Contractor or employee? Your contract should spell it out

Background

In February this year, the High Court handed down two significant rulings in relation to both contractors and employees. These rulings emphasised the importance of written agreements when substantiating the true nature of these relationships.[1]

The decisions deviated from the well-established ‘multi-factorial’ or ‘totality of relationship’ approach, which involves the court examining the broader circumstances of the relationship such as the way work was carried out, the level of control exerted by the principal or employer, and the obligations of each party.

In a move away from this approach, the High Court determined that where a robustly drafted contract exists, the court ought to consider the terms of the written contract itself and apply the usual contractual interpretation principles to ascertain the true nature of the relationship. Importantly, the court specified that the above only applies in cases where the contract:

is not alleged to have been varied
is unambiguous
does not lack particularity
is not a sham
should not otherwise be set aside by law.

The upshot of this is that, going forward, the wider relationship and day-to-day conduct of the parties will only be examined in cases where a contract is challenged or doesn’t exist. For contracting parties, this is a timely reminder that written agreements need to be appropriately drafted.

How the High Court arrived at this position

In both matters in question, there was no argument brought by the parties that the contracts were a sham, had been varied or displaced, were ambiguous or had been set aside by law or otherwise. In light of this, the High Court decided it was wholly inappropriate to look beyond the written contract to reach a decision. These matters were instead determined based on an examination of the rights, duties and obligations set out in the contracts, which “comprehensively regulated” the relationships.[2]

Matter 1: Jamsek – contractor was held to be a contractor

The brief outline of Jamsek is as follows (to read the full case, click here).

Mr Jamsek and Mr Whitby (Truck Drivers) were truck drivers, initially engaged as employees with the company (which at that time was ZG Operations) (Company).
The Company subsequently told the Truck Drivers it would only continue to use their services if they purchased trucks and entered into new contracts to carry goods for the Company.
The Truck Drivers agreed, set up partnerships with their respective wives, purchased trucks and entered into contractor agreements with the Company.
The Truck Drivers made deliveries requested by the Company and invoiced the Company for the deliveries provided, which the Company duly paid. Those payments were declared as partnership income for each partnership set up by the Truck Drivers and split between the relevant Truck Driver and their wife.
The agreements were terminated in 2017, and the Truck Drivers commenced proceedings in the Federal Court seeking employee entitlements from the Company (including long-service leave and superannuation).[3]
The Federal Court determined the Truck Drivers were independent contractors, not employees[4]. On appeal, the Full Court of the Federal Court determined the Truck Driver were employees.[5]
The matter was then brought on appeal to the High Court, which decided the Truck Drivers were contractors – not employees.

When considering the appeal, the High Court set aside the orders of the Full Court of the Federal Court (ruling the Truck Drivers as contractors), rejecting both the decisions and the approaches adopted by the lower Courts in reaching the decisions. The High Court ruled that it was inappropriate to consider the conduct of the parties post-contract and the relative bargaining powers between them.

Matter 2: Personnel – contractor held to be an employee

The brief outline of Personnel is as follows (to read the full case click here).

Mr McCourt was a backpacker who came to Australia on a Working Holiday visa. After seeking work through the labour-hire company Personnel, he signed an administrative services agreement with the organisation. This agreement described Mr McCourt as a “self-employed contractor”.
Personnel assigned Mr McCourt to work on construction sites where Mr McCourt performed basic tasks under the direction of Personnel’s client. There was no contract between Mr McCourt and Personnel’s client.
Proceedings were commenced in the Federal Court seeking compensation and penalties pursuant to the Fair Work Act 2009 (Cth). These proceedings considered whether Mr McCourt was a contractor (as he was described in the contract with Personnel) or an employee.
The Federal Court held that he was an independent contractor. An appeal to the Full Court of the Federal Court was dismissed (ruling that Mr McCourt was a contractor), with both courts applying the ‘multi-factorial’ test.
The matter was then brought on appeal to the High Court, which decided Mr McCourt was an employee – not a contractor.

The High Court set aside the previous decisions and held that Mr McCourt was not an independent contractor, but rather an employee of Personnel – irrespective of the contract. The court noted that the contract determined who Mr McCourt could work for, exerted a considerable level of control over Mr McCourt in the manner in which he could work (and for whom), and it was these rights and obligations that led to the conclusion that the relationship was one of employer and employee.

Implications for superannuation

In the case of Jamsek, the question was raised whether Jamsek was an employee for the purpose of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SIS Act) given that the contract was wholly or predominantly for labour. In previous cases,[6] it has been held that a contractor falls within the definition of employee under the Act when contracts are for the provision of labour (wholly or predominantly).

The High Court acknowledged that even if Jamsek was held not to have been an employee, there is a separate question of whether he is considered one under the SIS Act. Ultimately, the High Court did not deal with this issue and instead ordered the Federal Court to make a determination, which will require separate characterisation of the contract.

It will be interesting to see how this plays out, and whether the definition of employee under the SIS Act will be held to encompass contractors. We will continue to monitor updates relevant to this point and expect to publish further articles on this issue.

What these decisions mean for you

These decisions confirm that there are circumstances where the court is not required to consider the day-to-day conduct of the parties. In those instances, the duties, rights and obligations placed on the parties under that contract are all the court is required to consider.

It is imperative to ensure your contracts are appropriately and robustly drafted to reflect the true nature of your working relationships.

For those interested in how these cases may impact medical centres, you can read our related article here.

If you are concerned about any current contracts you have in place, the commercial team at Mahoneys can assist you by reviewing your existing contracts or preparing new contracts for your contractors and/or employees.

Please contact Mahoneys commercial Partner Antony Harrison or Lawyer Sabrina Austin on (07) 3007 3777. Alternatively, you can email aharrison@mahoneys.com.au or saustin@mahoneys.com.au.

[1] ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek); Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel).

[2] Jamsek at [8].

[3] Whitby v ZG Operations Australia Pty Ltd [2018] FCA 1934.

[4] Ibid.

[5] Jamsek v ZG Operations Australia Pty Ltd (2020) 279 FCR 114.

[6] Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118.

Written by Sabrina Austin

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