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06 Aug 2020

The Full Federal Court raises the bar on genuine independent contractor arrangements

By Oshie Fagir

The Jamsek decision suggests a substantial degree of control will be needed to tip the scale toward a contracting relationship, so many workers currently treated as independent contractors could now be found to be employees.

No change in approach – but the Full Federal Court signals that the degree of independence and control required in a bona fide contracting arrangement is high. If you use independent contractors and haven't conducted a risk assessment recently, now is a good time to take a closer look.

The Federal Court has once again looked at an independent contracting arrangement and found it be, in truth, employment. In Jamsek v ZG Operations Australia Pty Ltd [2020] FCAFC 1934 the Full Federal Court found that two drivers each engaged for 35 years as independent contractors were in fact employees all along. Compensation and penalties are yet to be determined, but it is likely there will be at a minimum 35 years of annual and long service leave owed to each driver.

A greater degree of control and independence needed

The Full Court did not create any new principle or take any different approach. It approached the case on the conventional basis, being "a multi-factorial assessment of the totality of the relationship, as ascertained from the surrounding factual matrix with no one matter being determinative". Even so, the decision has shifted the risk calculus for any business engaging independent contractors, for at least three reasons.

First, the Full Court has seemingly raised the bar in terms of the degree of control and independence required to be a bona fide contractor. The two drivers considered in this case, Mr Jamsek and Mr Whitby, had many of the features of independent contractors. For example:

  • They made a significant investment in their trucks. Between the capital expense of the vehicle and operating costs, the amount could have been six figures annually and millions over the years.
  • They had a significant degree of control over their work. They organised their own work to a significant extent, including by organising their own runs and distributing the deliveries between themselves. Unlike many owner drivers they were free to choose their own truck type without needing the principal's approval.
  • They had the formal trappings of independent contractors. They were party to a series of agreements over the years that described them as contract carriers; were organised as partnerships; remitted GST and claimed input tax credits; and split income with their wives.
  • They could and on at least one occasion did arrange for a substitute driver.
  • They had a fairly significant opportunity to increase (or decrease) profitability, including through their choice of vehicle, run organisation, finance options and so on.

It might be thought that this scenario involved a relatively high degree of financial investment, autonomy and control compared to most independent contractors – but the Full Court did not think so. The Court's view was that the drivers "certainly had no real independence" and "had no real or effective control in respect of the key aspects of the work relationship." This seems to mean that a substantial degree of control will be needed to tip the scale toward a contracting relationship.

Second, Justice Perram (with whom Justice Wigney agreed) emphasised that the drivers' inability to generate goodwill – in the strict sense of business goodwill which is an asset which would be sold – is an important factor. One of the reasons that Justice Perram disagreed with the trial judge is that he did not give enough weight to this issue.

Third, in his separate judgment Justice Wigney emphasised the fact that the contracting arrangement was offered to the drivers on a "take it or leave it" basis. This he thought was relevant to the question of how much weight should be given to the "contractual labels". In his view, seemingly, the drivers' lack of a real alternative to accepting the contracting proposal means the contracts should be given less importance in the weighing up process.

The reality is that many contracts in the world of work are "contracts of adhesion" – contracts that are offered with no real prospect of negotiation. If Justice Wigney's view on this point is generally accepted there may be implications beyond the employee/contractor question and for the enforceability of labour contracts more generally.

Treading the independent contractor / employee line

Most immediately, this case will affect businesses that engage owner drivers, and we look at the full implications here.

Each case will turn on its own facts, and each independent contracting arrangement needs to be considered in its own right. There is no formula to be applied. The reality is however that there are many apparent independent contractors at work who have far less control, less financial investment and less of the formal trappings of independent contracting than Mr Jamsek and Mr Whitby. Few truly negotiate the terms of their contracts. Very few if any have any realistic ability to generate or sell goodwill.

In short – if the Jamsek standard were generally applied (and as a Full Federal Court decision, it will be, barring a High Court challenge), many workers currently treated as independent contractors are likely to be found to be employees.

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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.