The terms of the contract are decisive of the employee/contractor issue – with some provisos, says High Court

11 Feb 2022

Businesses should ensure that any independent contracting arrangements are based on formal and comprehensive written contracts, following two decisions in the High Court. They should also ensure that the terms of the contract are actually followed in practice, in order to avoid arguments that the arrangement is a sham or that the written contract has been varied (Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2).

Employment vs independent contracting

For over a century, businesses, workers and the courts have struggled to identify the dividing line between employment and independent contracting relationships. Different approaches have been adopted at different times, with the "control test", "multi-factorial test" and "entrepreneurial activity" test all in vogue at different times. Those various tests, although labelled differently, had one thing in common: they required an evaluative judgment of the work arrangement based on a consideration of the "totality of the relationship".

The courts have conventionally assessed the "totality of the relationship" by considering (among other things) the way work was actually performed in practice. On this approach, the terms of the parties' formal contract or agreement were relevant, but were only one factor to be considered. In some cases the actual terms of the contract were treated as a relatively minor consideration, especially where the contract was drafted by the business and offered on a take-it-or-leave-it basis.

That traditional approach was applied in the Jamsek and Personnel Contracting cases in the Federal Court.

Jamsek considered the position of two drivers contracted to a lighting business. The trial judge considered evidence of the way work had been done over many years, and concluded that the drivers were independent contractors. On appeal the Full Court considered the same matters, but reached the opposite conclusion on the facts. Despite their disagreement on the outcome, both the trial judge and appeal court approached the question in the same way: by considering "the totality of the relationship", including evidence of the way work had been done over many years.

Personnel Contracting involved a backpacker who worked as a builder's labourer under a tripartite "Odco" type of arrangement. Similarly to Jamsek, both the trial judge and the Full Court approached the employee/contract question by considering detailed evidence about the way work was done in practice, treating the parties' contract as one factor in the analysis. In this case both the trial judge and Full Court found that the relevant worker was a contractor rather than an employee.

The High Court's decisions

The decision in each case was appealed to the High Court. Both appeals were upheld unanimously (although there were important differences between some of the judgments).

Importantly, the majority of the High Court rejected not only the Federal Court's conclusions on the facts, but also the underlying analytical approach. The majority held that, in these particular cases, the inquiry was limited to the terms of the written contracts, and that it was wrong to look beyond the terms of the contract to "post-contractual conduct" – that is, to the way the work was actually done over the period after the formal contract was made. In effect the majority held that the extensive evidence about the "reality of the work" was irrelevant and should not have been considered.

Importantly, the majority noted that both cases were argued on the basis that the written contracts were correct and comprehensive statements of the parties' rights and obligations. It was not suggested that the contracts were not observed in practice, or that the reality of the work was inconsistent with the contracts. In technical terms, it was not argued that the contracts were a sham or – importantly – that the written contracts had been varied by conduct. It was in that particular context that the majority held that the terms of the written contracts should have been the sole focus of the analysis.

Applying that approach, the majority found that the terms of the written contracts in Jamsek established an independent contracting relationship. The two majority judgments emphasised various aspects of the arrangement, including that:

  • the workers provided their own trucks;
  • the company had specifically set out to move away from an employment model; and
  • the contracts were with partnerships rather than the individual drivers.

The majority also rejected the Federal Court's suggestion that the superior bargaining power of the business was relevant to the contractual analysis.

In Personnel, on the other hand, the majority concluded that the terms of the written contract established an employment relationship, despite the fact that the parties had in their contracts labelled the worker as a contractor. The majority emphasised that it was the actual rights and obligations established under the contract which were relevant to the analysis. The mere fact that the parties had agreed to label the relationship one way or another was not particularly important, and the label as "employee" or "contractor" was a question for the court. Given the contract provided for the labour hire business to control all aspects of the labourer's work, the majority concluded that he was an employee.

Justices Gageler and Gleeson agreed with the majority's conclusions but disagreed with their approach. Their Honours said that what was is being considered is not simply the employment contract but the employment relationship, of which the employment contract is just one feature. They concluded that the traditional approach adopted by the lower courts was correct, and that the courts are not limited to examining the terms of the contract (or any later variation) in order to assess the status of the work relationship – even where there is a written contract.

Clarity for employers on superannuation obligations

The decisions in Jamsek and Personnel Contracting also provide some clarity on superannuation obligations by clarifying the employee/contractor demarcation at common law. The High Court decision did not however address the meaning of the extended definition of "employee" under the Superannuation Guarantee (Administration) Act 1992, which provides that a person is an employee for superannuation purposes if the person "works under a contract that is wholly or principally for the labour of the person".

Although the issue was before the High Court, the Court declined to deal with it, noting that any decision would have very serious implications for revenue and that the Commissioner of Taxation did not appear in the proceeding. The Court remitted the issue to the Federal Court in the expectation that the Commissioner would be joined to that proceeding.

The High Court's decisions also provide considerable support for the ATO's existing view as expressed in SGR 2005/1: where an individual performs work for another party through an entity such as a company or trust, there is no employer-employee relationship for the purposes of the Superannuation Guarantee (Administration) Act. 

Drawing a line between independent contractors and employees in your business

It is tempting to say in light of the majority judgements that the written contract is now the beginning and end of the employee/contractor analysis.

Certainly the written contract is now at the centre of the analysis. However it is important to recognise that the majority's conclusions were reached in the context of comprehensive written contracts, with no suggestion that the contracts were not observed or that the terms of the parties' agreements had changed. It was in that particular context that the Court held that the terms of the contracts were conclusive as to status.

The judgments leave open the question of the analysis to be applied where written contracts are incomplete or ambiguous, or where it is argued that the parties have operated inconsistently with the written terms of their contract. As Justice Gordon pointed out in Personnel, there are many scenarios in which post-contractual conduct (AKA the reality of the way the work has been performed) becomes relevant.

It can be expected that future cases will be constructed differently, and applicants disputing contractor status will argue that their written contracts are a sham, are incomplete, or that the terms of the contract have been varied by conduct.

That being the case, and in order to take advantage of the certainty potentially provided by the Jamsek and Personnel Contracting decisions, businesses should make sure that:

  • any independent contracting arrangements are based on formal and comprehensive written contracts;
  • the terms of the contracts are actually followed in practice; and
  • any change in working arrangements or practices are formalised in a fresh contract or written variation.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.