Employee or Independent Contractor? High Court provides direction
Mar 2022 | InsuranceThe High Court has recently heard two appeals together from judgments of the Full Court of the Federal Court of Australia,1 in cases involving the characterisation of an employment relationship. Both decisions provide direction as to how the court will approach determining the issue as to whether a worker is an employee or independent contractor.
The facts
In both proceedings, the respective workers were seeking employment entitlements under the Fair Work Act 2009, amongst other legislation.
Personnel Contracting, concerned a 22-year old backpacker who was working on a holiday visa. The worker, Mr McCourt, was engaged by a labour-hire Company, Construct, pursuant to a signed Administrative Services Agreement (ASA). Construct then assigned Mr McCourt to work on two construction sites operated by Hanssen.
Mr McCourt did not have a contract with Hanssen. Construct had an executed Labour Hire Agreement with Hanssen, which relevantly provided that Mr McCourt was engaged on a ‘daily hire basis’ and was to be paid at an hourly rate agreed to by Hanssen and Construct. The ASA provided that, while working at Hanssen’s constructions sites, Mr McCourt would be under the supervision and direction of Hanssen employees. Furthermore, Mr McCourt’s primary legal obligation was to ‘[c]o-operate in all respects with Construct and [Hanssen] in the supply of labour to [Hanssen]’.
The second matter, ZG Operations, concerned two workers who had been engaged by ZG Operations as truck drivers between 1977 and 2017. At some time in 1985 or 1986 both workers were offered the opportunity to become ‘contractors’. This opportunity meant that they were required to purchase their own trucks from the company and pay the maintenance and operational costs of those trucks; all for the provision of delivery services, which would be invoiced to the company. Both workers agreed and set up partnerships with their respective wives.
Each partnership executed written contracts outlining these terms, where the partnerships would later invoice the company for its services. Any income received in accordance with the contracts was considered ‘partnership income’.
In neither case was there any suggestion that the contract between the parties was a sham, had been varied, or was otherwise displaced by the conduct of the parties.
Decisions at first instance
In both cases, the primary judges applied a multifactorial approach in order to reach their decision.
In Personnel Contracting, the primary judge concluded Mr McCourt’s generally expressed obligation to cooperate with Construct’s client was insufficient to amount to ‘control’. This was evidenced by Mr McCourt not having a contract directly with Hanssen and the ASA stating he was to turn up for work at a specific time and place nominated by Hanssen. The primary judge also considered that being an unskilled labourer meant Mr McCourt would not represent himself as an employee of Construct. Amongst other factors, the primary judge concluded that on the multifactorial test, the worker’s ASA, which identified him as a ‘self-employed contractor’, showed clear intention for the relationship to be categorised as that of a principal and independent contractor.
This decision was upheld by the Full Court, who again applied a multifactorial approach to the issue. Considering all of the evidence, the Federal Court also deemed Mr McCourt to be an independent contractor.
In ZG Operations, the primary judge held the workers were examples of partnerships ‘running businesses of their own’ and it was the mutual intention of the parties for the structure of the employment relationship to be altered by the 1985/1986 contracts. The appeal was allowed by the Full Court, with the court having significant regard to the manner in which the parties conducted themselves over the course of the relationship and the disparity in bargaining power which resulted in the revised 1985/1986 contracts. The Full Court determined that, after considering factors such as the length of time for which the workers had provided the company their services and the fact the work undertaken for ZG Operations was their only source of income, the ‘reality’ of the relationship was that the workers were employees of the company rather than independent contractors.
Issues
The High Court acknowledged that since the decisions of Stevens v Brodribb Sawmilling Co Pty Ltd2 and Hollis v Vabu Pty Ltd,3 the Court has used a ‘multifactorial’ test to assess whether a worker is an employee or an independent contractor. This test considers various factors, including those listed below, to determine the true nature of the relationship between parties:
- Control over the way a task is performed;
- Whether standard hours are worked;
- Who supplies/maintains tools and equipment;
- Who accepts responsibility for defective works; and
- Whether the worker is free to work for others at the same time.
Despite this, the High Court considered the true nature of an employment relationship cannot be determined by ‘running down items on a checklist’ and the test creates ‘considerable uncertainty…[which] is exacerbated where it is… to be applied in respect of the parties’ conduct over the whole course of their dealings with each other’.
To this extent, in circumstances in which both cases had relationships that were wholly and comprehensively outlined in writing, the High Court held that the nature of the relationship was to be determined from the terms of the written contract itself. The High Court denied that the terms allocated to each party in the contract would necessarily be determinative of, or even relevant to, the characterisation of the relationship. Determination of the character of the relationship will, however, proceed by reference to the rights and obligations of the parties under the written contract.
Decision
In Personnel Contracting, notwithstanding being labelled an independent contractor in the ASA, the High Court held, by majority, that Mr McCourt was an employee. Mr McCourt’s promise to work for Construct’s client, and be paid for that work, went directly to the core of Construct’s business of acting as a labour hire company. In those circumstances, it was deemed that Mr McCourt’s contract with Construct could only accurately be described as a contract of service, rather than a contract for services.
In the decision of ZG Operations, the High Court unanimously held that the workers were contractors, who carried on the business of providing delivery services to the company.
The High Court held that, when determining whether a worker constitutes an ‘employee’, consideration should be given to the totality of the contracts and the effect the bargaining power between the parties had on ‘the reality of the situation’.
Having regard to the Full Court’s reliance on the context in which the workers entered into their contracts in ZG Operations, the High Court considered this was mounted on the company’s refusal to continue to employ the drivers. Hence the only ongoing intended relationship was that for the carriage of goods and was not reflective of a relationship of employment.
Key Takeaways for Employers and Insurers
This decision serves as a timely reminder to employers to ensure contracts are wholly committed to writing. The High Court has given a clear indication that, in circumstances in which a written contract is in existence, the courts will take a narrow approach to the application of the multi-factorial test and devote attention to the terms of the contract when determining the true nature of an employment relationship.
The High Court’s decision in these claims also has relevance to insurers in matters where an insured is alleged to have exposure to vicarious liability for a worker who injures a third party. Absent there being any suggestion that a contractual relationship is a sham or otherwise ineffective, the court will proceed by giving primary reference to the terms of a written agreement when considering the true nature of the relationship between parties. This could lead to an insured being exposed to a finding of vicarious liability for the negligent actions of a contractor if the terms of a written agreement between the parties suggests an employment relationship was actually in existence, even if the agreement labelled the worker an independent contractor.
1 Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (‘Personnel Contracting’); ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 (‘ZG Operations’).
2 [1986] HCA 1.
3 [2001] HCA 44.
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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
