11 February 2022
On 9 February the High Court of Australia delivered its judgments in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMMEU v Personnel Contracting) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (ZG Operations v Jamsek), which both concern whether workers were properly characterised as independent contractors or employees.
The High Court has discarded the previous approach that courts and tribunals have taken to distinguish employment relationships from independent contracting arrangements in favour of a narrow construction of the terms of the parties’ written agreement.
These decisions will have a significant effect on employment law and industrial relations in Australia and will reduce businesses’ exposure to claims from contractors that they were, at law, employees.
Background: the “totality of the relationship” test
Whether a worker who performs services for a business is an employee of that business or an independent contractor to that business is a legal issue that can have significant consequences.
Employees are entitled to minimum conditions (such as minimum wages, annual leave and paid personal leave) and other rights and protections (such as the ability to bring a claim for unfair dismissal) under the Fair Work Act 2009 (Cth) and other statutory instruments such as Modern Awards, to which independent contractors are not entitled. Employees, unlike independent contractors, are also subject to control and direction by their employer and an employer will often be liable to any third parties for any loss that a third party suffers as a result of an employee’s negligence in the course of their employment.
In recent memory, courts and tribunals have distinguished employees from independent contractors by considering the “totality of the relationship” between the parties. In applying that test, courts and tribunals considered how a range of factors or indicia applied to the relationship between the parties, including, for example:
- how much control the business could exercise over how the worker performed their work;
- whether the worker could delegate their work to other parties or was required to perform the work themselves;
- whether the work provided their own tools and equipment; and
- whether the business paid PAYG tax on the worker’s behalf, or whether the worker paid their own tax and paid GST for the services they provided to the business.
In practice, this meant that courts and tribunals did not restrict themselves to looking at the terms of the written agreement between the parties (which is ordinarily drafted and provided by the business) but instead looked at how the parties’ conduct during the relationship to determine the nature of the relationship.
The High Court sets a new approach: CFMMEU v Personnel Contracting
However, in CFMMEU v Personnel Contracting, the High Court discarded this approach to determining whether a worker is an employee or an independent contractor.
The plurality of Kiefel CJ and Keane and Edelman JJ held that where the parties have committed the terms of their relationship to a complete and valid written contract, whether the relationship is an employment relationship or an independent contracting relationship depends only on the rights and obligations of the parties under the contract and not on the parties’ conduct or their dealings. 1 That is because it is a rule of construction or interpretation of contracts that a written contract cannot be interpreted in light of the parties’ subsequent conduct. 2
While the totality of the relationship can be considered and factors such as control, delegation, tools and equipment and taxation will be relevant to determining the nature of the relationship of the parties, those factors can only be considered based on the rights and duties established by the contract. 3
Kiefel CJ and Keane and Edelman JJ indicated there will be occasions where it is necessary to look at the parties’ subsequent conduct and their dealings with each other in determining the nature of their relationship, for example, where:
- the contract is partly written and partly oral;
- the parties’ subsequent conduct amounts to a variation or waiver of the contract;
- conduct by one or both of the parties amounts to an estoppel; or
- one of the parties alleges that the written contract is a sham, that is, that the contract is not intended to create the rights and obligations that it gives the appearance of creating, but is used to conceal the real contract between the parties. 4
Significantly, their Honours pointedly observed that any “label” attached by the parties to their relationship in the contract will rarely be helpful in determining the nature of the relationship between the parties. It is for a court to determine the character of the relationship between the parties based on their rights and obligations under the contract. 5
Gordon J adopted a very similar approach to Kiefel CJ and Keane and Edelman JJ, 6 and held that the task of a court in determining the nature of the relationship between parties is to construe and characterise the contract between the parties at the time it was entered into. 7
Gordon J identified that, in accordance with orthodox principles of contractual construction, a court can have regard to objective events, circumstances and things known to the parties at the time of entering the contract and which assist in identifying the purpose or object of the contract. 8
Steward J agreed with Gordon J’s expression of the employee-independent contractor test. 9
Gageler and Gleeson JJ disagreed with the rest of the Court, and held, in accordance with previous applications of the totality of the relationship test, that the court can consider the manner in which the parties perform the contract and not just the terms of the contract. 10
The High Court applies the new approach: CFMMEU v Personnel Contracting and ZG Operations v Jamsek
In CFMMEU v Personnel Contracting, Kiefel CJ and Keane and Edelman JJ and separately Gordon J applied the terms of the “Administrative Services Agreement” between Mr McCourt, a construction worker, and Personnel Contracting, a labour hire company supplying workers to builders, to find that Mr McCourt was an employee of Personnel Contracting.
By having regard to the terms of the ASA, Kiefel CJ and Keane and Edelman JJ:
- rejected Personnel Contracting’s argument that it was simply a finder of labour that liaised between builders and self-employed contractors and found that it was impossible to say that Mr McCourt was in business on his own account; 11
- found that Personnel Contracting exercised significant control over Mr McCourt’s work; 12 and
- found there was no reason to consider the description of Mr McCourt as a contractor in determining the nature of his relationship with Personnel Contracting. 13
In ZG Operations v Jamsek Kiefel CJ and Keane and Edelman JJ, and Gordon and Steward JJ, found that truck drivers making deliveries for a company did so as partners in a partnership that contracted with the company, not as employees of the company.
Significantly, the truck drivers were previously employees of the company. After the truck drivers asked for a pay rise, the company offered them the opportunity to become contractors, which would involve them purchasing their old trucks. The company told the truck drivers if they did not agree to become contactors, it could not guarantee them a job going forward.
The truck drivers then set up partnerships with each of their respective wives and executed new contracts with the company on behalf of the partnerships in 1986, and again in 1998 and 2001.
Kiefel CJ and Keane and Edelman JJ had regard to these circumstances, on the basis that they were circumstances known to both parties at the time that the parties entered into the contracts in 1983, 1986, 1998 and 2001. Their Honours commented that in light of that history “it is difficult to see how there could be any doubt that the [drivers] were no longer employees of the company.” 14
Their Honours also noted that even if these contracts were alleged to be shams, “the reality of the situation is that the partnerships, and not the respondents individually, owned and operated the trucks.” That was because the partnerships contracted with the company, invoiced the company for services and took advantage of the tax benefits associated with the partnership structure by splitting the income of the partnerships with their wives. 15
Consequences of the new approach
The revised approach set out in CFMMEU v Personnel Contracting and ZG Operations v Jamsek will, as Gordon J identified in CFMMEU v Personnel Contracting, 16 lead to much greater certainty for companies engaging contractors to perform services for them. That is because, in most circumstances, it will only be the terms and effect of the contract that will be considered in determining whether a worker is a contractor or an employee.
Companies will be able to significantly reduce their exposure to claims of sham contracting if they consider how contractors will operate within their business and have carefully drafted contractor agreements that reflect those practical realities.
However, if the written contract does not reflect how the parties actually conduct themselves, then it may be arguable for a putative employee to argue that the contract has been varied by the parties’ conduct, that the contract was a sham or that the contract contained other oral terms.
It is important that businesses review their existing contractor agreements to see whether they are fit for purpose and will satisfy the principles articulated by the High Court.
For more information, please contact the authors:
Nathan Ebbs | Managing Principal
Nicholas Parkinson | Senior Associate
Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.
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