July 2022
Business Owners – Are your workers considered employees or independent contractors?
In the recent decisions of CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 (‘Personnel Contracting’) and ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors [2022] HCA (‘Jamsek’), the High Court has confirmed that contractual interpretation is key- In the event of a dispute relating to whether a worker classifies as an employee or independent contractor, the courts will uphold the rights and obligations contained within existing written agreements.
It is vital that contracts are well drafted as primacy is placed on rights and obligations contained in the contract at the time they are entered into, as opposed to conduct that occurs after the formation of the contract.
Importantly, misidentifying an employee as an independent contractor will attract significant liability.
Takeaways for Employers and Principals
What can you do as a business owner?
- Ensure that the rights and obligations under the written agreement genuinely reflect the nature of the relationship and the intention of the parties
- Relying upon a simple label such as ‘independent contractor agreement’ or ‘employment agreement’ is not sufficient to categorize the relationship
- Companies must ensure to act consistently with the terms of the contract, in order to avoid contractual arguments relating to variations or term waivers.
- Ensure each independent contractor engagement is confirmed through a written agreement:
- The agreement should clearly define and identify the nature of the relationship and set out terms and conditions such as payment, services being provided and termination.
- Be mindful that the agreement reflects a usual principal and contractor relationship and does not reflect employment entitlements such as the right to annual and sick leave.
- Principals should also be mindful of the legality of restraint of trade and intellectual property clauses within these agreements.
- Consider how incorrectly identifying these relationships could impact your obligations relating to taxation payments, superannuation contributions and workers compensation insurance
Why is this important?
Employees and independent contractors must be correctly identified, due to their different rights and obligations. Employers may be liable for misclassifying these relationships. Liability may be attracted for breaching provisions of relevant legislation such as the ‘sham’ provisions contained within the Fair Work Act 2009 (Cth), as well as taxation and superannuation legislation.
Employees are protected by rights and minimum conditions attracted by the Fair Work Act 2009 (Cth), such as the ability to bring unfair dismissal claims and the right to seek leave. Employees are also afforded with superannuation contributions and taxation payments from employers, as well as workers compensation in the event of workplace injury. Employees are subject to control by their employer and utilize business equipment for the purposes of their employment.
In contrast, independent contractors are governed by the Independent Contractors Act 2006 (Cth) and are liable for their own taxation and superannuation contributions. Contractors utilise their own equipment and retain control over their services as an independent enterprise, usually operating under an Australian Business Number and can delegate work.
In Personnel Contracting and Jamsek, the High Court changed the test previously used when distinguishing an employee and independent contractor, where a written contract exists.
Previously, the ‘multi-factor’ test was favoured, allowing courts and tribunals to consider certain indicia to determine the ‘totality’ of the relationship. The test involved examining the control and conduct of the business on the worker, the mode of remuneration, delegation or subcontracting of the workload, whether the business provided tools and equipment and whether the business made taxation and superannuation payments. This approach led to inconsistent results. Existing contractual terms were relevant in this assessment but were not solely decisive.
Position of the High Court
The High Court placed primacy upon contractual interpretation, providing more clarity to employers which accurately record their relationships.
In Personnel Contracting, the majority of the High Court held that a ‘self-employed contractor’ which was engaged by a labour hire company, was rather an employee of the company. The majority concluded that:
‘Where the parties have comprehensively committed the terms of their relationship to a written contract the validity of which is not in dispute, the characterisation of their relationship as one of employment or otherwise proceeds by reference to the rights and obligations of the parties under that contract’[1]
In Jamsek, the High Court unanimously held that truck drivers, which had been employed by a truck driving transport company for 40 years, were independent contractors of the company. Independent Contractor agreements existed between the company and the partnerships, which consisted of the drivers and their spouses. The services provided by these partnerships involved trucks owned by the partnership, and thus the services were consistent with the characteristics of a contractor relationship. The majority adopted the approach taken in Personnel Contracting, being to consider the rights and obligations under the Contract.
However, the courts will continue to favor the ‘multi factor’ indicia where no written contract exists between the parties.
Contact us
If you require clarification in understanding these decisions or wish to ensure that your existing arrangements are compliant, contact us today. We are also able to assist you in the drafting of Employment Contracts.
For further information, please call us on (02) 9189 5288.
Gabrielle El-Kazzi and Craig Higginbotham
29 July 2022
[1] Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1, 59.
