Two long-awaited cases signify just how essential it is to have a clear written contract when employing independent contractors. Here’s what HR needs to know.
The distinction between employees and independent contractors has been a hot topic in recent years. From the gig economy, to labour hire in the construction and mining industry, to truck drivers and IT professionals, it seems like everyone has heard of someone who isn’t sure whether their engagement is characterised correctly.
The potential underpayment of employee entitlements that can flow from incorrect (sometimes unintentional) characterisation of workers is a significant concern for many businesses.
Last week, the High Court of Australia handed down two very significant decisions that provide companies and employees with some much-needed clarity on what legal test and analysis should be applied when determining whether a worker is an employee or an independent contractor.
In ZG Operations & Anor V Jamsek & Ors and Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting, the High Court has decisively and unanimously held that the written terms of the agreement between the parties should be the primary factor when determining whether a worker is an employee or contractor.
The first case concerned two truck drivers who began working as employees for a company in 1977. Nine years later, they entered into agreements as independent contractors and were required to buy their own trucks to carry supplies. When their contracts were terminated in 2017, the drivers took the company to court, claiming they were owed superannuation and leave entitlements. The High Court found the workers were indeed independent contractors, thereby overruling the Federal Court’s decision which had sided with the workers.
In the second case, a labour contractor was engaged to work at a host company. His role was defined as a ‘self-employed contractor’ and this was stipulated in an Administrative Services Agreement, which he signed. However, he worked regular hours, was paid on an hourly rate, and given a significant amount of direction which was more characteristic of a traditional employer-employee relationship. When the labourer’s work came to an end, he initiated proceedings, arguing he was owed compensation and penalties.
James Allsop, Chief Justice of the Federal Court, found in favour of the employer, upholding law which states that ‘unskilled’ workers would be paid as contractors below the industry minimum wage. However, the High Court ultimately reversed this decision, finding that the labourer was an employee since the company determined who he worked for, and the labourer was required to cooperate in the supply of his labour to the client. As such, the court ruled the labourer was employed by the company, and is therefore entitled to be paid as an employee.
Both rulings reverse the previous decisions of the lower courts that held that a complex analysis of the “multifactorial indicia” present in the circumstances of the relationship between the parties took precedence over what the parties had written in the contract between them.
For the past 20 years, this initial approach sometimes, and confusingly, led to differing and conflicting results about whether a worker is a contractor or an employee.
What has changed?
Before these decisions were handed down, there was considerable uncertainty about whether businesses and workers could rely on what they had written and agreed upon in their contracts. The two decisions provide increased certainty in relation to engaging workers as contractors, and may also increase business confidence to engage contractors instead of employing employees.
Another key factual consideration in the first case was whether the truck drivers who had brought the case against the principal business conducted their own business ─ in which case they could not be contracted to work in the principal’s business as employees.
It is now clear that the question is whether the terms of the written contract indicate that the worker is conducting their own independent business or if they are serving in the business of the employer.
Why is it important for engaging independent contractors?
The decisions in these rulings are a significant change from the approach that courts have traditionally taken in such cases. The previous approach was to look beyond the terms of the contract to look at the work relationship.
However, the majority of the High Court stated in the Personnel Contracting case: “It is not a social or psychological concept like friendship. There is nothing artificial about limiting the consideration of legal relationships to legal concepts such as rights and duties”.
All seven judges of the High Court made it clear in both decisions that the terms of the contract between the parties are paramount. Unless there is a suggestion that the contract is a sham, unlawful or is completely inconsistent with the conduct of the parties, the terms of the contract define the relationship. However, the court also made it clear that if the arrangements were a sham, the outcome may have been very different.
Accordingly, the decisions may also become an upcoming election issue in terms of increasing worker rights in relation to sham or unlawful contracting.
For now, however, this means that if a contract between the parties sets down the terms of a contractor relationship, then legally that is what the relationship is. For example, if a contract provides that a worker is providing services through their own company or partnership, has some control over when they accept or reject work and the flexibility to perform work for other companies, then it is likely they are a contractor.
This does not mean that simply writing in the contract that the worker is a “contractor” is enough. In Personnel Contracting, despite the contract labelling the worker as an independent contractor, the High Court found that he was an employee. This was because the written terms of the contract provided that the company had the right to determine who he would work for and required him to cooperate in all respects in supplying his labour.
How will this impact businesses?
With a well-drafted contract between the parties, businesses can now be reassured and more certain that the workers they engage as independent contractors cannot later claim that they are entitled to employment-related payments, such as minimum hourly rates, leave and superannuation.
To keep themselves covered, businesses should:
- Ensure the arrangement is articulated in writing. Whether the person is an employee or a contractor, businesses should have a written agreement in place that sets out the rights and obligations of the parties.
- Revisit and reassess existing contractor arrangements to ensure that the terms of the arrangements are clearly set out.
A well-drafted employment contract is now more important than ever. Learn more with AHRI’s short course, an Introduction to HR Law. Book in for the next course on 22 March.
Aaron Goonrey is a Partner and Emma Lutwyche is a Senior Associate in Lander & Rogers’ Workplace Relations & Safety practice.