Background

On 9 February 2022, the High Court of Australia (HCA) handed down two highly anticipated landmark decisions which clarified the approach to determining whether a worker is engaged as an employee or an independent contractor.

Whether a worker is engaged as an employee or an independent contract has important practical consequences including in relation to taxation liabilities and obligations, employment obligations and entitlements, restraints of trade, insurance policies, vicarious liability, regulatory implications, and ultimately the allocation of risk, responsibility, and control.

In both ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (ZG) and Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMMEU), the HCA overturned the decisions from the Full Court of the Federal Court of Australia (FCFCA), ultimately finding that, in both instances, primacy should be given to the terms of the written agreement as opposed to applying a multifactorial analysis to the reality of the parties’ conduct in the relationship, in determining the legal character of the relationship between the parties.

The prior legal position: the multi-factor test

Previously, when establishing the legal relationship between the parties, courts considered a multitude of factors in examining the reality of the relationship to determine whether a worker is an employee or an independent contractor.

These factors included:

• whether the worker owes a duty of loyalty and fidelity to the principal;
• the principal’s degree of control over the worker;
• whether the worker has the right to delegate or subcontract the work; and
• whether the worker represents the principal.

ZG Operations Australia Pty Ltd v Jamsek

From 1977 to 1985, Mr Jamsek and Mr Whitby (Plaintiffs) were employed by ZG Operations. In 1986, ZG Operations terminated the Plaintiffs’ employment contracts, notifying the Plaintiffs that ZG Operations would no longer employ the Plaintiffs. Instead, the Plaintiffs were to work as independent contractors for ZG Operations and the Plaintiffs proceeded to form a partnership and sign independent contractor agreements.

The material terms of the independent contractor agreements included:

• the Plaintiffs were to provide invoices to ZG Operations who were to pay the invoices to the partnership;
• the Plaintiffs were to supply their own trucks;
• the Plaintiffs were to pay for the expenses related to their trucks, including insurance; and
• the Plaintiffs were required to be at the disposal of ZG Operations five days a week, nine hours a day (practically an exclusive agreement).

In applying the multi-factor test, the FCFCA found that the Plaintiffs were employed by ZG Operations. A significant factor indicating an employment relationship was that ZG Operations exercised a high degree of control over the Plaintiffs because ZG Operations required the Plaintiffs to be at the disposal of ZG Operations five (5) days a week for nine (9) hours a day.

Appeal to the High Court – Jamsek case

The High Court found that the FCFCA erred in its approach in two (2) ways:

• the FCFCA unduly placed significance on the manner the parties conducted themselves throughout their relationship; and
• the FCFCA erroneously considered that the imbalance in bargaining power between the parties affected the contract, resulting in an employment relationship.

The HCA considered the fact that the Plaintiffs were required to be at the disposal of ZG Operations five (5) days a week for nine (9) hours a day. In that regard, the HCA concluded that while this term may tend slightly in the favour of relationships of employer and employee, it should be viewed in the context that ZG Operations, whenever possible, would offer any extra work to the Plaintiffs at a mutually agreed rate for each job, thereby suggesting that there was flexibility built into the contract for remuneration to increase as extra work was undertaken.

Accordingly, the HCA held that the Plaintiffs were not employed by ZG Operations, but were independent contractors of ZG Operations, because the Plaintiffs owned, provided, and maintained their own equipment and operated as a partnership of which they enjoyed the benefits.  

Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd

Mr McCourt (Plaintiff) accepted a contract to work for Personnel Contracting (Construct), a labour hire company which would assign the Plaintiff to work at a host employer’s project site in the capacity of a labourer.

The agreement between the Plaintiff and Construct expressly stated that the Plaintiff was an independent contractor.

The material terms of the agreement between the parties included:

• the Plaintiff was a self-employed contractor;
• the Plaintiff was to attend at any building site as agreed at the time required, for the duration required;
• the Plaintiff was to co-operate in all respects with Construct and the host employer in the supply of labour;
• the Plaintiff was to supply such tools of trade and equipment as may be required;
• the Plaintiff was not to represent himself as being an employee of Construct at any time;
• Construct was empowered to fix the Plaintiff’s remuneration; and
• Construct assumed the obligation to pay the Plaintiff for his work with the host employer.

The FCFCA applied the multi-factor test, finding that the Plaintiff was an independent contractor for two main reasons:

• the FCFCA considered that because of the trilateral labour hire relationship, Construct did not necessarily exert control over the Plaintiff;
• the FCFCA could not depart from the authoritative decision of Personnel Contracting Pty Ltd T/As Tricord Personnel v The Construction Forestry Mining and Energy Union of Workers [2004] WASCA 312 (Personnel) – a proceeding with materially identical circumstances – because the reasons of the majority in Personnel did not disclose any clear legal error.

However, the FCFCA clarified that the element of control was but one indicator of the inquiry, that greater weight had to be given to the uncontested fact that the Plaintiff was not in business on his own account, and that if unconstrained by legal authority (binding precedent), the FCFCA would have found an employment relationship between the parties.

Appeal to the High Court – Construct case

The HCA overturned the FCFCA decision, finding that the parties were in an employment relationship for the following reasons:

• the Plaintiff promised Construct to work as directed by Construct and by Construct’s customers;
• the Plaintiff was entitled to be paid by Construct in return for the work he performed pursuant to that promise;
• the Plaintiff’s promise to work for Construct’s customers, and his entitlement to be paid for that work, were at the core of Construct’s business of providing labour to its customers;
• the right to control the provision of the Plaintiff’s labour was an essential asset of Construct’s business;
• the Plaintiff’s performance of work for, and at the direction of, the host employer or customers was a direct result of the deployment by Construct of their asset in the course of its ongoing relationship with its respective customer; and
• in totality, the terms of the agreement reflected an employer/employee relationship.

Significantly, the HCA stated at [59]:

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. Where no party seeks to challenge the efficacy of the contract as the charter of the parties’ rights and duties, on the basis that it is either a sham or otherwise ineffective under the general law or statute, 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. Such a review is neither necessary nor appropriate because the task of the court is to enforce the parties’ rights and obligations, not to form a view as to what a fair adjustment of the parties’ rights might require.

Similarly, the HCA also stated at [162]:

The resolution of the central question requires consideration of the totality of the relationship between Construct and Mr McCourt, which must be determined by reference to the legal rights and obligations that constitute that relationship. Where the parties have entered a wholly written employment contract, as in this case, the totality of the relationship which must be considered is the totality of the legal rights and obligations provided for in the contract, construed according to the established principles of contractual interpretation. In such a case, the central question neither permits nor requires consideration of subsequent conduct and is not assisted by seeing the question as involving a binary choice between employment and own business. The totality of the relationship between Construct and Mr McCourt was that of employer and employee.

Takeaways

All things being equal, when determining the nature of the legal relationship between parties, the court will examine the rights and obligations of the parties under their written contract rather than the manner of conduct throughout the relationship.

It is imperative for principals to utilise written agreements to engage independent contractors, and for the terms of the written agreements (particularly any terms concerning rights and obligations) to reflect a principal/contractor relationship, as the characterisation of the legal relationship between parties will follow the nature of the written agreement.