Two recent High Court decisions have made it clear that the terms of a written contract are essential when determining the classification of an employee, discarding the previous broad multi factor approach taken.
The decision will have a significant effect on businesses and reduce exposure to claims from contractors claiming to be considered employees at law.
Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA
Mr McCourt worked as a general labourer for Personnel Contracting Pty Ltd (“Construct”). Construct is a labour hire company which engages workers to supply labour to clients. Mr McCourt was offered a role by Construct at a project site and signed an agreement with them which described him as a self-employed contractor. The terms of the agreement included that Mr McCourt was to attend the work site at the nominated times and supply labour as required. He supplied his own boots and clothes but all other equipment was provided.
When Mr McCourt was directed by Construct to seize work at the project site, he, with the CFMEU, commenced proceedings against them in the Federal Court claiming compensation and penalties on the basis that he was not an independent contractor and Construct had therefore failed to pay his entitlements as an employee.
The primary Federal Court Judge and, on appeal, the Full Federal Court found that Mr McCourt was an independent contractor, this decision was made by using the multifactorial approach. The multifactorial approach has commonly been applied by the courts to ascertain a person’s employment status and considers not only the terms of the contract but focusses on the conduct that occurs after the formation of the contract.
The Full Federal Court’s decision was appealed in the High Court. The High Court found that applying the multifactorial test was not necessary in this circumstance and instead the proper approach was to examine the contract between the parties because the parties’ rights and obligations were entirely contained in a written contract. When examining the terms of the contract, the High Court found that the terms of the agreement did not reflect a traditional contractor relationship because:-
- Mr McCourt was not carrying on business on his own account and Construct retained a right of control.
- Construct determined who Mr McCourt would work for.
- Construct determined Mr McCourt’s pay and hours.
The High Court made it clear that the description of Mr McCourt being a self-employed contractor was irrelevant and determined that he was an employee.
ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2
Mr Jamsek worked as a truck driver for ZG Operations Australia Pty Ltd for nearly 40 years. Initially Mr Jamsek worked as an employee however after 8 years, at the request of ZG Operations, he ceased being an employee, set up a partnership and entered into an independent contractor’s agreement in which the partnership was the contractor.
The terms of the agreement were that the partnership had to supply and maintain its own truck, be at ZG Operations disposal five days a week, 9 hours a day and provide invoices for work which were paid to the partnership.
The agreement was eventually terminated by ZG Operations and Mr Jamsek commenced proceedings for the entitlements he claimed to be owed on the basis that he was an employee.
Firstly, the primary Federal Court Judge concluded that Mr Jamsek was not an employee and was an independent contractor. The full Federal Court then overturned this decision and held that Mr Jamsek was an employee.
This decision was appealed by ZG Operations and on appeal the High Court again emphasised the necessity to consider the parties rights and obligations under the contract in the circumstance where the contract is not challenged or ineffective. It was held that the Mr Jamsek was not an employee because:-
- The contract was entered into because ZG Operations refused to continue to employ the drivers and insisted on the relationship being one for the carriage of goods.
- The contract that was entered into was with the partnership and not Mr Jamsek as an individual.
- ZG Operations was not able to exercise much control over the provision of the delivery services.
- The partnership had to purchase, operate and maintain the truck.
- The partnership earned income and incurred expenses.
What does this mean?
Through these decisions, the High Court has held that to establish whether a person is an employee or independent contractor it is necessary to first consider the legal rights and obligations contained in the contract and not conduct that occurs after the contract was formed.
It is essential that businesses review written agreements in place with contractors to ensure that the terms of the contract correctly detail the arrangement between the parties. It is irrelevant how the relationship has been labelled so labelling the worker a contractor without all other terms accurately reflecting the relationship will not be sufficient. If the terms of the relationship are not detailed correctly and instead reflect an employee relationship, employers could be liable for unpaid entitlements.
If you require assistance in reviewing the terms of current contractor agreements or assistance in drafting a contractor agreement, please contact our office.
