Background

The High Court of Australia (the “HCA”) has handed down two judgments confirming that, provided there is a valid contract, contractual terms will determine whether an individual is an employee or an independent contractor. The decisions of the HCA are a shift away from the established position that a “multifactorial” test should be applied, and the totality of the relationship considered, when determining whether the nature of the relationship is one of employer/employee or principal/contractor.

The first case – Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (“Personnel Contracting”)

The first case of Personnel Contracting involved a British backpacker, Mr M, who had travelled to Australia on a working holiday visa and obtained a labouring job from a labour-hire company, Personnel Contracting (trading as “Construct”). Mr M signed an administrative service agreement (“ASA”) with Construct which described him as a self-employed contractor. Construct then sent Mr M to two worksites of one of its clients (the “client”). Mr M performed basic labouring tasks under instruction and supervision from employees of the client.

Mr M commenced proceedings in the Federal Court of Australia (the “FCA”) claiming that he was in fact an employee of Construct and accordingly was entitled to compensation and penalties under the Fair Work Act 2009 (Cth) (the “FW Act”). The central issue for the FCA to decide was whether Mr M was an employee or an independent contractor.

Both the FCA and, on appeal, the Full Federal Court of Australia (the “FCAFC”) applied the “multifactorial” test and held that Mr M was an independent contractor. In determining the nature of the relationship the FCAFC stated that: “…in assessing the “totality of the relationship” weight is not simply to be given to the contractual terms, but also the system operated thereunder, and work practices imposed by the putative employer”.

The HCA disagreed with this approach and instead of applying the “multifactorial” test the majority of the HCA confirmed that the correct approach in determining the nature of a relationship is to look at the terms of a valid contract. In examining the ASA the HCA considered the inclusion of clauses that:

• construct would determine for whom Mr M would work (giving Construct the right of control);

• Mr M promised to co-operate in all respects in the supply of his labour (allowing Construct to supply a compliant workforce); and

• Mr M had the right to be paid for work performed.

The HCA found that the rights and obligations in the ASA created a relationship of employer and employee. Importantly, the fact that Mr M and Construct chose to label the relationship as that of a self-employed contractor did not change the nature of the relationship.

The second case – ZG Operations & Anor v Jamsek & Ors [2022] HCA 2

The second case involved two truck drivers, Mr J and Mr W (the “drivers”) who had been engaged as truck drivers between 1977 and 2017 for a delivery business run by ZG Operations. The drivers were initially engaged as employees, but in around 1985 the drivers agreed to become contractors. The drivers:

• purchased their trucks from the business;

• paid the respective costs associated with maintenance and operation of the trucks;

• engaged in written contracts with the business for the provision of delivery services;

• set up a partnership with their respective wife; and

• invoiced the business for services and were paid accordingly.

In 2017 the drivers commenced proceedings in the FCA seeking declarations that they were employees and were accordingly owed superannuation, long service leave entitlements and employee entitlements in accordance with the FW Act.

In determining the nature of the relationship the FCA found that the drivers were not employees as their partnerships could be seen as “running businesses on their own”. The drivers appealed to the FCAFC. Overturning the decision of the FCA the FCAFC expressed a “preference for the substance of the relationships… over the contractual obligations”.

ZG Operations appealed to the HCA. Consistent with the decision in Personnel Contracting, the HCA upheld the importance of the contractual terms when determining the nature of the relationship. The HCA found that the drivers were not employees as where parties had comprehensively committed the terms of their relationship to a written contract the rights and obligations arise from that contract. In this instance the terms of the contract described a relationship of principal and independent contractor.

Key takeaways

While the cases mark a departure from the “multifactorial” test and a shift away from looking at the totality of a relationship, the approach taken by the HCA is consistent with the approach adopted by the HCA in WorkPac Pty Ltd v Rossato & Ors [2021] HCA 23 (“Rossato”). Our update following the Rossato case is available here.

Employers should take the opportunity to review their template contractor agreement as well as all existing agreements with independent contractors. Contractor agreements must be drafted carefully to ensure that the terms of the agreement do not create an employment relationship unintentionally.