Five key considerations following the High Court’s recent independent contractor decisions
The High Court of Australia has recently handed down two important decisions regarding the categorisation of working relationships. In both decisions, the High Court ruled that the terms of a contract take primacy over the subsequent conduct of the parties when distinguishing whether a worker is an employee or an independent contractor.
In this article, we address five key considerations for businesses arising from the decisions in Construction, Forestry, Maritime, Mining And Energy Union & Anor v Personnel Contracting Pty Ltd  HCA 1 (Personnel Contracting) and ZG Operations & Anor v Jamsek & Ors  HCA 2 (Jamsek). A summary of each of the decisions is set out below.
Is the ‘multi-factorial’ approach redundant?
It would be premature to declare the death of the multifactorial approach to any assessment of whether a worker is an employee or an independent contractor.
Prior to the High Court’s decisions in Personnel Contracting and Jamsek, the ‘traditional’ approach to determining whether a worker was an employee or an independent contractor was the application of the ‘multi-factorial test’. This involved a holistic consideration of all formal and practical aspects of the working relationship, with a key consideration being control of the way work is performed. Practically, this meant that courts would not restrict themselves to the terms of the written agreement in interpreting the nature of a relationship, but also looked at the realities of the parties’ post-contractual conduct.
The High Court has moved away from this approach, giving primacy to the legal rights set out in a written contract.
However, in both Personnel Contracting and Jamsek, the parties had comprehensively reduced the terms of the engagement to writing, with no suggestion that the relevant contract was a sham, had been varied, waived or was otherwise displaced by the conduct of the parties. If, for example, the terms were not reduced to a written agreement, a traditional multifactorial assessment having regard to how the parties have conducted themselves in practice, would be relevant to the assessment of the true character of the working relationship. Post contractual conduct could also be relevant if it is alleged that the contract is a ‘sham’ (discussed further below).
Further, any written contract must still contain the indicia of an independent contractor/principal relationship. Simply naming a worker as an independent contractor, or proclaiming that the working relationship is one of independent contractor/principal, will not be sufficient or determinative. Central to an assessment of the legal rights set out in the contract will be the extent to which the worker:
- has the authority to exercise control over how, where and when the work will be performed;
- can be said to be running an independent enterprise, as opposed to being merely subordinate to the principal’s business.
As such, the High Court decisions reinforce the importance of having in place a well-drafted contract with any worker engaged as an independent contractor. The contract should:
- reflect the contractor’s authority to exercise control over the performance of the work, including as to how, when and where the work will be performed. Conversely, to the extent practicable, the contract should minimise the principal’s control over these matters;
- establish that the worker is running an independent enterprise and is not merely subordinate to the principal’s business (for example, by expressly acknowledging this fact and permitting the worker to work for others); and
- confirm that any variations or waivers must be in writing and that the contract reflects the entire agreement between the parties.
Consideration should be given to whether the worker can be engaged through an incorporated entity which will further lessen the risk of a claim that the worker is an employee of the principal.
Finally, in order to avoid any claim of variation by conduct, businesses should ensure that they execute the contract in accordance with its terms.
Will claims of ‘sham’ contracting become more common?
As noted above, the High Court made it clear that in the cases before them there was no allegation that the arrangements were a ‘sham’. Therefore, an allegation that a particular arrangement is a sham remains a potential avenue of challenge which could expose a business to orders to pay compensation and penalties.
Under the Fair Work Act 2009 (Cth) (FW Act), a person must not:
- misrepresent an employment relationship as an independent contracting arrangement (s 357 of the FW Act);
- knowingly make a false statement to persuade or influence an employee to become an independent contractor (s 359 of the FW Act).
However, in order to succeed with such a claim, it is necessary to establish that the person knowingly or recklessly engaged in the conduct. This has typically been a high bar, and decisions under these provisions have typically been in relation to more vulnerable workers.
Employers should also be aware that they cannot dismiss an employee, or threaten to dismiss an employee in order to engage the individual as an independent contractor to perform the same, or substantially the same, work (s 358 of the FW Act).
Again, in order to avoid any suggestion of sham contracting, businesses should put in place carefully drafted contracts which correctly reflect the reality of the working relationship. However, in light of the decision in Personal Contracting, it may be more difficult for businesses to now enter into arrangements which reflect the traditional tripartite ‘Odco’ contracts.
Can companies expect more claims under the Independent Contractors Act?
The Independent Contractors Act 2006 (Cth) (IC Act) allows a review of contracts between independent contractors and principals. The Federal Court and Federal Circuit and Family Court can make orders in relation to contracts where the terms of the contract are deemed unfair, harsh or unconscionable, unjust or against public interest.
In order to make a claim under the IC Act, the court must be satisfied that the party seeking a review is an ‘independent contractor’ and that the contract relates to the performance of work. Importantly however, the IC Act does not give the court the power to review whether the totality of the working relationship, or to make orders other than in respect of the service contract. In view of the High Court’s decisions, the court will need to give primacy to the terms of the relevant contract when making the assessment that the party is an independent contractor.
As such, the IC Act is not an avenue for parties seeking compensation on the basis that they should be properly characterised as an employee having regard to the totality of the working relationship and post contractual conduct to seek compensation.
However, businesses should still be mindful that independent contractors can seek a review of their service contract and seek orders that it be set aside (in whole or in part) or varied. In reviewing the contract, the court can have regard to the relative strengths of the parties to the contract and whether there has been any undue influence or pressure exerted, or unfair tactics used.
Will the High Court decisions impact situations where a contractor may be deemed an employee or described as a ‘worker’ for the purpose of employment taxes?
The impact of the High Court decisions for employment taxes remains to be seen.
However, given the commercial shift towards contracting, following the High Court decisions we may see a further increase in contracting arrangements and potentially, an increase in arrangements that might have otherwise been characterised as employment arrangements being characterised as independent contracting relationships. This will, no doubt, then begin to turn the spotlight on the deemed employee test under the superannuation law and the relevant contract provisions of payroll tax legislation.
Specifically, in Personnel Contracting, the Court concluded that the worker was a common law employee. Common law employees are entitled to superannuation and employers are required to collect and remit PAYG withholding and pay payroll tax (subject to relevant thresholds being met in the relevant State/Territory).
In Jamsek, however, the Court held that the workers were not employees. As a result, PAYG withholding did not apply to the payments they received.
As many readers will know, the superannuation law also requires the contribution of superannuation to ‘deemed employees’, as well as common law employees. This is one the great misnomers about superannuation: contractors may be entitled to superannuation if they are a ‘deemed employee’ for superannuation purposes.
The ‘deemed employee’ test, is set out in subsection 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) and it extends the obligation to pay superannuation to a person who
‘works under a contract that is wholly or principally for the labour of the person,[then] the person is an employee of the other party to the contract’.
Given that the Commissioner of Taxation was not a party to the High Court hearing in Jamesk, the Court declined to rule on the scope of subsection 12(3) and, instead, remitted the matter to the Full Federal Court to determine this issue.
In passing, though, the High Court did acknowledge the arguments put to it that subsection 12(3):
- does not require that the worker be a party to the contract. At first instance, the primary judge noted that because it was the partnership that was a party to the contract precluded the operation of subsection 12(3) in the present circumstances; and
- although the contract was the provision of equipment, being the trucks, the contract could still be one ‘principally’ for the labour of the drivers.
The High Court felt that these arguments were not insubstantial. The potential expansion of the deemed employee test into circumstances where a person ‘works’ under a contract, but not a contract under which they are themselves a party, is an interesting question. Up until now, in the absence of a sham contracting arrangement or an arrangement where an entity is used to divert the personal services income of an individual, the courts have been reluctant to ‘look behind’ the structure used by the worker. Whether this continues, remains to be seen.
Of course, nothing in the High Court decisions alters the duties owed to workers engaged as contractors under work health and safety legislation.
Will there be any legislative changes in response to the High Court decisions?
The High Court decisions have been broadly welcomed by employer groups as allowing businesses to place greater reliance on their written contracting arrangements. It is unlikely that any legislative reforms will form part of Coalition policy heading into the Federal election.
To date, the Australian Labor Party has not indicated that it is proposing any legislative reforms in response to the High Court decisions. However, its current industrial relations policy paper states that if elected, a Labour Government will improve job security for workers, and lists contracting as a form of ‘insecure work’.
Further, various unions have called for legislative reforms to respond to numerous decisions which are said to facilitate ‘insecure work’. As such, it is possible that the sham contracting provisions, or other provisions, of the FW Act could be the subject of legislative change to increase the scope for courts to review the totality of the working relationship to determine whether a relationship that has been described as an independent contractor/principal relations should be characterised as an employment relationship.
In Personnel Contracting, the High Court held that a labourer was an employee of a labour hire agency, overturning two previous findings by the Federal Court and Full Court of the Federal Court that he was an independent contractor.
The case involved a young British backpacker, Mr McCourt, who was engaged as a general labourer for Personnel Contracting (trading as ‘Construct’) for some months in 2016 and 2017. Mr McCourt’s contract described him as a ‘self-employed contractor’. He was assigned to work on construction sites operated by a client of Construct, Hanssen, with whom he had no contractual relationship. This tripartite arrangement has been colloquially referred to as an ‘Odco’ relationship, commonly used by labour hire agencies to engage workers as independent contractors to perform services for clients of the labour hire agency.
Mr McCourt, with the Construction, Forestry, Maritime, Mining and Energy Union, commenced proceedings against Construct and Hanssen for alleged breaches of the Fair Work Act 2009 (Cth). Standing to bring such a claim was premised on the assertion that Mr McCourt was, in substance, an employee of Construct.
Both the Full Federal Court and Federal Court applied the multi-factorial test, considering the post-contractual conduct of the parties as well as the terms of the contract between McCourt and Construct. They particularly analysed the "control" in the trilateral relationship, the weight attributed to the fact the worker did not conduct his own business, and the weight to be given to the contractual description of Mr McCourt in his Administrative Services Agreement as ‘the Contractor’.
However the High Court majority found that where the terms of the parties' relationship are comprehensively committed to a written contract, the legal rights and obligations in the contract should be decisive in determining the character of the relationship, insofar as the contract has not been challenged on validity as a sham, or the terms otherwise varied, waived or the subject of an estoppel. Multi-factorial test indicia such as control, delegation, provision of equipment and taxation should only be considered within the rights and duties first established by the contract.
The High Court also made it clear that the labels placed on the relationship by the parties’ are not relevant. Rather, the substance of the rights and obligations within the terms of the contract are determinative. While Mr McCourt’s contract described him as a ‘self-employed contractor’, the effect of the terms of the contract created an employee-employer relationship.
In Jamsek, the majority of the High Court found that truck drivers making deliveries for a company did so as partners in a partnership that contracted with the company. This overturned the previous Full Federal Court decision that the drivers were employees.
The truck drivers were initially employees of ZG Operations Australia Pty Ltd (ZG), however after they requested a pay rise, ZG offered for them to become contractors, which would involve them purchasing their old trucks. If this opportunity was not accepted, ZG said they could not guarantee the drivers a job going forward.
The truck drivers subsequently set up partnerships with their respective wives, and contracted with the company through those partnerships over many decades.
The drivers were responsible for the maintenance and other costs of operating the trucks. There was also the purchase of replacement and alternative vehicles (at their own cost) at different times over the contracting period.
The drivers brought a claim based on the premise that they were employees. The Full Court of the Federal Court decided in the drivers’ favour, considering the totality of the circumstances, including the unequal bargaining power at the time the contract was entered int, and conduct of the parties over the 40 year relationship (including, among other things, the drivers worked relatively set hours and did not generally work for others).
However, the High Court emphasised that where there is a contract in writing which contains an accurate and comprehensive statement as to the parties rights and obligations, unless there is a suggestion that the contract no longer represents what is happening in practice or is a ‘sham’, there is no need for the Court to look beyond that contract to what is happening in practice.
Relying on that approach, the High Court found the drivers were independent contractors. The Court emphasised various aspects of the contracts in support of its conclusion, including that the contracts were established with the partnerships (and the drivers obtained the financial/tax benefits from them) and the drivers provided and maintained their own vehicles.
Interestingly, the High Court rejected the Federal Court’s finding that unequal bargaining power was relevant to the contractual analysis. The majority of the High Court also stated that the drivers’ lengthy period of service, the fact that they obtained their primary income from the company and did not actually drive for others were not a basis for disregarding the effect of the contracts between the partnerships and the company.
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