Employee or contractor? High Court decisions
On 9 February 2022, The High Court of Australia delivered two long-awaited decisions to confirm the primacy of the written agreement and the importance of contractual terms when determining whether a worker is an employee or independent contractor.
This has highlighted a shift away from the checklist type multi-factorial test, where a valid agreement exists. The High Court found that where parties have entered into a valid and comprehensive written agreement, the terms within the agreement establish the legal character of their relationship.
Below are summaries of the two High Court decisions.
ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors
This High Court case was an appeal from a judgment of the Full Federal Court of Australia.
Mr Jamsek and Mr Whitby were initially employed as drivers by ZG Operations Australia Pty Ltd. In 1985 or 1986 both the individuals set up partnerships, purchased their trucks and signed written agreements with ZG Operations to deliver goods.
The agreements stipulated that Mr Jamsek and Mr Whitby were to be at the exclusive disposal of ZG Operations for 9 hours a day, 5 days a week. The men drove trucks with the company logo and wore ZG branded clothing. They provided invoices to ZG Operations which were then paid to their respective partnerships.
The Full Federal Court of Australia found Mr Jamsek and Mr Whitby were employees of ZG Operations, given the level of control exerted by ZG Operations over the men and the requirement they be at the company’s disposal 9 hours a day, 5 days a week.
The High Court overturned the Full Federal Court decision and found that given neither party questioned the validity of the principal/contractor agreement or regarded it as a sham, the agreement was valid and determined the legal character of the relationship, being that of a principal and independent contractor.
Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd
This case concerned Mr McCourt, a British backpacker who had travelled, resided, and worked in Australia temporarily on a working visa.
Mr McCourt signed a contract with a labour-hire company, Personnel Contracting Pty Ltd, trading as Construct, which described his position as a contractor. Mr McCourt was assigned to two construction sites owned by Hanssen, a client of Construct. During the assignment, he was under the direction of Hanssen employees, although there was no contractual relationship between Hanssen and Mr McCourt. Mr McCourt supplied basic equipment, had recurring patterns of work and set start/finish times.
After his engagement with Construct concluded, Mr McCourt, with the Construction, Forestry, Maritime, Mining and Energy Union, brought an action against Construct seeking compensation and penalties for alleged breaches of the Fair Work Act 2009, on the basis that Mr McCourt was an employee of Construct.
The matter was heard by the Federal Court and later the Full Federal Court where it was decided that Mr McCourt was a contractor based on the multi-factorial test.
On appeal, the High Court unanimously overturned the Full Federal Court’s decision and held that Mr McCourt was an employee of Construct. The High Court found that the multifactorial test approach taken by both the Federal Courts was problematic as it is impressionistic and can lead to inconsistency and considerable uncertainty.
The High Court suggested the characterisation of whether a person is an employee or an independent contractor is determined by reference to a consideration of the legal rights and obligations of the parties under the contract.
The High Court found:
- Construct retained a right of control over Mr McCourt, which was fundamental to Construct’s business as a labour-hire agency
- Construct was entitled to determine for whom Mr McCourt would work and, once assigned, he was required to supply his labour to the client
- Mr McCourt had no right to exercise any control over what work he was to perform or how it was carried out
- The description of Mr McCourt as a ‘self-employed contractor’ was not determinative and did not change the character of the relationship created.
In both cases, the High Court highlighted the importance of applying the terms of the agreement where a valid agreement exists in assessing whether a worker is a contractor or an employee. Merely describing an individual as a contractor in the agreement is not sufficient to support an independent contractor relationship. The contract will need to be considered in its entirety to determine the relationship.
How SW can assist
These cases demonstrate the need to review contractual arrangements you have on foot and seek appropriate tax advice. We can assist in ensuring you remain compliant and make suitable disclosures regarding employment taxes. Please get in touch with your SW contact if you would like to discuss what these decisions mean for your business.