Employee or contractor? High Court revises approach to focus on terms of contracts for workers
The High Court of Australia, in two recent landmark judgments clarified how a person is determined to be an independent contractor and an employee at common law. Primacy was given to the terms stipulating the rights and duties provided in a written agreement between the parties.
The approach is consistent with the reasoning in the recent High Court decision, WorkPac Pty Ltd v Rossato & Ors  HCA 23 which confirmed that a written contract is the dominant authority used to determine whether a person is a casual or permanent employee.
The decisions are a major shift away from the uncertainty of the previously adopted multi-factor test which considered both the terms of the contract and the conduct that occurred after the formation of the contract to determine the “true relationship” between employers and employees or principals and independent contractors.
Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd  HCA 1 (Personnel)
The first case concerned Mr McCourt, a labourer who worked for a labour hire company, Construct. Under the terms of the administration services agreement between Mr McCourt and Construct, Mr McCourt was described as a “self-employed contractor”. Construct would assign Mr McCourt an opportunity to provide labour to building sites run by Construct’s client, Hanssen Pty Ltd (Hanssen) and Mr McCourt would perform work under the supervision and direction of the Hanssen staff. There was no contractual relationship between Mr McCourt and Hanssen. This trilateral labour hire agreement between Hanssen and Construct, and Construct and Mr McCourt is known as an Odco arrangement.
Personnel came to the High Court after the primary judge and a Full Court of the Federal Court of Australia on appeal determined that Mr McCourt was an independent contractor, having regard to the multifactorial test.
ZG Operations Australia Pty Ltd v Jamsek  HCA 2 (Jamsek)
In Jamsek, two long term truck drivers were engaged by ZG Operations Australia Pty Ltd (ZG). While the truck drivers were initially engaged as employees of ZG in around 1985, the workers formed partnerships with their respective spouses, and both partnerships entered into fresh contracts with ZG and purchased their own trucks. Known as an ‘owner-driver’ arrangement, ZG paid each partnership for delivery services provided.
Following the termination of the contracts between the partnerships and ZG in 2017, both workers sought back-pay of various employment entitlements in the Federal Court of Australia and restitution on the basis that they were employees.
On appeal, a Full Court of the Federal Court of Australia overturned the decision of the primary judge and found that the workers were employees. In reaching this conclusion, the Full Court had regard to the “substance and reality” of the relationship, including the disparity in bargaining power and the manner in which both parties had conducted themselves across a 40-year relationship.
The High Court rejected both Full Federal Court decisions – finding in Personnel that Mr McCourt was an employee, and in Jamsek that the drivers were independent contractors. In both outcomes, the High Court relied on consistent contractual interpretations that can be applied to determine the characterisation of an employment and independent contractor relationships in the future. The mere existence of unequal bargaining power between the parties does not “alter the meaning and effect of the contract”.
The opening reasons of Kiefel CJ, Keane and Edelman JJ in Personnel diminished the use of the multifactorial assessment, warning against “impressionistic” and “subjective judgement”, or “engaging in the mechanistic counting of ticks on a checklist”. This often created uncertainty both for the parties and for the courts.
In particular, the majority noted that in the absence of a challenge that the contract is a sham, is ineffective under general law or statute, has been varied or otherwise displaced by the conduct of parties (i.e. conduct giving rise to an estoppel or wavier), there is no occasion to look outside of the terms of the contract and conduct a historical review of the parties’ dealings to determine whether an employment relationship exists. Gordon J concluded that the rights and obligations under a contract or employment are to be ascertained in accordance with the principles governing contractual interpretation.
While the strict approach of the High Court placed primacy in the terms of the contract over the subsequent conduct the parties, employers should still be cautious of relying on the contractual labels given to a relationship in determining its character. Gageler and Gleeson JJ, whilst arriving at the same conclusion as the majority, differed in their reasoning, finding that while Mr McCourt’s contract described him as contractor, the legal obligations arising from the contract and the nature of the rights rendered him an employee of Construct.
Persuasive in the circumstances determining their relationship was the degree of control Construct ultimately had over Mr McCourt – the contract provided Construct with the right to determine who Mr McCourt would work for and required Mr McCourt to cooperate in supplying his labour for the purposes of Construct’s labour hire business. When these obligations were discharged, Mr McCourt was entitled to payment for his work. It was this contractual right of control in the relationship between both parties, which was determinative of an employment relationship at law.
In dissent, Steward J considered it an overreach for judiciary to retrospectively overturn previous tripartite contract agreements, citing that such a conclusion would throw businesses that relied on Odco arrangements into uncertainty and expose them to significant liability.
Steward J then joined the majority in Jamsek, rending a unanimous judgment which found that the workers were independent contractors per their contracts. Kiefel CJ, Keane and Edelman JJ reiterated the need to focus squarely on the contract ─ in the absence of a reason to doubt its validity (such as a sham or it being otherwise ineffective at law) in governing the relationship of the parties. Importantly, their Honours considered the fact that the drivers provided the trucks as part of the services weighted in favour of finding a relationship between ZG and the drivers to be one of principal/independent contractor.
Take Home Messages
The High Court decisions indicate a shift to the primacy of the contract where the exclusive rights and obligations that are set out in a written agreement on commencement of the engagement, or subsequent variation of the contract, will characterise the nature of the relationship. Where the terms of the written agreement are not in dispute, it is unnecessary to conduct a ‘wide-ranging’ review of the parties’ dealings.
While much anticipated certainty is provided, for many, these decisions expose a loophole for some organisations to achieve significant cost savings where the misclassification of workers may become an issue. On this basis, it is likely that more attention will be given to the sham contracting provisions contained within the Fair Work Act 2009 (Cth) and unfair contracts in the Independent Contractors Act 2006 (Cth). The purpose of the sham contracting provisions are to protect employees from the mischaracterisation of the employment as a contractor relationship.
In light of these decisions, a clearly defined employment contract or contractor agreement will provide employers and principals with clarity and will generally be determinative of the working relationship between parties. Organisations should review their written contracts with employees and independent contractors to ensure that the contracts correctly reflect the intentions of that the parties understood were being entered into when the contract was formed.
If you would like to discuss any elements of these decisions, are seeking a review on current engagements or wish to access template independent contractor agreements, please contact Sathish Dasan on +61 8 8210 1253 or email@example.com, Virginia Liu on +61 8 8210 1279 or firstname.lastname@example.org or Anastasia Gravas on +61 8 8217 1331 or email@example.com.