Engaging Contractors – High Court’s Refreshing Clarity

The High Court of Australia has recently made two key decisions in the following cases regarding workplace agreements:

• ZG Operations Australia Pty Ltd v Jamsek[2022] HCA 2 (Jamsek); and
• Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd[2022] HCA 1 (Personnel Contracting).

These decisions are a significant change from previous judgements involving the assessment of whether workers have been correctly engaged as employees or contractors. The High Court decided that the terms of the agreement are paramount and, unless there is evidence of a sham arrangement, it is not necessary to also examine the operation of the agreement after it has been signed.

The Decisions

In the Jamsek decision, two truck driving contractors had previously been employees.  They had agreed with the employer to end their employment contracts and to sign new independent contractor agreements.  The agreement required the contractors to use their own trucks and to establish their own partnerships entity to continue to provide services.

The High Court held that, unlike previous decisions, it was not necessary to assess the totality of the relationship to determine its true “substance and reality”. Instead, the High Court held that the correct classification of the relationship was comprehensively dealt with in their agreement and it was not necessary to look beyond that.

In the Personnel Contracting decision, the individual was engaged by a labour hire company to work as an unskilled labourer for a building company as a contractor and not as an employee.

The High Court determined that the agreement between the parties incorrectly classified the individual as an independent contractor. However, the terms of the agreement required the individual to be subject to significant controls which were not consistent with being an independent contractor.  As a result, the High Court held that the individual had been engaged as an employee in the agreement, despite the “independent contractor” label which had been applied to him.

Previous Multi-Factor Test

Determining whether an individual has been engaged as an employee or as an independent contractor is a complex issue and has been the subject of many court decisions.  Previously, courts have used an expansive approach and have applied a “multi-factor” test in determining the true “substance and reality” of the totality of the relationship between the parties.

The factors considered as part of this test have included the following:

• the degree of control over the individual;
• the intention of the parties;

• the extent of the required integration of the individual into the business (such as wearing uniforms, using business cards, promotion of the individual as being part of the business on its website);

• the terms of any written agreement;
• whether the individual has their own separate business, operating entity and ABN;
• whether the individual can provide services to other businesses;
• whether the individual can delegate or refuse work;
• whether the individual has their own tools of trade;
• whether the individual has any financial risk or liability;
• whether the individual receives any paid leave entitlements or other work allowances; and
• the tax and superannuation obligation of the parties.

The High Court has stated that the future use of this multi-factor test will be very limited due to the uncertainty which is caused.  Instead, where there is a clear written agreement in place, consideration should be of its terms and not of its actual operation in practice.

Required Action

As a result of these decisions, business operators who engage employees and contractors should attend to the following:

1. ensure they have a written agreement for each engagement;
2. review the terms of their agreements (including all precedents and pro-forma templates) to ensure that they clearly set out all of the required rights and obligations of the parties;
3. ensure that the classification of the individual as an employee or independent contractor is supported by the terms of the agreement; and
4. consider whether it is necessary to remove any inconsistent terms, phrases or classifications, such as the individual being subject to significant controls in an independent contractor’s agreement.

As this process is complex and the consequences are significant, we are happy to assist with reviewing your arrangements if required.  Please contact us by telephoning our office on (07) 3220 2929 or emailing us at contact@plastiraslawyers.com.