Employee or Contractor?

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Published by Preston Law on 13/07/2022

The High Court has recently revisited the fundamental principles in relation to the relationship of employer and employee and the relationship of principal and independent contractor. 

Earlier this year, the High Court of Australia delivered two judgements in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMMEU v Personnel Contracting) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (ZG Operations v Jamsek) which both provided a closer look at workers being characterised as contractors or employees.

Interestingly, the Court disregarded the previous approach and adopted a narrower approach focusing on the construction of the parties’ written agreements that were in place at the time.

The Old Approach

Previously, the Courts have looked at the totality of the relationship test. This test required courts and tribunals to consider how a range of factors applied to the relationship between the parties for example:

  1. how much control the business could exercise over how the worker performed their work;
  2. whether the worker could delegate their work to other parties or was required to perform the work themselves;
  3. whether the work provided their own tools and equipment; and
  4. whether the business paid PAYG tax on the worker’s behalf, or whether the worker paid their own tax and paid GST for the services they provided to the business.

This previous position meant that the Courts didn’t focus solely on the written agreement between the parties but the conduct of the parties during the relationship to determine if they were an employee or a contractor.

The New Approach

In these recent decisions, the Courts disregarded this approach and proceeded with a far narrower approach, focusing heavily on the written agreement in place at the time.

The Court held that in circumstances where the parties have committed the terms of their relationship to a complete and valid written contract the determination of the relationship between contractor and employee should depend only on the rights and obligations of the parties under the contract and not on the parties’ conduct or their dealings. 

The Court further indicated there will be occasions where it is necessary to look at the parties’ subsequent conduct and their dealings with each other in determining the nature of their relationship, for example, where:

  • the contract is partly written and partly oral;
  • the parties’ subsequent conduct amounts to a variation or waiver of the original contract;
  • conduct by one or both of the parties amounts to an estoppel; or
  • one of the parties alleges that the written contract is a sham. 

It was also held that the task of a court in determining the nature of the relationship between parties is to construe and characterise the contract between the parties at the time it was entered into and whether or not this has significantly changed from that.  

This new approach provides far greater clarification and certainty for companies engaging contractors. This is because, in almost all circumstances, the terms within the written contract, will be considered to determine if they are an employee or a contractor.

That being said, it also puts more pressure on employers to ensure that their written agreements and contracts are very clear as if the written contract does not reflect how the parties actually conduct themselves then it may be arguable that the contract has been varied by both parties and the original contract was a shame or that the contracted has changed to contain other oral terms.

Employers need to ensure that their independent contractor agreements are carefully drafted to reflect a broad range of factors indicating a genuine contractor relationship. Including important terms such as the control by the contractor of how, where and when work will be performed and that the contractor performing the work is a part of an independent enterprise rather than in a manner which is subordinate to the employer’s business. It is important to note that simply applying the label of contractor is not sufficient to give rise to the relationship, the contract must include all the necessary terms.

These new High Court decisions have a large impact on employment law and encourages employers to look closely at their existing contractor and employee agreements to see that they are fit for the purpose that they were originally intended for.  

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