Posted on March 2, 2022 by Adriana Kleiss and Sue Puckeridge 12

Employee or independent contractor – High Court clarifies the test

Government at all levels frequently enters contracts with individuals as independent contractors rather than as employees.  In construing whether these contracts achieve this intent the courts have tended to look at the whole of the relationship, not just the terms of the contract.   This has become known as the ‘multi-factor’ test for determining whether a worker is an employee or an independent contractor.  Under the multi-factor test, the terms of the contract are relevant but not conclusive and the whole of the relationship is considered.

In two recent important cases, the High Court has held that where the parties have entered into a written contract, the terms of that contract are essential to the question of whether a worker is an employee or an independent contractor, not the relationship between the parties.

This represents a move away from the ‘multi-factor’ test and a redirection to the terms of the contract itself, and whether it gives rise to a contract for services (forming a contractor relationship) or a contract of service (forming an employment relationship).

The key findings of the High Court are:

• Where the relationship between two persons is founded in a contract and no party is seeking to challenge the efficacy of the contract on the basis that it is a sham or ineffective under the general law, the character of that relationship depends on the meaning and effect of the contract.  There is no occasion to seek to determine the character of the parties relationship by a wide-ranging review of the entire history of the parties dealings.
• In the absence of any argument that the contract has been varied after it was made, its meaning and effect must be determined as at the time it was entered into.
• If the contract is in writing, then the court is directed to an examination of the terms of the written agreement in light of the circumstances surrounding its making.

It is worth noting that despite the emphasis on the terms of the contract, it does not necessarily follow that the label given to a worker by a written contract will be determinative of whether a worker is an employee or independent contractor. This is illustrated in the Personnel Contracting case discussed below.

Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting)

In Personnel Contracting the Court was dealing with a written contract that labelled a worker, retained through a labour hire company, as a ‘self-employed contractor’.  The worker provided services to a construction company under a separate agreement between the labour hire company and the construction company.  There was no contract between the worker and the construction company.

Both the trial judge and the Full Court of the Federal Court applied the multi-factor test and concluded that the worker was an independent contractor.

The High Court disagreed with the courts below and found that despite the label, the proper construction of the contract demonstrated that the worker was an employee of the labour hire company. The majority judgment explained:

“To say that the legal character of a relationship between persons is to be determined by the right and obligations which are established by the parties’ written contract is distinctly not to say that the “label” which the parties may have chosen to describe their relationship is determinative of, or even relevant to, that characterisation” (at [63].  See also [184]).

The following terms of the contract were particularly relevant:

• the company determined how much the worker was paid,
• the company paid the worker directly,
• the company retained a ‘right of control’ over the worker, and
• the company was able to terminate the engagement if the worker failed to obey directions.

The fact that the worker under the contract was free to accept or reject offers of work or work from another company was not necessarily indicative of an independent contractor, because this is also a common feature of casual employment.

In reaching this decision the majority was focused entirely on the terms of the contract and did not go outside of the contract.  How the contract operated on a day to day basis was not relevant.

You can read the Personnel Contracting case here. 

ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek)

Similar reasoning was applied by the High Court in Jamsek, although the outcome in that case was a finding that the workers in question were independent contractors, not employees.

The case concerned two truck drivers who were employed by ZG for approximately nine years before subsequently entering into agreements with ZG to purchase their own trucks and become contractors of ZG.

The Full Court of the Federal Court found that the drivers were employees of ZG. It considered the ‘substance’ and ‘reality’ of the relationship conducted over a period of 40 years was the ultimate question, including the disparity in bargaining power between the parties when ZG presented an effective ultimatum to the drivers that their employment would cease if they did not agree to become contractors.

The High Court overturned the decision of the Full Court.  The majority judgment focused on the terms of the written contract, and in particular the following factors:

• the contracts in place were between partnerships established by the drivers and their wives and ZG,
• the effect of the contracts were for each partnership to operate and maintain a truck for the delivery of ZG’s goods and the partnerships were paid on the basis of work completed,
• ZG was not able to exercise significant control over the provision of those delivery services, and
• although the drivers had set working hours, flexibility was built into the contracts and remuneration was increased where extra work was undertaken.

An interesting aspect of the Jamsek case is that it not only departs from recent Federal Court precedent but it also squarely distinguishes the Australian position from that of other jurisdictions such as the United Kingdom.

In the case of Autoclenz Ltd v Belcher [2011] UKSC 41 the Supreme Court of the United Kingdom held that the the relative bargaining power of the parties must be taken into account when deciding whether a person counts as an employee, to get employment rights.

However, while the majority of the High Court acknowledged the issue of disparity of bargaining power, they said “that circumstance has no bearing on the meaning and effect of the bargains that were struck between the [parties]”. 

You can read the Jamsek case here.

Implications

These cases confirm the primacy of the contract when construing a relationship between parties as one of principal/ independent contractor or employer/employee.  However, they also show that care must be taken when drafting a contract to ensure that the description given to the contractor and the terms of the contract accurately reflect the relationship.  Government authorities may wish to review their standard contracts in light of these decisions.

If you wish to discuss the above please contact Sue Puckeridge, Partner or Adriana Kleiss, Associate.