from 1977 until 2017).

The drivers were initially engaged as employees and drove trucks provided by ZG until approximately 1986, at which time ZG insisted that it would no longer employ and would continue to use their services only if they purchased their trucks and entered into contracts to carry goods for ZG.

Each of the truck drivers agreed, and set up partnership arrangements with their wives. From that time the partnerships:

  • purchased trucks from ZG;
  • executed a written services agreement with ZG for the provision of delivery services as requested by ZG;
  • invoiced ZG for the delivery services provided and was paid for those services;
  • part of the revenue earned was used to meet the operating costs of operating the trucks and the net income earned was declared as partnership income and split between husband and wife for tax income purposes.

The High Court found that, given the origin of the service agreement was the company’s refusal to continue to employ the drivers, and the acceptance by the drivers of that refusal, “it is difficult to see how there could be any doubt that the [drivers] were thereafter no longer employees of the company”.

Importantly, the High Court noted that it was the partnerships, and not the drivers individually, that:

  • owned and operated the trucks;
  • contracted with ZG;
  • invoiced ZG for delivery services provided by the operation of the trucks;
  • earned income from ZG and incurred expenses associated with the ownership and operation of the trucks; and
  • took advantage of tax benefits of the structure.

Accordingly, it was “not possible” to conclude that the drivers were not conducting a business of their own as partners.

The drivers therefore were contractors and not employees.

What does this mean for businesses?

As the High Court noted, there is no need to look beyond the terms of a comprehensive written contract unless one contractual party argues that the contract is a “sham” or is otherwise legally ineffective.

This could likely see a sharp increase in sham contracting allegations and/or claims in the near future.

It is now important, more than ever, that businesses:

  • undertake a detailed assessment of the operational needs of the business and the purpose and intention of entering into the particular contracting arrangement;
  • consider whether an independent contractor agreement is appropriate in the circumstances;
  • take time to carefully and comprehensively record the relationship between the parties to writing; and
  • once in place, ensure that the relationship is carried out consistently with the written contract.

If you would like more information about these decisions or what they mean for your business, please contact our Employment, Workplace Relations and Safety Team.

[1] Hollis v Vabu

[2] Stevens v Broadribb

Kathryn Maric

Kathryn Maric