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06 Aug 2020

Three's a crowd: Federal Court queries employee/independent contractor distinction and "Odco" labour hire arrangements

By Jennifer Wyborn, Belinda Miller and Ali McMaster

The critical comments made by the Full Bench about labour hire relationships and the multifactorial approach are a strong warning sign that things might change sooner rather than later.

In an interesting decision from the Full Federal Court, the lawfulness of trilateral "Odco" labour hire arrangements have been upheld, though how these relationships are characterised has been questioned by the Bench and the issue has been flagged for further consideration. While no immediate changes are required, companies should tread very carefully when engaging unskilled, entry-level workers under labour hire arrangements, and ensure that whatever terms and conditions are set out in the contract truly reflect the nature of the parties' relationship. 

The importance of ensuring all parties are on the same page about worker status was also recently made clear in another Full Federal Court decision in Jamsek v ZG Operations Australia Pty Ltd [2020] FCAFC 1934 (Jamsek), which found that workers classified as independent contractors for 40 years had actually been employees all along.

If they look like an employee and act like an employee: they are… not an employee?

The recent case of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2020] FCAFC 122 has again highlighted the difficulties faced in classifying workers either as employees or independent contractors, particularly in a "trilateral" labour hire context.

In this case, Mr McCourt, a 22 year old backpacker approached Personnel Contracting Pty Ltd, a labour hire company, looking for work as a builder's labourer. Personnel engaged Mr McCourt as an independent contractor. He was then assigned to work at a construction site run by Hanssen Pty Ltd, under a contract for services between Hanssen and Personnel. No contract existed between Hansenn and Mr McCourt. This set-up reflected what is often referred to as an "Odco" style labour hire arrangement, named after the case that first considered the interaction between employee classifications and trilateral work relationships under such arrangements (Odco Pty Ltd v Building Workers Industrial Union of Australia [1989] FCA 483).

In this matter, the CFMMEU brought a case against Hansenn and Personnel on Mr McCourt's behalf. It alleged that Mr McCourt, who was unskilled, was not running his own business, who had no intention of starting a business, and who worked under direct supervision when he was at work, was not in fact an independent contractor, but was instead a casual employee of Personnel. As such, he was entitled to the rights and benefits that went along with being an employee. Specifically, the CFMMEU alleged Mr McCourt's rates under his contract with Personnel amounted to only 75% of what he would have received if he had been paid under the terms of the relevant modern award.

At first instance, the primary judge determined that Mr McCourt was an independent contractor, not an employee of Personnel. Crucially, notwithstanding many factors which indicated Mr McCourt was an employee, the first instance judgment placed weight on the contract between Personnel and Mr McCourt (which identified Mr McCourt as an independent contractor) as a "tie-breaker" in characterising the relationship. The CFMMEU appealed this decision to the Full Federal Court.

Too many indicia makes things too confusing

The Full Bench was critical of the multifactorial approach developed by the courts to distinguish between an independent contractor and an employee. The multifactorial approach requires an assessment of the totality of the relationship between parties, by reference to particular indicia. Indicia the Court has considered include whether the worker is under the control of the other party in when and how they perform services (an indication they are an employee); whether the worker is skilled and operates their own independent business (an indication they are an independent contractor); and how the relevant contract describes the relationship. However, the Full Bench noted this multifactorial approach has resulted in inconsistent outcomes, with different weight being placed on different indicia on a case by case basis.

What is in a name?

A key issue in this case was the weight placed on the contract between Personnel and Mr McCourt, which clearly referred to him as an independent contractor, and included terms and conditions designed to reinforce this.

On appeal, the Full Bench reflected that careful legal drafting meant that a contract could make a relationship appear the way the dominant contracting party wanted it to appear, regardless of the true nature of the relationship. Combined with the inherent power imbalance present in employment relationships, the Full Bench was critical of the weight given to the contract in determining the true nature of the relationship between parties.

The Full Court also suggested issues with the multifactorial approach extend to the entire process of classifying workers into binary categories of either employee or independent contractor.

In this particular case, the Court observed that Mr McCourt was offered a standard Personnel contract to sign, which was (reasonably) considered by Mr McCourt to be the set terms of his engagement. He was also an unskilled labourer on holidays in Australia from England, and was not presented the contract as a starting point for negotiations. Given these circumstances, the Court reasoned that the contract should not have been given enough weight to act as a tie-breaker in characterising the relationship.

Despite these views, the Full Bench were reluctant to make a binding ruling and overturn the first instance decision. In particular, they felt bound by earlier judgements which had upheld both the structure of Odco relationships involving unskilled workers, and the relative weight which can be placed on a contract under the multifactorial approach.

When the shoe doesn't fit, you still have to wear it

The Full Court also made a number of comments suggesting issues with the multifactorial approach don’t stop at the weight placed on contracts, but extend to the entire process of classifying workers into binary categories of either employee or independent contractor.

Justice Lee in particular suggested that having just two categories of worker may no longer reflect modern working arrangements, instead hinting a third category of worker might be needed. However, the Full Bench again declined to make any significant changes to the state of the law on this point, noting that the issue hadn't been directly raised in the case, and the weight of past case law meant the current binary categories are "too deeply rooted" in Australian law to be pulled out.

So what happened to Mr McCourt?

Ultimately, the Full Bench declined to overturn the primary judgement which had found Mr McCourt was an independent contractor. This was largely driven by a desire to maintain consistency with previous decisions on Odco relationships, in particular a decision on an earlier version of Personnel's contract. The Full Bench acknowledged the labour hire industry relies on consistency in the law and have developed practices around the state of the law, which they were not in a position to change.

What does it all mean?

The impact of this decision is that nothing needs to change in labour hire relationships – for now. However, the critical comments made by the Full Bench about labour hire relationships and the multifactorial approach are a strong warning sign that things might change sooner rather than later. In particular, the strong criticism around the weight placed on contractual terms is a reminder for labour hire companies to take particular care that their practices reflect the terms of their contract (or vice-versa).  It is interesting to consider this case alongside the Court's approach in Jamsek, which held that workers who had a number the formal trappings of independent contracting were nonetheless employees. Whether in a trilateral labour hire relationship or not, careful attention needs to be given to setting up worker engagement properly to reflect the true nature of the relationship, within the available legal categories, as they currently exist.

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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.