Clarification of contractor & employee classifications

Posted on 2/3/2022

HR & Recruitment

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On the 9th of February 2022, the High Court of Australia handed down two significant decisions relating to the classification of independent contractors, which will have a major impact on how workers are characterised in future.
Contract over substance

Cecilia White, Director at Perks People Solutions reminds us that it is important to periodically review your existing contracts and agreements to ensure they really do what they are intended to.

“This certainty is good news for businesses employing independent contractors and is a timely reminder to clearly document the intention of the employment relationship from the start,” says Cecilia.

“The reasoning in these decisions will make it much harder for workers, such as casuals and those on short term or freelance contracts to challenge their characterisation as contractors.”

These recent decisions provide further clarification for employers, in addition to the decisions handed down in March 2021 around what constitutes a casual employee vs. a permanent employee.

The Cases That Shaped These Laws

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

The case of CFMEU v Personnel Contracting was an appeal by the CFMEU against a Federal Court decision that found the workers were independent contractors, as set out in the service agreement signed by the parties.

The case involved a 22-year-old backpacker, Mr McCourt, who approached the company, Personnel Contracting (trading as “Construct”) looking for work as a builder’s labourer. The worker had no tools and no business of his own and he was simply seeking to be paid in return for his labour. At the request of the company, the worker signed a standard contract provided to him and thereafter was told where and when to work.

Under the contract, Construct had the right to determine for whom Mr McCourt would work, and Mr McCourt promised Construct that he would co-operate in all respects in the supply of his labour to Construct’s client Hanssen. In return, Mr McCourt was entitled to be paid by Construct for the work he performed. This right of control, and the ability to supply a compliant workforce, was the key asset of Construct’s business as a labour‑hire agency.

These rights and obligations constituted a relationship between Construct and Mr McCourt of employer and employee. The fact that the parties chose the label “contractor” to describe Mr McCourt did not change the character of that relationship.

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

This case concerned whether two truck drivers were engaged by a company as employees or independent contractors.

The High Court unanimously held that the respondents (Jamesk) were not employees of the Company and adopted the same approach that the High Court took in the Personnel Contracting case that:

where parties have comprehensively committed the terms of their relationship to a written contract, the efficacy of which is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute, the characterisation of that relationship as one of employment or otherwise must proceed by reference to the rights and obligations of the parties under that contract.

Between 1977 and 2017, Mr Jamsek and Mr Whitby (“the respondents”) were engaged as truck drivers by a business run by the second appellant (“the company”).

The respondents were initially engaged as employees of the company and drove the company’s trucks. However, in 1985 or 1986, the company offered the respondents the opportunity to “become contractors” and purchase their own trucks.

The respondents agreed to the new arrangement and set up partnerships with their respective wives. Each partnership executed written contracts with the company for the provision of delivery services, purchased trucks from the company, paid the maintenance and operational costs of those trucks, invoiced the company for its delivery services, and was paid by the company for those services.

Income from the work performed for the company was declared as partnership income for the purposes of income tax and split between each respondent and his wife.

The contracts between the partnerships and the company involved the provision by the partnerships of both the use of the trucks owned by the partnerships and the services of a driver to drive those trucks. The context in which the first contract was entered into involved the company’s refusal to continue to employ the drivers and the company’s insistence that the only relationship between the drivers and the company be a contract for the carriage of goods. This relationship was not a relationship of employment.

What do these cases have in common?

1. Reinforced the multi-factor approach as the means to determine whether a worker is in fact an employee or contractor to a principal, i.e. all factors relevant to the contractual relationship are assessed to determine the worker’s true status.

2. Reinforced that the label the parties ascribe to the relationship is of minimal importance.

3. By a majority, overturned the previous Federal Court approach of looking at conduct post-formation of a contract to determine the true status of the relationship. Rather, where a contract is wholly recorded in writing, the majority held that the terms determine the worker’s status are those agreed at the time the contract is formed.

4. Reinforced that, the mere existence of a bargaining disparity between parties should not form the basis to re-characterise a contractual relationship. Rather, there are existing common law principles, such as misrepresentation, undue influence, unconscionability, etc., that need to be satisfied if a party is to undo a contractual bargain.

5. Reinforced the notion that where workers significantly invest in an asset and maintain it, for example owner-drivers, there is a very strong indicator of a contracting relationship.

How Employers can clearly define Employee vs. Contractor

There are many steps employers can take to safeguard themselves from falling into the same trap as the employers in these cases:

1. Ensure each engagement of an independent contractor is confirmed in a written agreement.

It is important that all independent contractors are engaged according to a written agreement, with terms that accurately reflect a principal/contractor relationship. In the absence of a written agreement, organisations are exposed to a finding of employment.

2. Review your template independent contractor agreements

Organisations should review current written agreements with independent contractors to ensure that the terms of the agreement reflect the principal / contractor relationship. For example, contractor agreements should not include any entitlements such as annual leave.

3. Review current engagements

Organisations should review current engagements and written agreements to ensure independent contractors have not been provided with a ‘label’ where the duties and obligations reflect an employment.

It is important to realise that legislation in the areas of payroll tax, workers compensation and compulsory superannuation, attach ‘employer-like’ obligations to principals in common law independent contractor relationships. As a result, regulators with responsibility for enforcing this legislation are likely to continue an approach that looks beyond the agreement to the nature of the relationship in assessing whether the relationship comes within the scope of the legislation.

If you need assistance or advice relating to contracts and agreements in your workplace, get in touch with Cecilia White, Director HR Consulting, Perks People Solutions.

Talk to our HR Consulting Team

Cecilia White

Cecilia White

With a background in legal practice, Cecilia has developed strong technical expertise in all matters relating to workplace law, including awards, contracts, disciplinary matters, investigations, equal opportunity and HR policy development.

Brigid Emmett

Brigid Emmett

Brigid is outcome driven and has a sensible approach to supporting an inclusive and cohesive workplace culture that also meets the commercial needs of the business.

Chloe Lange

Chloe Lange

Chloe is driven to support and meet the needs of each individual client whilst also engaging with candidates to provide them with the most suitable opportunities.

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