Personnel Contracting

The worker, Mr McCourt, was a British backpacker who entered into an Administrative Services Agreement (ASA) with the company, trading as "Construct", that stated he was a “self-employed contractor”.

While Mr McCourt was "labelled" an independent contractor, the ASA also contained various terms that didn’t reflect a ‘usual’ independent contracting relationship. For example, Mr McCourt was provided with equipment (other than clothing) and was required to follow a set pattern of working hours.

Mr McCourt was then assigned by the company to work at its client’s construction sites where he performed general labouring duties under the supervision and direction of the client’s workers.

There was no written contract between Mr McCourt and the client, however, the company had a separate written labour hire agreement with the client.

Proceedings were commenced in the Federal Court by Mr McCourt who sought compensation and penalties on the basis that he was actually an employee of the company for the purposes of the Fair Work Act 2009 (Cth) (FW Act).

The Federal Court applied the multi-factorial approach and disagreed with Mr McCourt, finding that he was in fact an independent contractor. Mr McCourt’s appeal to the Full Federal Court was then dismissed on the same basis.

The High Court came to a different finding. While it acknowledged that Mr McCourt was labelled an independent contractor, it was held that he was not actually carrying on his own business, rather he was required by the ASA to work under the direction of the company or their client. The rights and duties afforded to the parties under the ASA created a relationship akin to employment as the company retained significant control over Mr McCourt under the contractual terms.

Jamsek

Between 1977 and 2017, Mr Jamsek and Mr Whitby were engaged as truck drivers by a business run by the company. The drivers were initially engaged as employees of the company and drove the company's trucks.

In 1985 or 1986, the company offered the drivers the opportunity to "become contractors" and purchase their own trucks. The drivers 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 service.

The drivers sought declarations in respect of entitlements under the FW Act, superannuation and long service leave legislation, on the basis they were employees of the company.

However, the High Court unanimously held Mr Jamsek and Mr Whitby were not employees.

A majority of the Court held that where parties have comprehensively committed the terms of their relationship to a written contract, 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.

The view of the majority rejected the notion that the differential in bargaining power could affect the meaning of what was agreed between the parties.

The decision aligns with last year’s ruling in Workpac v Roassato in relation to casual employment, which also focussed on the primacy of the contract in determining legal rights.

The minority (Gageler and Gleeson JJ) also found that the truck drivers were not employees, based on the totality of the working relationship.

The Contract is Key

While Personnel Contracting and Jamsek resulted in different outcomes, the High Court’s reasoning on both decisions signalled a new approach to how we define employee and independent contractor relationships and marks a substantial shift away from the multi-factorial approach (which was itself established in previous High Court decisions, Stevens v Brodribb Sawmilling Company Proprietary Limited; Gray v Brodribb Sawmilling Company Proprietary Limited (1986) 160 CLR 16 and confirmed in Hollis v Vabu Pty Ltd [2001] HCA 44).

In Personnel Contracting, the High Court 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"

While this does not mean that the indicia of employment and independent contractor relationships which have traditionally underpinned the multi-factorial approach are no longer relevant, they must now be assessed by reference to the terms of the contract (i.e. do the terms of the contract assign rights and obligation in a way that signifies an employment or independent contractor relationship?) and not by conducting a broader review of the post-contractual conduct of the parties or an assessment of how work was performed in practice.

The Courts will still pay particular regard to whether one party has significant control over how the other performs work, with a higher degree of control likely to be indicative of employment. The independence of the parties to the contract, as separate and distinct businesses, will also be key.

How should my business respond?

The High Court’s decisions in Personnel Contracting and Jamsek are good news for organisations and create opportunity for them to engage workers with greater certainty as to their employment or independent contractor status.

In particular, the decision will make it far easier to engage workers as independent contractors without risk of a successful claim for employment entitlements as long as the contracts clearly outline the nature of the legal relationship.

The decision will be welcomed by gig economy businesses whose model relies on contracts that seek to establish independent contractor relationships. This in turn will place greater pressure on the Federal Parliament at some stage to legislate protections in the gig economy.

An effective independent contractor agreement must still assign the rights and obligations of the parties in a manner that is consistent with the characteristics of the intended relationship. For example, simply titling a contract an ‘Independent Contractor Agreement’ will not be sufficient to avoid a finding of employment if the rights and obligations set out in that contract indicate the relationship is one of employment instead, and vice versa.

As a result, we recommend that organisations consider:

1. Auditing their current arrangements with independent contractors to ensure an appropriate written contract is in place for all engagements. In circumstances were independent contractors are engaged without a written contract, the Court will likely have no choice but to apply the multi-factorial test to determine the true nature of the relationship, which could result in a finding of employment, if the status of the relationship is ever challenged;
   
   
2. Reviewing independent contractor agreement templates to ensure they assign rights and responsibilities in a manner that reflects an independent contractor relationship and doesn’t seek to impose requirements or elements of control that more closely align with a relationship of employment;
   
   
3. Updating the independent contractor agreements currently in use to ensure that they do not contain terms that could be interpreted as reflecting employment; and
   
   
4. Ensuring that relationships with third parties are managed in accordance with the terms of the relevant contract. While the Courts will give primary consideration to the terms of the contract when identifying the nature of the relationship, contracts can still be subject to legal challenge if they constitute a sham arrangement or are otherwise implemented in an unlawful manner. Such circumstances could give a Court reason to look behind those terms and assess the relationship in practice. Sham independent contractor arrangements, if proven, can lead to the imposition of penalties for the employing entity (and potentially also for individuals) under the FW Act.

Further information / assistance regarding the issues raised in this article is available from Brian Jackson, Special Counsel (Perth), Elizabeth Radley, Partner (Newcastle), Matthew Parker, Senior Associate (Newcastle) or your usual contact at Moray & Agnew.