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The Decisions of Jamsek and Personnel Contracting Reducing the Risk of Independent Contractors being Determined as Employees

The decisions of the High Court of Australia in Jamsek and Personnel Contracting will reduce the risk of independent contractors being subsequently determined by Courts as employees – but only so far

 

On 9 February 2022, the High Court of Australia handed down the much anticipated decisions in ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek) and Construction, Forestry, Maritime and Energy v Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting). Each of these decisions deal with the court's approach to determining whether a person has been engaged in a relationship of employment, or one of principal and independent contractor. Personnel Contracting also addresses (and significantly impacts) a commonly adopted arrangement used by labour hire providers, known as “Odco” arrangements. Broadly, an Odco arrangement refers to a tripartite arrangement whereby a labour hire agency engages a worker as an independent contractor to perform their services for a client of the labour hire agency.

A. Need to Know

There are four separate judgements in Personnel Contracting, and three in Jamsek. Distilling a clear test or methodology from these judgements for determining whether a person is an employee or independent contractor is not easy. This is because although three of the judgements in Personnel Contracting, and all of the judgements in Jamsek, came to the same conclusion that the appeals should be allowed, they did so by applying different reasoning and analysis of what is the correct approach.

However, in our view, these decisions do clarify the following key concepts in this area of the law:

  • First, the actual terms of the written contract at the time the parties enter the relationship (or vary the terms) are determinative of the question of whether the relationship between the parties is one of employment or principal/independent contractor. Put another way, the rights and obligations of the parties as set out in the written terms on commencement of the engagement or subsequent variation of the contract will characterise the nature of the relationship. The approach that had been favoured by the Full Court of the Federal Court, of weighing up the circumstances across the course of the relationship and post-engagement conduct of each party to determine the nature of the relationship of the parties, has been rejected.
  • Second, in considering the terms of the contract, a key question is “does this person really operate their own business or not?”. Despite criticisms of the multifactorial test in some of the judgments (which involves weighing up a range of indicia in determining the status of such relationships), the traditional indicia used under that test remains relevant to determining whether a person is an employee or independent contractor. Arguably, the HCA has given additional weight to the assessment of the level of the person's subservience in the relationship, or the exercise of control by the putative employer, in respect of the performance of work.
  • Third, the decision does not resolve the application of the multifactorial test, and indeed the weight that should be given to the various factors within that test when characterising the relationship. Consequently, the application of the factors is still subject to an impressionistic and subjective outcome having regard to the various factual circumstances that may come before a court when determining whether a person is an employee or an independent contractor.

B. What do these decisions mean for organisations?

  • Well drafted written contracts with independent contractors will be paramount in managing the risk that independent contractors may be deemed as employees.
  • The label given to the relationship within any written contract terms will be given short thrift by a court. Instead, a court will look to the contract terms to determine the actual rights and obligations that have been agreed to by the parties, and from that assessment determine the nature of the relationship.
  • Careful consideration of the structure of the relationship is still important. This includes concepts such as how payments are made, who can make decisions about when and how the work is performed, who provides the tools of trade, and who bears the risk.
  • Any variations to the arrangement between two parties should be effected by way of a updated written contract or written variation to the original contract.
  • It will be easier for a principal to maintain the assertion of an independent contractor relationship where some or all of the following apply:
    • significant tools of trade are supplied by the independent contractor (eg trucks);
    • there is an interposed legal entity controlled by the individual (corporate entity, partnership etc);
    • there is a clear written contract with the right mix of “the indicia”. 
  • Given the above, there will almost certainly be more attention on the sham contracting provisions of the Fair Work Act 2009 (Cth) (Fair Work Act) and the unfair contracts provisions in the Independent Contractors Act 2006 (Cth).

C. What should businesses do now?

A business should:

  • ensure that the terms of an existing independent contractor relationship are documented in a properly drafted agreement, which excludes (where reasonably possible) any indicia that may support a finding that the relationship of the parties is one of employment;
  • when engaging an independent contractor, a highly effective risk management strategy is to ensure that the independent contractor is engaged through a corporate entity or legal structure (such as a partnership). At the very least, a business should require the independent contractor (if a natural person) to have an Australian Business Number (ABN);
  • when considering the engagement of an independent contractor who is a natural person (such as a consultant providing mostly or exclusively labour), carefully consider the nature of the remuneration structure, who can make decisions about the work to be performed by the independent contractor, and who provides tools of trade.

It is important to note that these decisions will not impact the obligations of a principal under certain statutes that treat an independent contractor as an employee for particular purposes (for example the Commonwealth superannuation legislation and state and territory-based workers compensation legislation). These obligations are often missed when engaging an independent contractor, and a business must be aware of the requirements.

D. The Jamsek case

In Jamsek, two long term truck drivers engaged by a business (ZG Operations Australia Pty Ltd (ZG)) as independent contractors asserted that they were employees of ZG and sought back-pay of various employment entitlements and restitution on that basis.

The drivers started working for ZG as employees in 1977, before ZG informed the drivers their ongoing employment could no longer be guaranteed, proposing that they become contractors.

The drivers agreed and set up partnerships with their spouses and entered into an agreement with ZG on behalf of their partnerships as independent contractors. They purchased and provided their own vehicles, were responsible for the registration and maintenance of these vehicles, and provided contracting services to ZG through various written and unwritten agreements over the years.

The Federal Court at first instance found the drivers were not employees. 

On appeal to the Full Court of the Federal Court of Australia (FCFCA), the decision of the trial judge was overturned, with a finding that the drivers were employees, having regard to the:

  • relative bargaining power of the parties at the time – with there being no room for negotiation in respect of the formation of the contract. The drivers ultimately either had to accept the changes or have no work at all;
  • the control exerted over the drivers by ZG – while the drivers had a degree of freedom over their day-to-day activities, they were also required to work set days and hours, not permitted to take more than four weeks annual leave, had a ZG logo on their trucks, and occasionally performed clerical and warehouse work for ZG;
  • absence of written contacts at various stages highlighting the drivers’ ongoing engagement and centrality to ZG;
  • exclusivity of work and right to subcontract – while the drivers did have a contractual right to work for third parties, this was never acted on in practice and nearly all of their work was done for ZG;
  • ability (or lack thereof) by the drivers to generate goodwill for their partnerships – with their trucks, for the most part, being linked with ZG and their sole income being generated by set rates from ZG.

This decision and reasoning confirmed that the written terms of engagement were not a determinative factor in deciding the nature of the relationship between the parties. Rather, the decision of the FCFCA highlighted the importance of looking at the totality of the relationship.

Decision of the High Court

Across three separate judgements, each justice of the High Court found that the drivers were independent contractors. We have summarised these judgments below.

Judgment Finding Detail
Kiefel CJ, Keane and Edelman JJ Drivers were independent contractors

In coming to this finding, their Honours:

  • stated that the FCFCA was in error by focusing too much attention to the manner in which the parties actually conducted themselves over the decades of the relationship;
  • erred in placing weight on the disparity in bargaining power between the parties;
  • placed a great deal of emphasis on the fact that the contracting entity of the drivers was a partnership;
  • considered the fact that the drivers provided the trucks as part of the services weighed heavily in favour of a finding of the relationship between ZG and the drivers to be one of principal/independent contractor.
Gageler and Gleeson JJ Drivers were independent contractors

Gageler and Gleeson JJ disagreed with finding of the FCFCA and placed more weight on the following factors in determining the relationships were independent contractors:

  • that the drivers were required to provide and maintain the trucks as part of the services, noting that these were significant tools of trade; and
  • the drivers’ contracting entities were genuine partnerships.
Gordon and Steward JJ Drivers were independent contractors Gordon and Steward JJ similarly placed significant emphasis on the fact that the contracting parties for the drivers were partnerships in forming the view that the relationship was an independent contracting relationship.


E. The Personnel Contracting case

Personnel Contracting concerned an application brought by the CFMEU on behalf of Daniel McCourt, a 22-year-old from Britain on a working holiday visa, against a Perth Labour hire company, Personnel Contracting Pty Ltd, trading as Construct (Construct).

Mr McCourt was engaged through an “Odco” labour hire arrangement, named after the case of Building Workers Industrial Union of Australia v Odco Pty Ltd [1991] FCA 96. An Odco arrangement is where a labour hire agency engages workers as independent contractors, hiring them out to third parties. In such cases the worker is not considered an employee of either party. The third party generally pays the labour hire company for the service, and the labour hire company pays the worker.

In Personnel, Construct engaged Mr McCourt as an independent contractor undertaking building labourer duties. He was assigned to work at a construction site run by Hanssen Pty Ltd (Hanssen) through a contract for services between Hanssen and Construct (with no contract between Hanssen and Mr McCourt).

The CFMEU alleged that as Mr McCourt had no intention of running his own business and worked under supervision and control, he was a casual employee of Construct (and was therefore entitled to benefits under the Building and Construction General On-Site Award 2010 and the Fair Work Act).

At first instance, Judge O’Callaghan of the Federal Court determined that Mr McCourt was an independent contractor. Applying earlier precedent cases on this issue, his Honour thought the assessment was finely balanced, and ultimately adopted that the fact the written contract between Construct and Mr McCourt identified Mr McCourt as an independent contractor was the “tie-breaker”.

On appeal, the FCFCA upheld the primary judgment, again placing particular weight on the written contract between the parties reflecting an independent contractor arrangement. This was despite evidence that the way in which Mr McCourt performed work conformed with the characteristics of a relationship of employment. The FCFCA, while being critical of the generally established position in Odco, noted that a large factor of their decision was to maintain consistency with the accepted Odco position.

High Court decision in Personnel Contracting

Six of the seven justices found that Mr McCourt was an employee at law, overturning the decision of the FCFCA.

Across four separate judgments, the High Court adopted different approaches to the assessment of the issues – with Steward J ultimately dissenting.

We have summarised the judgments at a high level in the below table.

Judgment Finding Detail
Kiefel CJ, Keane and Edelman JJ Mr McCourt was an employee of Construct

In finding that Mr McCourt was an employee of Construct, Kiefel CJ, Keane and Edelman JJ:

  • placed significance on the assessment as to whether the individual can be said to be “conducting his or her own business" as distinct from “serving in the business of the employer”;
  • held that where the terms of a contract are comprehensively set out in a written contract, unless there is (1) an allegation of a sham, (2) an allegation that the terms have been varied, or (3) a challenge to the validity of the terms, the legal rights and obligations set out in the contract should be decisive in determining the characterisation of the relationship;
  • found that Mr McCourt could not be said to be carrying on business on his own account, rather, he was engaged by Construct to serve Construct in its business;
  • found that under the contract, Construct had significant control over the work of Mr McCourt – including for whom he could work and the type of work he would be required to do;
  • held that the fact that the contract described Mr McCourt as a “contractor” was immaterial;
  • held that the fact that Mr McCourt was free to work for other organisations was not in any way determinative of an independent contractor relationship, noting that casual employees often can work for more than one employer.
Gageler and Gleeson JJ Mr McCourt was an employee of Construct

In finding that Mr McCourt was an employee of Construct, Gageler and Gleeson JJ:

  • essentially applied the previously accepted position that “the totality of the relationship must be considered”;
  • stated that the level of control the organisation has over how, where and when the individual works is important; and
  • placed significance on the extent to which the individual can be seen as working in his or her own business, as distinct from the business of the “putative employer”, taking into account factors such as the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work and provision of holidays, the deduction of income tax and the delegation of work.
Gordon J Mr McCourt was an employee of Construct

In finding that Mr McCourt was an employee of Construct, Gordon J held:

  • a court can determine the character of a legal relationship between the parties only by reference to the legal rights and obligations which constitute that relationship;
  • one must construe and characterise the contract made between the parties at the time it was entered into;
  • the way the contract addresses matters such as the mode or remuneration, the provision and maintenance of equipment, the obligation to work, the provision for holidays, the delegation of work, and where the right to exercise discretion and control resides may show that the relationship is not one of employer and employee;
  • the contract in this case gave Construct significant control over where, when and how the work to be performed by Mr McCourt would occur; and
  • Mr McCourt’s mode of remuneration was consistent with that of an employment relationship.
Steward J Mr McCourt was an independent contractor of Construct Steward J agreed with Gordon J’s statements of the law, however stated that the longstanding law allowing the use of Odco labour hire arrangements should not be overturned unless it is plainly wrong, noting the substantial impact it would have on businesses structured according to that position.

 

F. A renewed focus on sham contracting and unfair contracts?

On the basis that these decisions will make it harder for independent contractors to subsequently challenge their status, it is likely more attention will be given to the sham contracting provisions in the Fair Work Act and the unfair contracts provisions of the Independent Contractors Act.

These two areas of employment law represent other avenues of recourse available to independent contractors who seek to challenge the basis upon which they are engaged.

Sham contracting

The purpose of the sham contracting provisions in the Fair Work Act is to protect employees from the deliberate mischaracterisation of the employment relationship as a contractor relationship.

Under those provisions, the following actions are unlawful:

  • engaging a person and representing that the engagement is an independent contractor relationship, when it is actually an employment relationship;
  • dismissing, or threatening to dismiss, an employee in order to engage the employee as an independent contractor to perform the same, or substantially the same, work under a contract for services;
  • making a statement that an employer knows is false in order to persuade or influence an employee to enter an independent contractor agreement under which the person will undertake the same, or substantially similar, work for the employer.

However, it is not a breach if an employer who makes a representation that a contract is a contract for services if the employer did not know, or was not reckless as to whether the contract was actually a contract of employment.

Breaches of these provisions can lead to significant civil penalties and/or compensation to the individual for loss.

In practice, these provisions set a high bar to clear before the employer will be found to be in breach.  That, coupled with the fact that such proceedings are a “no costs” jurisdiction, is why such claims are not commonly made. However, they do present a real risk for employers where they:

  • knowingly seek to engage persons as contractors, where in reality they would be considered employees; or
  • seek to terminate employees and re-engage them as independent contractors to undertake the same or similar duties.

Unfair Contracts

The Independent Contractors Act, which is a no-costs jurisdiction, allows independent contractors to seek review of the terms upon which they are engaged by the principal on the grounds that:

  • the contract is unfair;
  • the contract is harsh.

Once the court forms an opinion as to the services contract, having regard to factors such as:

  • the terms of the contract when it was made;
  • the relative bargaining strengths of the contract parties and, if applicable, anyone acting on their behalf;
  • whether there was any undue influence or pressure, or any unfair tactics used against, a party to the contract;
  • whether the contract provides remuneration that is less than that of an employee doing similar work, it can make an order to set aside the whole or part of the contract or make an order to vary the contract.

The Independent Contractors Act is often overlooked. However, following Jamsek and Personnel Contracting, it is likely that it will be considered as an alternative cause of action for independent contractors seeking to challenge the terms upon which they are engaged.


For more information, please contact Hamilton Locke Workplace and Employment partner, James Simpson.