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Employee or Independent Contractor? High Court says the contract is key – Employee Rights/ Labour Relations



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The High Court recently handed down two decisions that mark a
significant shift in how employment and independent contractor
relationships are determined.

Essentially, the High Court has held that the terms of the
written contract will determine whether a person is an employee or
an independent contractor, and not conduct that occurs after the
contract was formed. The reasons for the decisions are complex, so
we expect subsequent cases to provide further clarity in this area.
In the meantime, businesses can be more confident that their
written agreements will be essential when determining whether a
person is classified as an employee or a contractor.

Key takeaways

  • You should review your written contracts with your employees
    and independent contractors to ensure the terms of engagement are
    comprehensively set out in the contracts and accurately record the
    nature of the relationship between the parties.

  • You should enter into written contracts with your independent
    contractors to minimise the prospect of such a relationship being
    held to be one of employment instead.

  • These decisions do not affect the laws relating to, for
    example, superannuation, payroll tax and workers compensation,
    which impose obligations on principals when dealing with certain
    independent contractors.

The multifactorial approach

For over 20 years, the courts have used the multifactorial test
to determine whether a relationship is one of employment or
independent contractor. The test involved considering a range of
indicia in the worker/business relationship, including:

  • mode of remuneration;

  • degree of control exercised over the worker;

  • hours of work and who dictates the hours; and

  • provision of equipment, tools or vehicle.

Importantly, the test encompassed a consideration of how the
parties to the written contract acted in practice, with proper
analysis not restricted to the terms of the contract. It has posed
tremendous difficulty for employers and workers alike, particularly
those who have worked together over several decades and in
circumstances where the relationship has continually evolved.

The Personnel case

The High Court has now held that this approach is no longer
warranted. In Construction, Forestry, Maritime, Mining and
Energy Union & Anor v. Personnel Contracting Pty Ltd

[2022] HCA 1 (Personnel), the High Court held that
it is solely the terms of the written agreement that determine
whether a person is an employee or independent contractor, and
not also how the parties acted in practice. The
factors of the old test are still relevant, but are to be applied
first and foremost to the contract between the parties, rather than
to the whole of their relationship and to the conduct of the
parties.

In Personnel, the High Court looked to the contract
only, and considered that the following terms of the engagement
contract between Construct and their worker, Mr McCourt, meant that
the relationship was one of employment:

  • The labour hire company Construct retained a high degree of
    control over Mr McCourt;

  • Construct had the capacity to terminate the engagement if Mr
    McCourt failed to follow the direction of Hanssen (host employer);
    and

  • Mr McCourt was not carrying on a business on his own
    account.

The Jamsek case

The High Court handed down the decision of ZG Operations
Australia Pty Ltd & Anor v. Jamsek & Ors
[2022] HCA 2
at the same time as the Personnel case. In that case, the
Court was persuaded by the following factors in deciding that Mr
Jamsek and Mr Whitby (the respondents and the workers in question)
were independent contractors:

  • The trucks were owned and operated by the partnerships, and the
    respondents conducted a business of their own as partners;

  • The origin of the arrangement between the parties acted as
    acceptance from the respondents that they would transition from
    employees to independent contractors; and

  • The trucks were maintained and paid for by the respondents, and
    ZG Operations were invoiced for the services provided.

Whilst it will bring comfort to businesses that the terms of
their written contracts will be the key focus on a question of
whether a worker is an employee or a contractor, there are
scenarios where a court will apply the multifactorial test to the
parties’ conduct and broader relationship, including, for
example:

  • where there is no written agreement between the parties (or if
    that written agreement does not reflect the whole of the
    agreement), their conduct will dictate the nature of the
    relationship;

  • where a party alleges that their engagement contract is a sham
    contracting arrangement (where a person ought be classified as an
    employee but is instead treated as a contractor); or

  • where the agreement is otherwise void,

then the courts will look to the parties’ conduct and
relationship rather than the contract alone.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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