The High Court has delivered two important decisions concerning independent contractors. The Court held that where a written agreement governs the relationship between the parties, generally that agreement will determine whether a person is an employee or independent contractor. Both cases were heard together by the High Court and judgments handed down on the same day. The High Court’s approach provides greater certainty for businesses who have properly recorded their independent contractor relationships in written contracts that accurately reflect the nature of the relationship.
The decisions are a significant departure from the approach previously applied by Australian courts which involved an extensive assessment of the actual circumstances of the working relationship between the parties to determine (not just their contract) whether or not an employment relationship exists.
In (ZG Operations & Anor v Jamsek & Ors  HCA 2 (Jamsek) and Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd  HCA 1 (Personnel Contracting)), the High Court rejected that the parties’ actual conduct after entering into their consultancy agreement is relevant to working out if an employment or contractor relationship exists. Rather, subsequent conduct is only relevant to:
- identifying the contractual terms (i.e., where the contract is not wholly or partly in writing); or
- challenge the enforceability of the contract (including where the contract has been varied by the conduct of the parties or is a “sham”).
Importantly, the High Court has confirmed that the parties’ description of their relationship in the contractor agreement (i.e., the parties do not intend to create an employment relationship) will not be determinative of what is their actual legal relationship.
Mr McCourt was engaged under a written contract as a “self-employed contractor” by Construct, a labour hire company specialising in the provision workers to the construction industry. During two engagements with Construct, Mr McCourt performed labouring on construction sites owned by a construction company, Hanssen. He:
- did not sign a contract with Hanssen;
- worked under the supervision and direction of Hanssen;
- was paid by the hour; and
- was able to refuse work.
Mr McCourt and the CFMMEU commenced proceedings claiming he was a casual employee. At first instance, the judge held that Mr McCourt was an independent contractor, and an appeal of the decision to the Full Federal Court was dismissed. Mr McCourt and the union appealed the decision to the High Court.
The High Court allowed the appeal, finding that Mr McCourt was an employee of Construct. Four of the seven judges held that:
- the contractual terms (not the subsequent conduct of the parties to the contract) are relevant in determining the character of the relationship; and
- the legal rights and duties are created by the parties’ written contract, assuming the contract has not been varied or challenged for invalidity (e.g., a sham contract) or there has been other conduct such as a waiver in relation to the contract. If a contract is not wholly or partly in writing, the performance of the contract may be relevant to working out its terms.
Once the terms of the contract are identified, the indicia of a contractor/employment relationship are then considered in respect of those terms.
The High Court held that Mr McCourt’s contract established an employment relationship as Construct retained a right of control over Mr McCourt, paid Mr McCourt, determined how much he was paid and was able to terminate the engagement if he failed to obey the directions of it or its clients.
The key facts are:
- Mr Jamsek and Mr Whitby (Respondents) were initially employed by ZG Lighting Pty Ltd or predecessors (ZG) and drove its trucks;
- around 1986, ZG offered to engage the Respondents as contractors but otherwise could not guarantee them work. The Respondents accepted and each established individual partnerships with their wives (the Partnership);
- the Partnerships executed written contracts with ZG to provide delivery services using their own trucks;
- the Respondents borrowed money to purchase the trucks from ZG and were responsible for their maintenance and operational costs. In return, ZG agreed to pay the Partnership for the services provided by the Respondents;
- the Partnerships entered into subsequent contracts with ZG in 1993, 1998 and 2001. Each new contract was prompted by the Respondent requesting their rate be increased. The fee for services was income of the Partnerships and split between each Respondent and their spouse;
- the Respondents had discretion over which routes or areas they would follow in making deliveries based on personal preference and overall convenience. They had no control over what was to be delivered and were rarely involved in the picking and packing of delivery items; and
- the Respondents were asked by ZG to display its logo on their trucks, which they agreed to do on occasion. The Respondents were also supplied with company uniforms but were not instructed by ZG to wear them.
After the termination of these arrangements, the Respondents commenced proceedings in the Federal Court claiming statutory entitlements, superannuation and long service leave but were unsuccessful before the trial judge.
The Respondents successfully appealed to the Full Federal Court which found an employment relationship between ZG and each of the Respondents. The Full Court emphasised the “substance and reality” of the history of the parties’ dealings, including the way the parties conducted themselves over certain aspects of the contractual obligations governing the relationship.
ZG appeals to High Court
The High Court allowed ZG’s appeal, finding that the Full Court incorrectly adopted an expansive approach to determine the “substance and reality” of the relationship between the parties. Where the validity of the contract is not being challenged, the nature of the relationship should be determined based on the contractor agreements with ZG.
The High Court unanimously held that the Respondents were not employed by ZG. A majority of the Court applied the approach from Personnel Contracting and decided the case based on the contractual terms and conditions of the parties. The key facts set out above were factors supported the existence of a contractor relationship.
What should employers do next?
The High Court decisions in Jamsek and Personnel Contracting mean that in general, the existence of an employment or contractor relationship depends on an assessment of the totality of the parties’ relationship based on their contractual terms and conditions. The previous approach of considering the subsequent conduct of the parties as well as their contract when making this assessment is no longer correct.
The intention of the joint judgment in Personnel Contracting is to provide parties with greater certainty in their legitimate contracting relationships. We think this may well be the case for those parties whose contractor relationships are set out in some detail in written agreements which set out all terms of the contractor’s engagement. However, in some cases, complicated legal and factual questions may still arise as to what the actual terms and conditions of the parties are – these questions may still result in an examination of the conduct of the parties but to determine those terms and conditions.
The key messages for principals when engaging contractors are:
- the terms of engagement should be comprehensively set out in a written agreement between the parties. If key aspects of the relationship are not regulated by the agreement, this could allow a contractor to challenge the contract and a court to examine the conduct of the parties;
- agreements should prescribe the sole methods by which they are varied (i.e., by written agreement of the parties, not their conduct) and provide that the written agreement constitutes their entire agreement;
- documents relating to the recruitment of contractors (such as advertisements and description of proposed services) could be examined to ascertain the intention of the parties when entering into the contract and should be consistent with a contractor relationship; and
- review and update their contractor agreements to ensure the legal rights, duties and obligations created between the parties are consistent with the relationship of an independent contractor and principal.
If you have any questions regarding these decisions or contractor agreements for your business, please contact G+T’s employment lawyers.