In two important decisions this week the High Court has emphasised the importance of contractual terms when characterising workplace relationships.
Both decisions are significant in finding that, where parties have entered into a valid and comprehensive written agreement, which the parties have not deferred from through their actions, the Courts are required to determine the working relationship in line with the written terms of the agreement.
Following on from the 2021 decision in WorkPac v Rossato, the High Court again placed a strong emphasis on the terms of the written agreement between parties in determining how a relationship is defined. Although consideration can be given regarding the circumstances surrounding the making of the contract, the proper way to define a working relationship is by analysing the rights and obligations of the parties under the contract itself.
The Jamsek Decision – ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2
In Jamsek, the High Court overturned the decision of the Full Court of the Federal Court finding that truck drivers Mr Jamsek and Mr Whitby were independent contractors and not employees, as embodied in the partnership agreements they had with ZG Operations Australia Pty Ltd and ZG Lighting Pty Ltd and their predecessor companies – let’s call them “ZG”.
What the Jamsek case was about
Jamsek concerned two truck drivers who were engaged by ZG to deliver their goods. While the truck drivers had previously been employed by ZG directly, in the mid 1980s, at ZG’s suggestion, they both began providing services through a partnership.
While the arrangements between ZG and the partnerships were updated over the years with new agreements, in each case the truck drivers, through their respective partnership:
- Entered into an agreement with ZG to deliver their products;
- Purchased a truck to be used in the deliveries;
- Were responsible for all running costs and other expenses associated with the trucks, including insurances, with relevant deductions claimed by the partnerships for tax purposes;
- Declared the net revenue received from ZG as partnership income; and
- Split the income received from ZG for the deliveries with their spouses.
How it ended up in court?
After the agreement was terminated between the parties in 2017, the truck drivers initiated proceedings in the Federal Court of Australia claiming they were actually employees the whole time and seeking entitlements owed to them as employees under the Fair Work Act 2009 (Cth) (“Act”), in addition to entitlements under superannuation and long service leave legislation.
The first judge found the truck drivers to be independent contractors. This original decision was overturned on appeal to the Full Federal Court which found that the truck drivers were employees of ZG.
The High Court’s Decision
On further appeal, the High Court found in favour of ZG and decided that the truck drivers were not employees but were members of a partnership which provided a delivery goods service to ZG. The High Court emphasised that:
- the partnerships, and not the individual truck drivers, owned and operated the trucks and contracted with ZG;
- it was the partnerships who invoiced and received payments from ZG, incurred expenses associated with the ownership and operation of the trucks and which took advantage of the tax benefits associated with this operational structure;
- the obligation in the 1993 Contract to undertake the carriage of goods “as reasonably directed” did not confer a power of control by ZG over the truck drivers as an employer may have over employees but instead was control of a particular kind, enabling ZG to give directions to make deliveries, not providing them with power as to how the deliveries should be made.
A separate issue related to whether the truck drivers would come within the expanded definition of “employee” under superannuation legislation that entitles some independent contractors to statutory superannuation. That is dealt with in other HR Legal workplace updates on our website.
The Personnel Decision – CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1
What this decision is about?
Mr McCourt was a 22-year-old British backpacker who performed labouring work for Personnel Contracting in 2016. Mr McCourt signed what was called an Administrative Services Agreement with Personnel which described him as a “self-employed contractor”. This Services Agreement set out that Mr McCourt:
- was to attend the host employer’s site at nominated times to supply his labour;
- supplied his own hard hat and boots, but all other equipment was supplied;
- was subject to the supervision and direction of the host employer’s employees (the host employer was a company called “Hanssen”) while on Hanssen’s site but did not sign a contract with Hanssen; and
- provided invoices to Personnel of the work completed and Personnel paid him accordingly
The Labour Hire Agreement between the host employer Hanssen and Personnel stated that the workers placed by Personnel would be “independent contractors” and the pay rates were determined between these parties.
How it ended up in court?
In June 2017, Personnel told Mr McCourt that he was to cease work at the Hanssen site he was working at and after that he did not receive any further work from Personnel.
Mr McCourt and CFMMEU commenced proceedings in the Federal Court, seeking orders for compensation on the basis that Mr McCourt was an employee but had not been paid according to his entitlements as an employee. Similar orders sought against Hanssen as an accessory for Personnel’s breaches. The first judge held that Mr McCourt was an independent contractor. An appeal to the Full Federal Court was dismissed.
The High Court’s Decision
The High Court found that Mr McCourt was an employee of Personnel. In doing so the High Court again emphasised that there was no reason the rights and obligations contained in the written agreement between the parties should not be decisive of the character of the relationship, given the terms of the parties’ relationship were comprehensively embodied in a written contract, the validity of which was not challenged.
The High Court considered that a ‘label’ given, such as “independent contractor” to Mr McCourt was not determinative, or even relevant, to how the rights and obligations contained in the Services Agreement were characterised. The Court found that Mr McCourt was not carrying on his own business and that the core of his obligations under the Services Agreement was to undertake work as directed by Personnel or the host employer. Due to the terms of the Services Agreement, Personnel was considered to be effectively a labour hire business, having authorization to fix Mr McCourt’s pay rate, provide him with payment for his work and terminate his engagement if he failed to obey its directions, or those of the host employer.
The High Court emphasized that:
“…it is the right of a person to control the work of the other, rather than the detail of the actual exercise of control, which serves to indicate that a relationship is one of employer and employee”.
Through deciding which host employer Mr McCourt was referred to undertake work, Personnel was exercising “and commercialising” its right to control what work Mr McCourt would do and how he would do it.
What are the Implications of these decisions – and what you should do?
These High Court decisions reinforce that the starting point in determining how a relationship is characterised is by reference to the written terms of an agreement and the rights and obligations embodied in it.
When the validity of the contract is not in dispute, there is no need to apply an expansive approach in determining the reality of a relationship, with reference to post-contractual conduct.
In light of these decisions, it is essential that contractor agreements and employment contracts specify clearly and accurately the legal rights and obligations of the parties so the nature of the relationship is characterised correctly.
For many organisations, the decisions will provide certainty that their existing contractor arrangements and documentation are suitable. However, for others, particularly in the on-hire industry, Personnel may prompt consideration of their arrangements.
We are not surprised by the outcome in the Jamsek case where, in our view, it seemed clear that there was a relationship of contractor and principal. The more concerning ramifications arise from the Personnel case. While the decision in Personnel is not overly surprising given the circumstances of Mr McCourt’s engagement, it is likely to have significant broader ramifications on labour hire operators and challenges some traditional engagement models for certain businesses, who previously relied on different authorities to set up their operating model.
We also consider that underlying these decisions may be a level of frustration by judges as to the number of cases it has been required to determine about independent contracting relationships and the gig economy. Reading between the lines the courts may be suggesting it is time for legislative reform in order to provide clarity of these arrangements.
Rather than piecemeal federal legislation regarding superannuation, sham contracting, and conflicting state laws – including workcover and payroll tax – coupled with varying court decision – it is about time for our Federal politicians to look to legislate to clarify these arrangements that are an ever increasing proportion of the workforce. We know that is not going to happen any time soon …
Key Take Away messages
Companies engaging contractors, and particularly those engaging contractors to work on third party sites, need to be aware of the impact of these decisions and act now. We suggest a comprehensive review of your contracting arrangements, including:
- review of your contractor agreements with consideration of whether their terms adequately reflect both:
- the nature of the relationship in practice; and
- a true independent contracting relationship (with reference to factors such as control, delegation, ability to work for other busineses and provision of equipment);
- consideration of the benefits and risk to your organisation in engaging contractors, particularly where they are assigned to an external host site, compared to engaging those same workers as casual employees; and
- given the significant emphasis placed by the High Court on the contractual terms, ensuring you have appropriate set-off and other protective mechanisms and indemnities in your contractor agreements.
For further information about independent contractor vs employee issues we will be running a webinar on this topic at 12.30pm on 18 February 2022. You can register for this webinar by clicking here.
If you need any assistance in reviewing your agreements or your operations more broadly, our team is here to help. Please don’t hesitate to contact your favourite team member or if you don’t have a favourite contact us at info@hrlegal.com.au.
Authors:
Dan Feldman, Managing Partner
Georgie Chapman, Partner
