The High Court of Australia: how to tell the difference between a contractor and an employee

It’s been 20 years since the High Court of Australia revisited the question ‘how do you tell the difference between a contractor and an employee?’ On 9 February 2022 the Court handed down two judgements which answer this question:

  1. CFMMEU v Personnel Contracting; and
  2. ZG Operations Australia v Jamsek & Ors.

    Personnel Contracting

    In Personnel Contracting, A 22 year old British backpacker with a white card and some personal protective equipment had agreed to work as a self-employed builder’s labourer on a Hanssen construction site. Despite agreeing to be a contractor, he was found to have engaged in two periods of casual employment with Personnel Contracting for the following reasons:

    Mr McCourt promised to work as directed by Personnel Contracting and its customer. He was required to attend a building site as agreed with the Builder, at the time required by the Builder and supply labour for the duration required by the Builder in a safe, competent and diligent manner;

    The right to control the provision of Mr McCourt’s labour was an essential asset of the business;

    Mr McCourt’s work was dependent upon, and subservient to, Personnel Contracting’s business.

    ZG Operations

    In ZG Operations, two truck drivers were engaged to work for almost 40 years; first as employees, then their employer required them to buy their trucks and operate as contractors. They established partnerships with their wives. They had a theoretical right to work elsewhere but worked full-time hours for ZG Operations. The Federal Court found the truck drivers were employees for the entire period of service and that they were entitled to benefits under the Fair Work Act, long service leave and superannuation.

    The High Court overturned the Full Federal Court decision and considered that the truck drivers (or more accurately, the partnerships they established) were contractors because the contracts were entered into with partnerships and it was not suggested that the contracts were a sham or had been varied.

    The Reasoning Behind These Cases

    It is not the details of these cases that will be relevant to determining the nature of future contracts for work. Judges must follow previous decisions of other courts unless they are inconsistent with the decision of a higher court or plainly wrong. They must follow other judges’ reasons for deciding previous cases.

    So what were the High Court’s reasons for deciding these cases?

    The High Court has retained the ‘totality of the relationship’ test that was established back in 1986 but the way we apply it needs to change. Another name for the ‘totality of the relationship’ test is the multifactorial test. Factors such as the following are considered to determine whether a worker is a contractor or an employee:
    Control;
    Terms of the contract;
    Method of remuneration;
    Provision of equipment;
    Obligation to work;
    Hours of work and leave;
    Deduction of income tax;
    Goodwill;
    Ability to delegate work; and
    Ability to perform work for others.

    Some courts have interpreted this test as an invitation to broaden their enquiries beyond the contractual rights and duties of the parties to an analysis of the post-contractual behaviour of the parties.

    Not anymore.

    The rules that govern the interpretation of contracts say that a court can consider the circumstances surrounding the making of a contract to help interpret that contract, but it cannot consider conduct that occurs after entry into the contract. So while the multiple factors listed above are still relevant, where the terms of the contract are in writing, the court will only assess the rights and duties of the parties created by the written agreement against those criteria – not the ‘vibe’ of the working relationship.

    But wait, there’s more

    The judges of the High Court also provided guidance on how to apply the multifactorial test. In the majority judgement of Personnel Contracting their Honours said:

    Look to the extent to which it can be shown that one party acts in the business of, and under the control and direction of, the other;

    Agreeing to label someone a contractor does not make them one. Whether someone is a contractor is a legal question; and

    The fact that Mr McCourt’s work for Personnel Contracting was non-exclusive did not weigh heavily in favour of him being classified as a contractor. Their Honours made the point that non-exclusive work is consistent with casual employment.

    In ZG Operations the majority judgement followed the reasoning in Personnel Contracting and noted that the superior bargaining power of ZG Operations was not relevant to interpretation of the contract.

    In ZG Operations an interesting question about superannuation was remitted to the Full Court of the Federal Court for determination; namely whether despite the contractor agreement with the partnership being upheld as valid, the truck drivers were nonetheless entitled to be paid superannuation under section 12(3) of the Superannuation Guarantee (Administration) Act.

    This means that:

    Partnerships will enjoy a rise in popularity.

    We will see more claims that contracts have been varied (from independent contracting to employment) and of sham contracting.

    It has never been more important to have in place a carefully drafted written contract.

    The irrelevance of uneven bargaining power and the conduct of the parties after a contract is made means that, with careful drafting, it is now easier to classify a not-very-independent worker as a contractor. If federal parliament wants to reduce the risk of exploitation that this development presents, we may see legislative change.

    While we wait for legislative change, to obtain a legal remedy for injustice caused by disparity of bargaining power, parties will need to allege sham contracting, variation of contract, or seek an equitable or statutory remedy (eg under the Independent Contractors Act).

    People in business still have no certainty as to whether a not-very-independent worker is legally a contractor or an employee. If you want certainty in engaging not-very-independent workers then employ them.

    We’ll be keeping an eye out for the next ZG Operations judgement of the Full Court of the Federal Court regarding superannuation.

    What is the future for labour hire (and the rest of us)?

    Personnel Contracting now faces a return to the Federal Court for the primary judge to determine what compensation and penalties are owing with respect to alleged breaches of the Fair Work Act and the Building and Construction General On-site Award 2010.

    Is there a way for other labour hire businesses to avoid this outcome?

    Under Mr McCourt’s contract, Personnel Contracting was not just a ‘finder of labour’. Mr McCourt was contractually obliged to work as directed by Personnel Contracting or its customer. The High Court made this finding even though Personnel Contracting rarely attended the sites of its customers.

    This decision will pose a significant challenge for labour hire businesses that seek to do much more than operate as an introduction agency unless their contractors can exercise a significant degree of independence in the performance of their services.

    While workers are more likely to be bound by deals they have struck via a company or partnership, the High Court has narrowly interpreted the level of control that can legitimately be exercised over an independent contractor. If you want to exert significant control over the work of an independent contractor, consider engaging them via another entity (noting that a party may allege this is a sham arrangement).

    For further information or assistance to review current contracts contact Thea Birss at tbirss@vardons.com.au or on 0422 203 184.