Both employers and their workers often prefer to avoid the legal obligations of being an employee by describing the worker as a contractor. Is it that simple? The High Court has recently answered that question.

The old law

Since at least 1986, to decide whether a worker was legally an employee or contractor required looking at how the relationship actually worked in practice. Having a contract saying that someone was a contractor was not really relevant. The question was whether the employer treated the worker as an employee, for example, by telling them what work to do, how to do it and when to do it. This all changed following two recent High Court cases.

From now on, we must focus on the terms of the contract, unless, of course, the parties act in a completely different way from what the contract states.

The High Court cases

On 9 February 2022, the High Court determined two appeals – CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2. Both cases concerned whether the workers were employees or independent contractors.

CFMMEU v Personnel Contracting Pty Ltd

Personnel Contracting, a labour hire company, engaged a 22-year-old backpacker under an agreement which labelled the worker as a ‘self-employed contractor’. The CFMMEU later commenced proceedings in the Federal Court alleging the worker was misclassified by the labour hire company as an independent contractor. The union claimed compensation and penalties under the Fair Work Act on the basis that, in reality, the backpacker was an employee, not a contractor.

The High Court decided that, while the ‘label’ chosen by the parties was ‘self-employed contractor’, the terms of the contract showed that it was a relationship of employment. This included the company having the right to fix the remuneration for the labourer’s work, to terminate the contract if the worker failed to follow directions, and to control how the worker performed their duties.

The High Court held that where the parties have comprehensively committed to the terms of their relationship in a written contract, then the relationship should be characterised by reference to that contract. The High Court explained that if there is no suggestion that the parties did not act in accordance with the contract, a wide-ranging review of the parties’ conduct after entering the contract is unnecessary and inappropriate.

ZG Operations Australia Pty Ltd v Jamsek

ZG Operations Australia Pty Ltd initially engaged two truckdrivers as employees and provided them with trucks to drive. However, the company later insisted that they could only engage the truckdrivers if they purchased their trucks and entered into contracts for the delivery of services. The truckdrivers agreed, purchased trucks from the company, set up partnerships with their respective wives and caused those partnerships to enter into contracts with the company.

The truckdrivers later sought compensation on the basis that they were in fact employees, having regard to the history of the parties’ dealings, . The High Court decided that it was not necessary to consider the day-to-day workings of the relationship spanning several decades.  Instead, the legal character of the relationship should be determined by reference to the contract. The Court reviewed the terms of the contract and found that the truck drivers were independent contractors.

What this means for you?

These two High Court decisions mean that it is now crucial that the terms of an independent contractor agreement truly reflect what is accepted as indicative of a contractor relationship.

Companies now have an opportunity to review their existing arrangements with independent contractors, to ensure that there is a written agreement in place which clearly sets out both the nature of the relationship as well as the parties’ respective rights and obligations under it.

Simply labelling the agreement as an ‘independent contractor agreement’, or relying on a clause which says that the relationship is an independent contractor relationship, is not enough.

For further information please contact Tim Somerville on (02) 9923 2321 or enquiries@somervillelegal.com.au.