14 February 2022

More certainty in determining if your worker is really an employee or contractor

James Mattson

Driven by the need to provide certainty, the High Court of Australia delivered two decisions on 9 February 2022 that have reset the way we determine whether a worker is really an employee or contractor. Consistent with its earlier decision in WorkPac Pty Ltd v Rossato [2021] HCA 23 dealing with casual employees, the High Court has again emphasised the central importance of the contract to resolving issues of a worker’s status.

These two decisions of the High Court are widely viewed as a win for business. By limiting the focus of the inquiry to the contract, significant opportunity is given to businesses to achieve certainty of outcome. However, as we explore in this bulletin, there can still be uncertainty if the contract is poorly drafted, or the business departs from the contractual framework. There also remain legislative traps for the unwary.

The two decisions

It can be said that both decisions of the High Court are intuitively sound:

in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (see here), a 22-year-old British backpacker engaged to perform basic labouring work on a construction site was found to be an employee; and
in ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (see here), two partnerships that owned and operated a truck were found to be independent contractors.

If the outcomes are unsurprising, then how did we get all the way to the High Court?

The claims

In both proceedings, the workers sought employment entitlements under the Fair Work Act 2009 and other employment legislation.

In Personnel Contracting, both the Federal and Full Federal Court dismissed the backpacker’s claim on the basis he was an independent contractor.

The backpacker was engaged by Personnel Contracting as an independent contractor and placed to work for its client, a building company. As Personnel Contracting did not control the backpacker’s work at the building site, and this arrangement has been previously held by the Western Australian Industrial Appeal Court to be a contractor relationship, the Court could not overturn that outcome.

In ZG Operations, the Federal Court found the two drivers to not be employees, but the Full Federal Court disagreed.

Initially engaged as employees to work for ZG Operations, in 1986 the company changed its position and only offered to engage them as contractors. The drivers established partnerships with their wives, purchased a truck and drove exclusively for ZG Operations. Over the years, the drivers negotiated increased fees for their services and brought replacement trucks, all before their services were no longer required by ZG Operations in 2017.

In both cases, the backpacker and two drivers were engaged under a written contract that comprehensively set out the terms of their engagement.

How we determined the status of a worker

Since 1986, following the High Court decision in Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1, the approach to determining the true nature of a worker was determined by looking at the entire relationship and balancing a number of different indicia:

… the existence of control, whilst significant, is not the sole criterion by which to gauge whether a relationship is one of employment. The approach of this Court has been to regard it merely as one of a number of indicia which must be considered in the determination of that question: …. Other relevant matters include, but are not limited to, the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work and provision for holidays, the deduction of income tax and the delegation of work by the putative employee.

Then in the case of Hollis v Vabu Pty Ltd [2001] HCA 44, a case concerning whether a bicycle courier was an employee or independent contractor, the High Court said the test of whether a person is an employee or contractor is dependent on the totality of the relationship between the parties and a careful consideration of how the relationship operates on a day to day basis. The High Court held that the bicycle courier was an employee, saying:

…viewed as a practical matter, the bicycle couriers were not running their own business or enterprise, nor did they have independence in the conduct of their operations.

The approach had come to be known as the ‘multifactorial test’ balancing many different indicia and then forming a view as to the true nature of the relationship.

That approach naturally resulted in different outcomes based on an impression of the evidence. To resolve difficult cases, courts also found comfort in looking at whether the worker was running their ‘own business’.

The High Court says we had it all wrong

Apparently, we had all read the above High Court decisions in Stevens and Hollis all wrong for the last 35 years. In Personnel Contracting, the High Court said:

the multifactorial test ‘is apt to generate considerable uncertainty, both for parties and for the courts’ and that uncertainty ‘is exacerbated where it is … to be applied in respect of the parties' conduct over the whole course of their dealings with each other’;
the approach to determining the nature of a relationship is not ‘running down items on a checklist in order to determine a balance of ticks and crosses’; and
‘in neither Stevens nor Hollis did this Court suggest that, where one person has done work for another pursuant to a comprehensive written contract, the court must perform a multifactorial balancing exercise whereby the history of all the dealings between the parties is to be exhaustively reviewed even though no party disputes the validity of the contract’.

So what is the correct approach? The High Court said that ‘it is the task of the courts to promote certainty with respect to a relationship of such fundamental importance’. With that in mind, and in the circumstances of a relationship comprehensively committed to writing, the High Court said the nature of the relationship is to be determined from the contract itself.

In limiting the analysis to the contract itself, the High Court was clear that contractual labels about the relationship are not determinative, and, in fact, are likely to be irrelevant. So how does one determine the true nature of the relationship from the contract ignoring the label the parties give the relationship?

As the majority of the High Court said, you determine the issue by examining the totality of the relationship from reading the entire contract:

… in the characterisation of a relationship as one of employment or of principal and independent contractor, [it is appropriate] to consider "the totality of the relationship between the parties" by reference to the various indicia of employment that have been identified in the authorities. What must be appreciated, however, is that in a case such as the present, for a matter to bear upon the ultimate characterisation of a relationship, it must be concerned with the rights and duties established by the parties' contract, and not simply an aspect of how the parties' relationship has come to play out in practice but bearing no necessary connection to the contractual obligations of the parties.

Expressed another way, Justice Gordon explained:

The task is to construe and characterise the contract made between the parties at the time it was entered into. The nature of the contracting parties, such as where a contracting party is a separate entity or a partnership, rather than an individual, may suggest that the relationship between the parties is not that of employer and employee. The way that the contractual terms address the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work, the provision for holidays, the delegation of work, and where the right to exercise direction and control resides may together show that the relationship is not one of employer and employee.

The High Court has favoured a contractual analysis. And as such, in cases where the relationship is committed wholly to writing, ‘the central question neither permits nor requires consideration of subsequent conduct’, Justice Gordon said.

Operating their “own business”

The majority of the High Court held there was force in the argument that the question of whether a worker ‘is conducting his or her own independent business, as distinct from serving in the business of the employer, provides a more meaningful framework to guide the characterisation of the parties' relationship’. The majority said:

While the "central question" is always whether or not a person is an employee, and while the "own business/employer's business" dichotomy may not be perfect so as to be of universal application for the reason that not all contractors are entrepreneurs, the dichotomy usefully focusses attention upon those aspects of the relationship generally defined by the contract which bear more directly upon whether the putative employee's work was so subordinate to the employer's business that it can be seen to have been performed as an employee of that business rather than as part of an independent enterprise.

As Justice Gordon usefully said, ‘[t]he better question to ask is whether, by construction of the terms of the contract, the person is contracted to work in the business or enterprise of the purported employer’.

Outcome: the backpacker is an employee but the drivers are not

In the case of the backpacker labourer, his contract with Personnel Contracting – a labour hire company – provided that:

it would determine for whom he would work (and the duration, place and daily hours to be worked);
it would fix his remuneration;
he would be paid for performing the labouring work;
he would co-operate in all respects with the builder client; and
it could terminate his employment if he did not obey the directions of Personnel Contracting or the builder client.

In looking at the totality of the contract with the backpacker, the High Court concluded that Personnel Contracting actually exercised control over the backpacker. The contract was for his personal performance of work paid for in a manner like an employee. Further, it was apparent from the contract that the backpacker was not running his own business but rather served in the business of Personnel Contracting.

The position of the two drivers was starkly different. In circumstances where ZG Operations no longer wanted to engage drivers as employees, both entered into a contract that:

was between their partnership and ZG Operations;
required them to provide and maintain a truck (a significant capital expense);
required them to be responsible for the expense, maintenance and insurances of the truck;
entitled them to a fee, on provision of an invoice, for the delivery of the service of the truck and their labour;
entitled them to delegate their services to another; and
was varied, on occasions, by the drivers negotiating higher fees.

The drivers argued that ZG Operations had superior bargaining power and they had no choice but to enter into the contract, but the High Court said that had no bearing on the meaning of their contract.

The drivers relied on the fact that they wore a uniform, had ZG Operations livery on their trucks and did not work for anyone else (and rarely delegated their work). The High Court said these matters, post-contract, were not relevant. Indeed, they represented no more than ‘expectations’ which are not contractual rights and obligations.

The ‘reality of the situation’ was that the drivers were operating their own business.

What do the decisions mean for business?

The correct analysis to determine the true nature of a working relationship involves an examination of the contract. The focus is on legal rights and obligations and not “expectations” or other matters external to the contract. As such, this provides some certainty for business in the engagement of its workers.

Nevertheless, the totality approach may still result in uncertainty of outcome where the contract contains right and obligations that point in different directions. The “own business” analysis may assist in resolving the matter but may not always be useful given businesses can take different shapes.

Where a relationship is not wholly committed to writing, then evidence of the conduct of the parties may be examined to determine what are the rights and obligations of the parties. The High Court analysis was based on contracts wholly committed to writing.

The High Court did indicate that different considerations may apply when the contract is partly written, when it is varied or in cases of a sham arrangement. Businesses should expect workers to seek to raise issues of sham arrangements and variations to overcome the narrow approach taken by the High Court.

Our key tips to businesses are:

Review your contractor agreements to ensure the terms of the relationship are wholly committed to writing, including by having a self-serving statement to that effect in the contract.
Ensure the contractor agreement reflects the legal terms and conditions of the relationship and not any “expectations” and other extraneous matters. Some matters can be dealt with in the ordinary course of dealings and do not need to be committed to writing in a contract.
Take active steps to ensure the agreement is reflected in practice to avoid arguments that the contract has been varied or is a sham.
Reflect on whether the work being undertaken is truly employment. Some work, no matter how carefully a contract is drafted, will be employment because the worker can only serve in your business (and could not be running their own business).

Managing a contractor relationship involves a lot of hard work. We recommend businesses obtain tailored advice to their individual circumstances.

Author: James Mattson