Employee vs independent contractor - Contractual terms reign supreme

What you need to know

• The High Court has held that the characterisation of a relationship as that of an employee or an independent contractor, is answered by considering the rights and obligations as set out in the written contract (unless the contract is challenged as a sham or its terms are alleged to have been varied or displaced by conduct).
• Regard should no longer be had to the history of the parties' dealings, or post-contractual conduct, where the written contract represents the totality of the parties' agreement.

What you need to do

• Ensure that your organisation has a current, comprehensive written contract in place with each contractor whom it engages to perform services.
• Ensure that your organisation has a procedure for clearly documenting any variations to contractual arrangements with contractors.
• Review the terms of all independent contractor agreements to ensure that the rights and obligations contained are consistent with their characterisation and complete.
• Carefully review any situations in which an employee's employment ceases and they are re-engaged as a contractor performing the same, or substantially the same, work.
• It is possible there may be a rise in cases challenging contracts as being ineffective, or applications for remedies under statutory contract review scheme, in light of the High Court decisions.

Overview

On 9 February 2022, the High Court allowed two appeals (which were heard together) concerning the determination of the correct classification of workers as employees or independent contractors.

The effect of the decisions of the High Court, are to affirm the primacy of contractual terms in determining worker classification when characterising a relationship as one of "employer-employee" or "principal-independent contractor".

Where the parties have comprehensively committed the terms of their relationship to a written contract (and its validity is not challenged), the characterisation proceeds by reference to the rights and obligations of the parties under that contract which regulates the relationship.

The Court held that where no party seeks to challenge the efficacy of the contract (on the basis that it has been varied or otherwise displaced by conduct, or is otherwise ineffective under the general law or statute), there is no reason to determine the character of the parties' relationship by undertaking a wide-ranging review of the entire history of the parties' dealings, nor to rake through the day-today workings of their relationship.

The Court confirmed the task is not to form a view as to what is a fair adjustment of the parties rights, nor to determine the "practical reality" of the relationship, neither to examine any impact of "superior bargaining power" – but to enforce the parties' rights and obligations in the contract.

Does the multifactorial test still apply?

In reaching its conclusions, the Court noted that previous High Court decisions in Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 and Hollis v Vabu Pty Ltd (2001) 207 CLR 21, had not superseded the requirement to characterise the relationship by reference to the contract of the parties. The "multifactorial test" adopted in those cases concerned situations where the parties had not committed the totality of their relationship to written contract terms.

In cases where the parties have a comprehensive contract, the Court said any assessment of the "totality of the relationship between the parties" by reference to the various indicia of employment (in the "multifactorial test"), must focus on the rights and duties established by the contract itself, in order to bear on the ultimate characterisation of a relationship. That does not involve an analysis of considering simply how the parties' relationship has come to play out in practice with no connection to contractual obligations.

As a result, relevant indicia will continue to have a role, but applied through the prism of the contract.

CFMEU v Personnel Contracting – the control test

In Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 this reasoning ultimately led to a conclusion that the relationship was one of "employment". The case concerned a labourer who was engaged by a labour hire company. The labourer was a young British backpacker, on a working holiday visa who had limited working experience. He was engaged by the labour hire company under a written agreement, in which he was required to perform basic labouring tasks on two construction sites run by a host client.

The Court concluded, that while the 'label' chosen by the parties was a "self-employed contractor", the terms of the contract established a suite of rights and obligations leading to the relationship being one of employment. This included the ability to fix the reward for the labourer's work, terminate the contract if the labour failed to follow directions, and retaining a right of control that was fundamental to the company's business as a labour-hire agency. It considered that the labourer was not in a business of his own.

ZG Operations v Jamsek

ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 ('Jamsek') concerned whether two truck drivers engaged by a transport company were employees or independent contractors.

The two drivers were both initially engaged as employees of the company, but were later told they would no longer be engaged as employees and offered the opportunity to become contractors. They each set up partnerships with their spouses and executed written contracts with the company for the provision of delivery services, purchased trucks from the company, paid the maintenance and operational costs of those trucks, invoiced the company for their delivery services, and were paid as such.

The Court held that the two truck drivers were not employees of the company. The Court relied on the fact that the contracts between the parties 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 Court also had regard to the context in which the contracts were entered into, being the company's refusal to continue to employ the drivers, and instead only engaged with them as contractors.

Implications

Having comprehensive contracts in writing that deal with the rights and obligations between the parties remains the surest way to navigate the "employee/independent contractor" territory.

Given the High Court decisions, it is possible there may be a rise in challenges to contracts as amounting to shams or being otherwise ineffective under the general law. Cases exploring statutory variation or invalidity mechanisms might also be explored.

Authors: Trent Sebbens, Partner; Kate Hollings, Senior Associate; Heidi Kornman, Lawyer; and  Jasmin Collins, Lawyer.