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High Court affirms the importance of contractual terms when distinguishing between an employee and independent contractor

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Special Edition E-Update

The High Court of Australia has handed down two long-awaited appeals regarding the distinction between employee and independent contractor, ultimately deciding that the answer is to be found in the terms of the written contract, with particular regard for the rights and obligations of the parties under that contract.

The High Court of Australia has handed down two long-awaited appeals regarding the distinction between employee and independent contractor, ultimately deciding that the answer is to be found in the terms of the written contract, with particular regard for the rights and obligations of the parties under that contract.

In both cases, the High Court held that where parties have comprehensively agreed in a written contract as to the terms of their relationship, “the characterisation of their relationship as one of employment or otherwise proceeds by reference to the rights and obligations of the parties under that contract.”  

The High Court went on to state that a wide-ranging view of the parties’ conduct is inappropriate and that ultimately, it is unnecessary to look beyond how the contract operates in practice.

CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1

The first decision concerned whether Mr McCourt was engaged by labour-hire company, Personnel Contracting Pty Ltd (Personnel Contracting) as an employee or independent contractor.

Background

Mr McCourt was offered a role as a labourer for Personnel Contracting. At the beginning of his engagement, Mr McCourt signed an Administrative Services Agreement (Services Agreement) that described him as a “self-employed” contractor, despite him being an unskilled labourer who did not operate his own business.

Mr McCourt was assigned to work on two construction sites run by Personnel Contracting’s client, Hanssen Pty Ltd (Hanssen). Here, Mr McCourt performed basic labouring tasks under the supervision and direction of Hanssen.

Mr McCourt commenced proceedings in the Federal Court of Australia seeking compensation pursuant to the Fair Work Act 2009 (Cth) (FW Act). The Federal Court was tasked with determining whether Mr McCourt was an employee of Personnel Contracting for the purposes of the FW Act. That Court ultimately held that he was an independent contractor.  

Mr McCourt appealed the decision to the High Court of Australia.

The High Court Decision

The majority of the High Court overruled the decision of the Federal Court and held that Mr McCourt was in fact an employee of Personnel Contracting.

It was held that while Mr McCourt was labelled a contractor in the Services Agreement, the label was irrelevant to the characterisation of the relationship stating that "an employment relationship will not always be defined exclusively by a contract between the parties".

Ultimately it was held that Personnel Contracting had the right to determine who McCourt would work for and Mr McCourt promised Personnel Contracting that he would co-operate in all respects to ensure the supply of his labour to Hanssen.

The majority held that Mr McCourt was more appropriately considered an employee and was entitled to be paid by Personnel Contracting for the work performed and for entitlements under the FW Act.

ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2

In the second decision, ZG Operations Pty Ltd (ZG Operations) sought to overturn a full Federal Court ruling that two truck drivers engaged as independent contractors for more than 20 years were actually employees.  

Background

The two truck drivers were initially engaged as employees of ZG Operations.

In 1986, ZG Operations advised the truck drivers that it no longer required them as employees and offered to continue to use their services if they agreed to purchase their own trucks and enter into a new contract to perform delivery services.

The truck drivers agreed and set up partnerships with their respective wives, executing written contracts with ZG Operations for the provision of delivery services. The truck drivers purchased trucks from ZG Operations and were then responsible for the repair and maintenance of those trucks.

Under the new agreement, the truck drivers invoiced ZG Operations for the delivery services they provided and in return, ZG Operations paid them for those services. The truck drivers also treated the net revenue earned from the delivery services as the income of each partnership.

In 2017, the agreement between the truck drivers and ZG Operations was terminated. The truck drivers subsequently commenced proceedings in the Federal Court of Australia claiming that they were owed entitlements as employees of ZG Operations under the FW Act, the Superannuation Guarantee (Administration)Act 1992 (Cth) and the Long Service Leave Act 1955 (NSW).

The primary judge concluded that the truck drivers were not employees and instead independent contractors of ZG Operations.

The decision of the primary judge was subsequently overturned on appeal to the Full Court of the Federal Court which held that truck drivers were employees.

ZG Operations appealed the Full Court’s decision to the High Court of Australia.

The High Court Decision

The High Court unanimously held that the truck drivers were not employees of the company and were instead independent contractors.

The High Court found that after the truck drivers transferred their engagement from employee to contractor in 1986, the contracting parties became the partnerships and ZG Operations.

The High Court looked to the substance of the contract in coming to this decision, in particular the use of trucks owned by the partnerships to perform services, the partnerships’ provision of drivers to drive those trucks and the partnerships’ enjoyment of advantages such as the income derived from the operation.

Accordingly, the High Court was satisfied that the truck drivers were engaged as independent contractors.

Lessons for employers

There is still a distinction to be made between a contractor conducting their own business and a worker serving the business of the employer, irrespective of any contract signed. This distinction is to be made by considering the rights and obligations of the parties under the contract. This limits the otherwise very far-reaching examination of the conduct of the parties in the multiple indica tests.

Employers should therefore be mindful of the importance of the rights and obligations of the parties and make sure these are clearly set out in the written contract and accurately reflected in the reality of the relationship.

Information provided in this blog is not legal advice and should not be relied upon as such. Workplace Law does not accept liability for any loss or damage arising from reliance on the content of this blog, or from links on this website to any external website. Where applicable, liability is limited by a scheme approved under Professional Standards Legislation.

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