Independent’s day – the next chapter in independent contracting

This decision attracted a significant amount of interest and provided some much-needed clarity in ensuring the primary importance of contractual terms in defining the scope and nature of a particular work-related engagement.

However, contrary to some commentary that followed the decisions of the High Court, the old common law ‘multi-factorial’ test has not been totally disregarded, but the High Court has clarified and limited the circumstances in which it is to be applied.

The detailed consideration provided in the respective decisions has been analysed and applied in Court and Tribunal decisions that followed through 2022 where, in certain factual scenarios, different outcomes have arisen in contested disputes over employee/contractor status as compared to what would otherwise have been determined prior to the High Court’s rulings.

Further proposed legislative reform, as well as certain aspects of the recent Secure Jobs, Better Pay amendments to the Fair Work Act 2009 (Cth) (FW Act) may also see an increase in the prevalence of independent contracting arrangements.

Personnel Contracting & Jamsek – the biggest thing since…

The High Court decisions handed down in February 2022 in the cases of Personnel Contracting[1] and Jamsek[2] represented the most significant change in Australian contract law – as it relates to the determination of working relationships as either principal/contractor or employer/employee – at least since the landmark High Court decision in Hollis v Vabu in 2001.

Whilse the factual background in each respective decision was quite distinct, and the succession of decisions in the lower Courts took the range of legal arguments in various directions, the key fundamental change in the Personnel Contracting and Jamsek decisions was to reinforce the primacy of clear, unambiguous written contractual terms in defining the nature of the relationship as opposed to the conduct of the parties over time.

Prior to the Personnel Contracting and Jamsek decisions, the primary consideration given by Courts and Tribunals in any contested matter where the nature of the relationship was in dispute was to apply the ‘multi-factorial’ test to determine whether a worker was an employee or an independent contractor. This involved a detailed and often inherently subjective analysis of various indicia of employment or contracting, with a key consideration being control of the way work is performed, as well as an overall consideration of the way the relationship between the parties operated in practice[3]. While written contractual terms were relevant to the consideration, the terms of the contract itself, even where unambiguous and agreed in good faith between the parties, often took a back seat in the analysis of Courts and Tribunals.

The High Court has confirmed that the primary consideration of whether a person is an employee, where the relations between those persons are the subject of a comprehensive written contract the validity of which is not in dispute, is to be conducted by reference to the rights and obligations of the parties under that contract.

This line of reasoning continued the theme from other recent landmark High Court decisions such as WorkPac v Rossato[4], where the Court has reinforced that an expansive approach in placing undue importance on factors outside of the boundaries of the contract itself involves an unjustified departure from orthodox contractual analysis.

Jamsek – an overview

In Jamsek, two truck drivers engaged by a business, ZG Operations Australia Pty Ltd (ZG), over nearly 40 years in total, asserted that they were employees of ZG and sought back-pay of various employment entitlements.

The drivers were originally engaged by ZG as employees in 1977, before ZG informed the drivers in around 1985 – 1986 that 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 no room for negotiation in the formation of the contract – the drivers 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 their work was done for ZG; and
• 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.

In three separate judgments, all of which allowed ZG’s appeal and found that the drivers were independent contractors, the High Court variously held that:

• the FCFCA was in error by focusing too much attention on 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;
• 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; and
• the drivers’ contracting entities were genuine partnerships.

Personnel Contracting – an overview

Personnel Contracting involved a contract between Mr Daniel McCourt, a British backpacker on a working holiday, and labour-hire company, Personnel Contracting Pty Ltd trading as Construct.

Under the terms of the contract, Mr McCourt was engaged as a contractor to supply labour and was subsequently offered work on a building site with a host company, Hanssen Pty Ltd. Mr McCourt was engaged subject to what is generally referred to as a tripartite ‘Odco’ arrangement, where Construct had an agreement with Hanssen to supply workers to its building sites, but there was no agreement between Hanssen and Mr McCourt.

Mr McCourt sought compensation from Construct for contraventions of the FW Act and breaches of the relevant award, arguing that he had in fact been an employee of Construct.

At first instance, the Federal Court considered various indicia, such as:

• the degree of control Construct had over Mr McCourt’s work;
• whether Mr McCourt was running his own business;
• his mode of remuneration;
• whether he provided his own tools and equipment; and
• whether he was integrated into Construct’s business, among other things.

The Court found that, on balance, the indicia pointed in different directions and could not determine the issue. In such circumstances, where the parties were acting honestly and there was no suggestion the contract was a sham, significant focus was placed on the intention of the parties and how they characterised their relationship. It was held that Mr McCourt was an independent contractor, as it was clear from the contract that the parties intended for him to be engaged as such.

This decision was upheld on appeal to the FCFCA which acknowledged various limitations with the multi-factorial approach, especially in its application to Odco-style arrangements.

On appeal to the High Court, six of the seven judges overturned the FCFCA’s decision and held that Mr McCourt was an employee of Construct at common law.

The High Court held that:

• where a contract is entirely in writing and there is no suggestion it is a sham, it is the rights and obligations under the terms of the contract that are decisive of the character of the relationship;
• it is not appropriate to review the history of the dealings between the parties or any subsequent conduct unless it is argued that such conduct has varied the terms of the agreement, or gives rise to an estoppel or waiver;
• while the assessment of the totality of the relationship is carried out by reference to the legal rights and obligations provided for in the contract and does not require consideration of the subsequent conduct of the parties. Nevertheless, recourse may be had to events, circumstances and things external to the contract which are objective, known to the parties at the time of contracting, and which assist in identifying the purpose or object of the contract; and
• the label chosen by the parties for the relationship is not determinative.

The Court noted that Construct had the right to fix Mr McCourt’s remuneration, was responsible for paying him and could terminate the contract if he failed to obey Construct or Hanssen’s directions.

Given these features, it was clear that Mr McCourt was not running a business of his own and had no discretion as to how he carried out the work.

Has the state of play really changed that much?

The significance of the High Court’s decisions is that having a clear, detailed written contract between the parties is vital and will be the primary source of reference for interpreting the status and rights of the parties in the event of any dispute.

Where the relationship is accurately described in a written contract, the spectre of some of the previous ‘sacred cows’ of the multi-indicia test, such as the exclusivity of service, regularity of scheduled work, use of equipment, wearing company uniforms/logos etc. will have less impact and effect on any determination of the relationship.

What is also evident is that the contract must also be a genuine reflection and accurate statement of the relationship between the parties, otherwise, the risk arises of a similar result to that in Personnel Contracting, and in certain circumstances, any arrangement that mischaracterises an employment relationship as a contractor relationship may also run the risk of contravening the sham contracting prohibitions in the FW Act.

However, the High Court decisions have not resulted in an abandonment of the indicia approach when examining the totality of the relationship and reinforced the focus on the importance of the element of control of the work being performed.

Where a contract is partly or entirely oral and the nature of the relationship is ambiguous, the subsequent conduct and manner of performance of the agreement will be analysed to determine the nature of the relationship between the parties and the multi-factorial test will have a significant role to play[5].

The High Court decisions have been applied in several circumstances in decided cases in the Federal Courts and the Fair Work Commission (FWC), including such scenarios as:

• A contractor who was engaged (via a Pty Ltd entity) by a construction company over an extended period subject only to an oral agreement was unsuccessful in a claim for redundancy pay, long service leave, and superannuation contributions (as well as pecuniary penalties for contraventions of the FW Act)[6].
• A truck driver who owned a truck and was operating as a company (of which he was the sole shareholder and director) that was engaged for the provision of carrier services by a construction materials company was not found to be an employee of the construction company[7].
• A food delivery rider providing delivery services via an app-based platform (Deliveroo) as a contractor subject to a detailed written ‘supplier agreement’ was held to be a contractor and not an employee – even though the FWC noted that the individual would have been classified as an employee as the law stood before the Personnel Contracting and Jamsek[8] decisions.

While all decisions above referenced either Personnel Contracting and Jamsek in their reasoning, out of the factual scenarios in the cases noted above, it is only the decision noted at (c) that unequivocally turned in favour of the putative employer/principal defending the claim because of the High Court decisions.

The superannuation question  

A further issue that was not completely resolved in the High Court decisions was the issue of whether the workers in question would be entitled to superannuation payments as deemed employees as a person who “works under a contract that is wholly or principally for the labour of the person” in accordance with superannuation guarantee legislation[9].

Of course, in Personnel Contracting, as the High Court concluded that the worker was a common law employee it was clear that there was an entitlement to superannuation. However, in Jamsek the High Court held that the workers were not employees. Given that the Commissioner of Taxation was not a party to the proceedings in Jamsek, the High Court declined to rule on the scope of subsection 12(3).

The question has been addressed to a significant extent in the Federal Court decision of JMC[10] in June 2022. JMC provides higher education programmes within the creative industries sector. It engaged Mr Harrison, a qualified sound engineer/technician to provide JMC with teaching services. Those teaching services involved delivering lectures to JMC’s students and marking student examinations or assignments. The terms on which Mr Harrison was engaged by JMC were detailed in a written contract, including:

• JMC would pay Mr Harrison an hourly rate for delivering lectures and marking exams;
• Mr Harrison was required to submit invoices to JMC, accompanied by time sheets and signed weekly lesson plans; and
• JMC had a degree of oversight and control over Mr Harrison, including when, how, and where he was to provide the teaching services.

JMC did not make any superannuation contributions in respect of Mr Harrison on the basis that he was an independent contractor rather than an employee of JMC.

The Commissioner of Taxation had ruled that Mr Harrison was an employee for whom JMC was liable to make superannuation contributions, under the ordinary meaning of the term and the extended definition under s 12(3) of the SGAA, which JMC challenged in the Federal Court.

In dismissing JMC’s application, the Court noted that while Personnel Contracting and Jamsek confirmed that the indicia should not be considered as a checklist exercise, it was still useful to analyse contractual rights and obligations as some degree of uncertainty is unavoidable, particularly in the case of many modern-day work or service contracts.

Considering the above, the Court found that:

• Mr Harrison was paid principally (but not wholly) at an hourly rate for his labour, being the delivery of lectures and marked assessments;
• although Mr Harrison had limited rights to sub-contract or assign, this did not preclude a finding that the contracts were principally for labour as the contracts properly construed required him to personally provide his labour to provide the teaching service; and
• he was paid hourly for any work performed, not paid to achieve a result.

Future developments for independent contracting

In addition to the clarity provided by the High Court in Personnel Contracting and Jamsek, several other recent and emerging developments may influence the rate of take-up of independent contracting arrangements, including but not limited to the following:

• New legislation proposed by the current Australian Government to provide significant protection against unfair contract terms and related practices for small businesses and individuals in the proposed Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth), to prohibit contract terms that are heavily one-sided and provide for one party to unilaterally vary prices, payments, renewal terms, or terminate the contract.
• The ever-expanding scope and reach of Award coverage – particularly the Miscellaneous Award 2020 – increasingly prescriptive Award terms, and the significant expansion of traditional permanent employment entitlements conferred on casual employees provide even further incentive for certain types of work/industries to shift from an employment model to a contracting model to achieve workable and flexible engagement arrangements.
• The recent Secure Jobs, Better Pay amendments to the FW Act have introduced strict limits on fixed-term employment contracts (for a maximum of two years), which may see a shift towards independent contractor models of engagement where a specified term arrangement is desired.
• Similarly, the new pay secrecy prohibitions applicable to employment contracts introduced by the recent Secure Jobs, Better Pay amendments may also see a move to independent contracting arrangements where there is a desire for payment arrangements and related terms to remain confidential.

[1] Construction, Forestry, Maritime, Mining And Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting)

[2] ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek)

[3] Rod Marshall, Sham Contracting: A New Era of Exploitation or Just More Regulation?, Workplace Relations Review (2018), p 32-34.

[4] WorkPac Pty Ltd v Rossato [2021] HCA 23

[5] Pruessner v Caelli Constructions (Vic) Pty Ltd (No 2) [2022] FedCFamC2G 697 at [57]

[6] Pruessner v Caelli Constructions Pty Ltd [2022] FedCFamC2G 206

[7] Selim De Borzatti v Hanson Construction Materials Pty Ltd [2022] FWC 2693 (6 October 2022)

[8] Deliveroo Australia Pty Ltd v Diego Franco [2022] FWCFB 156

[9] Superannuation Guarantee (Administration) Act 1992 (Cth), s 12(3) (SGAA); Superannuation Guarantee Ruling 2005/1

[10] JMC Pty Limited v Commissioner of Taxation [2022] FCA 750 (JMC)

About our author

Rod Marshall is a Partner and Solicitor with Citation Legal and is an accredited specialist in workplace and employment law. Based in our Sydney office, he has extensive experience in a wide range of industrial and employment-related issues, both as an advisor and as an advocate. He has particular experience in advising clients operating in the hospitality and leisure, manufacturing and transport sectors.