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Contract Is King: High Court of Australia Provides Clarity on 'Employee vs Contractor' Test

In Short 

The Situation: Two recent decisions of the High Court of Australia have held that the terms of a valid written contract will determine whether a worker is classified as an employee or contractor where the contract is not challenged as a 'sham', is not otherwise ineffective (by statute or due to conduct amounting to waiver or estoppel) or has not been varied on ordinary contractual principles.  

The Result: The two recent decisions affirm that the substantive rights and obligations of the parties set out in a valid written contract (and not just the title of the contract) will be key in characterising the relationship between them, thereby marking the end of the long-held practice of the Australian courts focusing on the parties' subsequent conduct, rather than the terms and conditions of a valid contract governing the relationship, to determine the nature of their work relationship.  

Looking Ahead: While these two recent decisions offer some comfort to employers and principals, Australia is likely to see more cases challenging the classification of workers. These could involve allegations of sham contracting or workers alleging that contracts are unlawful, have been varied or there has been conduct giving rise to a waiver or estoppel. To avoid such claims, principals engaging contractors should ensure that the contracts they put in place faithfully reflect the relationship between the parties and satisfy themselves that the relationship can truly be characterised as one of principal and contractor.

On 9 February 2022, the Australian High Court heard two appeals together—Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 ("Personnel") and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 ("Jamsek")—concerning whether the workers involved in both cases were employees or independent contractors. 

The Personnel Decision 

The Personnel decision concerned a labourer who was engaged by a labour hire company under a written contract to perform labouring tasks on a construction client's construction sites. The contract between the labourer and the labour hire company defined the labourer as a "self-employed contractor". In practice, he performed basic labouring tasks under the supervision and direction of the client's supervisors.  

The Construction, Forestry, Maritime, Mining and Energy Union ("CFMEU") commenced proceedings in the Federal Court of Australia alleging the labourer was misclassified by the labour hire company as an independent contractor and seeking compensation and penalties under the Fair Work Act 2009 (Cth) ("FW Act"). Despite the labourer not running his own business, the Federal Court held that the labourer, who had limited work experience, was an independent contractor, not an employee.  

The CFMEU appealed to the High Court, which unanimously found that the terms of the contract between the labourer and the labour hire company established rights and obligations of the parties consistent with an employment relationship, notwithstanding the 'self-employed contractor' label in the parties' contract. The Court did not consider the labourer was conducting a business of his own because the labour hire company retained the ability to determine for whom he would work, to fix the payment for the work undertaken, retained a right of control over the work (which was a key asset of the business as a labour hire agency) and could terminate the contract if the labourer did not follow directions.  

The High Court found that where the parties have "comprehensively committed to the terms of their relationship" in a written contract—the efficacy of which is not challenged as a 'sham' or is otherwise ineffective (for example, under statute), then the contractual characterisation of the relationship should proceed by reference to that contract. Further, the High Court explained that if there is otherwise no suggestion that the contract had been varied and no conduct amounting to an estoppel or waiver of rights under the contract, then a wide-ranging review of the parties' conduct after entering the contract is "unnecessary and inappropriate". 

The Jamsek Decision 

In Jamsek, two truck drivers were initially engaged by a company, ZG Operations Pty Ltd ("ZG"), as employees. In 1985, however, ZG notified the employees it was ending the employment relationship but offered them an opportunity to buy their own trucks from ZG and become independent contractors. The drivers accepted the offer, and both set up partnerships with their respective wives, and subsequently signed contracts with ZG for the provision of delivery services. The drivers invoiced ZG for their services and paid the maintenance and operational costs of the trucks themselves.  

The drivers commenced proceedings in the Federal Court of Australia alleging they were misclassified as independent contractors and seeking declarations for entitlements they claimed were owed to them under the FW Act (in addition to superannuation and long service leave under the applicable legislation). The primary judge concluded they were independent contractors, not employees.  

Subsequently, the Full Federal Court held that the drivers were actually employees, who had worked exclusively for the same company, despite having been engaged under independent contractor agreements for almost 40 years. The Court found the "substance and reality" of the relationship indicated the drivers had "no real independence" from the company, including because it provided their sole source of income and their trucks displayed the company's logo—therefore the drivers were employees.  

On appeal, the High Court unanimously held that the two drivers were not employees of ZG. The Court noted that the contracts between the parties provided for the partnerships to utilise their own respective trucks and provide the services of a driver to drive them. Of significance to the majority was the context in which the contracts were agreed, namely that they were subsequently engaged as contractors after ZG had ended the employment relationship and insisted that the parties' relationship proceed only as an independent contractor relationship under a contract for the carriage of goods on its behalf. Based on the terms of the contract alone, the Court could not find an employment relationship.  

A Change to Long-Standing Precedent 

Before Personnel and Jamsek, the seminal decisions on the characterisation of a worker as an employee or contractor—Hollis v Vabu Pty Ltd (2001) CLR 21 and Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16—had long required use of a 'multifactorial test' to analyse the parties' working relationship. Personnel and Jamsek noted that such a test should be used only where the employer and the individual had not committed the terms of the relationship to a written contract, or it is successfully argued that the parties have operated inconsistently with the written terms of such contract.  

These decisions confirm that where a comprehensive, complete and unambiguous written contract exists and there is no suggestion the parties have conducted themselves inconsistently with it, the court's analysis must focus on the rights and duties established by the written contract itself, not the parties' subsequent conduct or the relationship in practice.  

Notably, the decision of the High Court to give primacy to the contract in Personnel and Jamsek in the independent contractor context is consistent with its approach in the recent WorkPac Pty Ltd v Rossato [2021] HCA 23 decision. This decision considered whether an employment relationship was casual ("at-will" as understood in the United States) or permanent (namely, terminable by written notice of termination). The Full Federal Court found that the "real substance, practical reality and true nature of … [the employment] … relationship" was determinative, not the contract. 

On appeal, the High Court rejected the Federal Court's approach and unanimously found that the employee was a casual employee for the purposes of the FW Act because there was no firm advance commitment to ongoing work at the time the employee was offered employment. The High Court did so on the basis that when deciding whether an employee is casual or permanent, the court must focus primarily on the written terms of the contract with the employee, not the parties' subsequent conduct.

Three Key Takeaways 

  1. Companies should review existing written contracts with their workers to ensure they accurately and comprehensively define the parties' relationship consistent with the classification (employee versus independent contractor) the parties agreed upon at the time the contract was formed. Any variations should be formalised in written variations or a new contract agreed in writing between the parties. 
  2. If an employee ceases employment and is subsequently re-engaged by the same employer as an independent contractor to perform the same or similar work, such arrangements should be treated with caution. As in Jamsek, however, a court will uphold the classification when the written contract accurately reflects an independent contractor relationship between the parties.
  3. Even if someone is genuinely an independent contractor, adverse consequences can arise if the principal has not made superannuation contributions required at law because the contractor is treated like an employee for superannuation purposes.

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