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Contractor or employee? High Court settles the mat...

Contractor or employee? High Court settles the matter

The High Court has made two important decisions concerning independent contractor relationships. These relationships are business-to-business arrangements, but they can sometimes slide into one of employment. Case law is replete with cases over the years where contractors have successfully argued they are employees based on how the contract operates practically.

That has now changed. The High Court held that where a written agreement governs the relationship between the parties, generally that agreement will determine whether a person is an employee or independent contractor. Conduct is now secondary.

The decisions are a significant shift from the approach previously applied by Australian courts, which previously involved a deep dive into the working relationship between the parties to determine whether or not an employment relationship exists. Indicators or ‘indicia’ of employment are control over the person, ownership of tools, tax arrangements, wearing of logos and delegation of tasks.

In cases Jamsek and Personnel Contracting the High Court rejected approach that the parties’ actual conduct after entering into their agreement was relevant to working out if an employment or contractor relationship exists. Conduct during the relationship is only relevant to identifying contractual terms or assessing whether the contract is a “sham”.

The High Court has also confirmed that the parties’ description of their relationship in the contractor agreement will not be determinative of what is their actual legal relationship.

In the Personnel Contracting case, the contractor signed an agreement as a “self-employed contractor” with Construct (a labour hire agency) to perform work with a construction company. He did not sign an agreement with the construction company he actually performed work for. The High Court held that the contract established an employment relationship, as Construct retained a right of control over Mr McCourt, paid Mr McCourt, determined how much he was paid and was able to terminate the engagement if he failed to obey the directions of it or its clients.

Once the terms of the contract are identified, the indicia of a contractor/employment relationship are then considered in respect of those terms.

In Jamsek, the two contractors drove trucks initially as employees and then were forced to buy their trucks to continue working with the company and do delivery work as independent contractors. The contractors accepted and each established individual partnerships with their wives and a written agreement was signed. The income was shared in the partnership, and each borrowed money to buy their respective trucks and vehicles. During the engagement they only worked for the one company and wore the logos of the company.

After the termination of these arrangements, the truck drivers commenced proceedings in the Federal Court claiming statutory entitlements, superannuation and long service leave, claiming they were employees.

The High Court allowed the company’s appeal, finding that the Full Court incorrectly adopted an expansive approach to determine the “substance and reality” of the relationship between the parties. Where it is not alleged the contract is a “sham”, the nature of the relationship should be determined based on the contractor agreements with the company.

The High Court unanimously held that the truck drivers were not employed by ZG.  A majority of the Court applied the approach from Personnel Contracting and decided the case based on the contractual terms and conditions of the parties.

What should employers do now?

The High Court decisions in Jamsek and Personnel Contracting mean that, in general, the existence of an employment or contractor relationship depends on an assessment of the totality of the parties’ relationship based on their contractual terms and conditions. The previous approach of considering the subsequent conduct of the parties as well as their contract when making this assessment is no longer correct.

The two decisions provide parties with greater certainty in their legitimate contracting relationships.

The key messages for employers when engaging contractors are:

First, the terms of engagement should be set out in a written agreement between the parties.  If important aspects of the relationship are not dealt with by the agreement, this could allow a contractor to challenge the contract and argue they are an employee;

Second, agreements should detail the methods by which they are varied (i.e., by written agreement of the parties, not their conduct) and provide that the written agreement constitutes their entire agreement;

Third, review and update contractor agreements to ensure the legal rights, duties and obligations created between the parties are consistent with the relationship of an independent contractor and principal.

Ultimately legal advice should be sought to ensure that there is no room for litigation of these matters. As can be seen, in the Jamsek case, ultimately eleven judges of the Australian court system were involved in this case, with the consequent cost and time in determining the issues.


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