Is your worker a contractor or employee?

Two recent High Court decisions, Construction, Forestry, Maritime Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Pty Ltd & Anor v Martin Jamsek and Ors [2022] HCA 2, make it clear that if there a valid comprehensive written agreement between the parties, the terms of the agreement and the interpretation of those terms will be decisive in deciding whether a worker is an “employee” or “contractor”.

When deciding whether the arrangement you have with the worker is one of “employee” or “contractor” ask yourself, does the worker operate a business on their own account and how is the worker’s business structured? In ZG Operations v Jamsek, the workers were in partnership with their wives. The partnership invoiced Personnel Contracting. The partnership earned the income and incurred the expenses. The partnership gained tax benefits from the partnership structure. The workers were clearly conducting a business of their own as partners. They were independent contractors.

Where it can get tricky is when the worker is a sole trader as the individual is earning the income and incurring the expenses and they pay tax at the individual income rate of tax. There is no other “body” or “legal entity” running the show.

A decisive factor in characterising the relationship is to understand “who controls the show”. If the worker (let’s say a sole trader) controls the performance of their work and how they do it, they determine their remuneration and issue invoices to the company, the relationship may be characterised as “independent contractor”. On the other hand, if the company has the right of control over the worker, ie the worker must comply at all times with directions from the company, the company determines the person’s remuneration or sets the prices, the company is the paymaster, the worker is required to wear the company’s uniform or branded clothing, the relationship may be characterised as “employment.” When thinking about the arrangement, ask yourself is this a “contract of service” or a “contract for services.”

The High Court decisions below highlight the issues for consideration when deciding whether the worker is an "employee" or "contractor".

Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1

Material Facts

Personnel Contracting Pty Ltd, a labour hire company, had a contract with a building company, Hanssen for the hire of labour. Mr McCourt, a British backpacker travelling in Australia, was offered a role with Personnel Contracting and signed an Administrative Services Agreement (“Agreement”) which described him as a “self-employed contractor”.

Personnel Contracting hired out Mr McCourt to work for Hanssen. There was no contractual arrangement between Hanssen and Mr McCourt. Oahn 30 June 2017, Mr McCourt was told that he was not to continue working and he did not engage in any further work.

Mr McCourt and the Construction, Forestry, Maritime, Mining and Energy Union commenced proceedings against Personnel Contracting seeking orders for compensation and penalties under the Fair Work Act 2009 (Cth). They claimed Mr McCourt had not been paid his entitlement as an employee of Personnel Contracting. Similar orders were sought against Hanssen on the basis that it was liable as an accessory for Personnel Contracting’s alleged breaches.

Both the primary judge and the Full Court of the Federal Court of Australia applied the multifactorial test and found that Mr McCourt was an independent contractor. The matter went on appeal to the High Court.

High Court of Australia

The High Court held that Mr McCourt was an employee of Personnel Contracting. He was not an independent contractor.

In the Agreement, Mr McCourt warranted that he was a “self-employed contractor” and that he would not represent himself as being an employee of Personnel Contracting. However, the High Court considered that labelling the relationship as a “self-employed contractor” was not determinative of the relationship, but rather a Court must consider the rights and duties of the parties to determine the relationship.

The High Court noted that Mr McCourt was not carrying on business on his own account. Personnel Contracting had a right of control over Mr McCourt, they determined his remuneration and could terminate his engagement if he failed to obey instructions.

Personnel Contracting decided who Mr McCourt was going to work for and he was required to follow Hanssen’s directions. Mr McCourt had no discretion as to the work he would do and how he would do it.

The High Court held the rights and duties created by the Agreement was to the effect that Mr McCourt was engaged to serve Personnel Contracting in its business and thus Mr McCourt was an employee of Personnel Contracting.

Personnel Contracting argued that given Mr McCourt was performing the work for Hanssen and they had no ability to influence Mr McCourt’s performance and that given Hanssen created the risk, Personnel Contracting should not bear vicarious liability for any actions of Mr McCourt. Personnel Contracting also argued that Mr McCourt was not required to wear a uniform, nor did he publicly represent Personnel Contracting and thus he was not integrated into their business.

The High Court held that these broad appeals to public policy considerations did not alter the effect of the Agreement. Personnel Contracting had the right of control over Mr McCourt to determine the environment in which he would work and there was no conflict in recognising both Personnel Contracting’s non-delegable duty to Mr McCourt and its vicarious liability for Mr McCourt’s wrongful acts or omissions.

ZG Operations Pty Ltd & Anor v Martin Jamsek and Ors [2022] HCA 2

Material Facts

For many years, Mr Jamsek and Mr Whitby (the workers) were employees of ZG Operations Pty Ltd (the company) as delivery drivers. Later the workers entered into a partnership with their respective wives and the partnerships entered into a contract with the company (1986 contract).

Over the years, further agreements were executed between the partnerships and the company. The company’s agreement with the partnerships terminated on 20 January 2017. The workers commenced proceedings in the Federal Court of Australia seeking declarations in respect of statutory entitlements alleged to be owed to them as employees of the company.

The primary judge concluded the workers were not employees of the company.

On appeal, the Full Court of the Federal Court of Australia, looked beyond the terms of the written contract and focused on the “totality of the relationship” between the parties to find the workers were employees of the company.

The Full Court noted the workers’ wives made little contribution to generating income for the partnerships, that it was a partnership in name only. However, the High Court pointed out it was common practice for one partner not to contribute his or her service to a partnership business. At no time did the workers claim the partnership was a sham.

The Full Court argued the “reality” was the workers had no bargaining power. The company effectively forced the workers into the restructured arrangement. The requirement for their partnerships to purchase the trucks and enter into a contract diminished its effect. The trucks were adorned with the company’s logo, the workers wore the company’s branded clothing and there was no great skill required to drive the trucks. The Full Court noted the workers’ devoted service to the company, that they were not motivated by profit, which is the hallmark of an independent business. There was an absence of goodwill, an important element of any business, and thus the workers must be regarded as employees.

High Court of Australia

The High Court considered this expansive approach, this multifactorial test adopted by the Full Court to be an unjustified and erroneous departure from orthodox contractual analysis. It could not be a basis for disregarding the effect of the agreement between the partnerships and the company.

The High Court held that the 1986 contract confirmed the partnerships would own and operate the trucks for delivery of the company’s goods and thus the workers were no longer employees of the company. The partnerships invoiced the company for its delivery services. The partnerships earned income from the company, incurred expenses associated with ownership and operations of the trucks and took advantage of tax benefits of the structure. The workers were clearly conducting a business of their own as partners and they enjoyed the advantages of splitting the income generated by the partnership business. They were independent contractors, not employees of the company.

DISCLAIMER - this article is general information only. It is not legal advice. You must seek independent legal advice for your particular circumstances.