Importance of Contractual Terms in Determining Independent Contractors vs Employees

Identifying the true nature of a workplace relationship has long been a minefield for businesses, especially those that rely on independent contractors – two recent High Court decisions highlight how important clear contractual terms are.

Determining whether a worker is an independent contractor or an employee eligible for long service leave, annual leave and other workplace entitlements is sometimes a confusing and costly process for businesses.  This is because courts have applied a ‘multi-factorial test’ that considers the day-to-day reality of the relationship and the post-contractual conduct of the parties over any written agreement stating the nature of the relationship to be either employment or contractual.

Acknowledging the problematic nature of this approach, two recent High Court decisions, Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek), have confirmed the primacy of contractual terms when characterising the true nature of the workplace relationship.  This approach is consistent with the High Court’s recent decision in Workplace Pty Ltd v Rossato [2021] HCA 23 where contract terms were determinative when characterising a permanent or casual employment relationship.

What does this mean? Well, in situations where the parties have comprehensively and clearly set out the terms of their relationship in a written agreement, the characterisation of the relationship will be determined by reference to the rights and obligations of the parties under the contract, not necessarily, how the parties have described themselves. This means, unless the contract is a sham or invalid for some other reason or its terms have been varied or there has been conduct giving rise to an estoppel or a waiver, there is no need to take an expansive approach and look beyond the contractual terms at the parties’ subsequent conduct.

Although there were different outcomes in the cases of Personnel Contracting and Jamsek, the key takeaway from these decisions is how important contractual terms are in characterising a workplace relationship.

Personnel Contracting involved a young British backpacker named McCourt who entered a written contract with Personnel Contracting, a labour hire company, the terms of which described McCourt as a self-employed contractor. Personnel Contracting assigned McCourt to work on two construction sites run by its client, Hanssen, where he performed labouring tasks under the supervision and direction of Hanssen employees.  In finding McCourt was an employee of Personnel Contracting, rather than independent contractor, the High Court chose not to use the multifactorial test which it said often resulted in inconsistent outcomes, especially when the test is applied over the whole course of a parties’ dealings, preferring instead to focus instead on the aspects of the relationship generally defined by the parties’ contract. In particular:

  • The right of Personnel Contracting to direct McCourt’s place of work;
  • McCourt’s promise to co-operate in the supply of his labour to the client; and
  • Personnel Contracting’s obligation to pay McCourt for the work he performed.

Regardless of the label ‘contractor’ to describe McCourt, the High Court found the relationship was one of employer and employee.

Jamsek involved two truck drivers, Jamsek and Whitby, who were engaged by ZG Operations between 1977 and 2017.  Initially the drivers were employed by the business but in 1985 the drivers were asked to become contractors and supply their own trucks.  Jamsek and Whitby set up partnerships with their respective wives and entered written contracts with ZG Operations in which they undertook to provide delivery services to the company using their trucks (purchased from the company), to pay for the maintenance and operational costs of the trucks themselves and invoice the company for their services.  It was these factors that the High Court relied upon to find Jamsek and Whitby independent contractors notwithstanding that on occasions they wore uniforms or used equipment with the company logo or provided services at the company’s direction beyond just delivery services.

Going forward, this new ‘contract focused’ approach puts the written agreement between businesses and their workers front and centre.  If your business relies on independent contractors, now is a good time to make sure:

  • You have written contracts with your workers setting out both the nature of the relationship and your respective rights and responsibilities;
  • You ensure the description of the work relationship is consistent with each party’s rights and responsibilities; and
  • If you think that you have mischaracterised any existing work relationships, then consider how you will address your financial and legal obligations to affected workers.

These recent High Court decisions have the potential to make characterising work relationships more certain. However, the devil will be in the detail.

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