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High Court resets approach to distinguishing employees from contractors

Charles Power – Workplace Bulletin17th February, 2022

The Fair Work Act 2006 (Cth) (FW Act) creates a range of rights, obligations and liabilities, the vast bulk of which attach to employment relationships. However, the FW Act doesn’t define employment; this is left to the common law. 

If you get it wrong – if you treat an employee as a contractor and therefore outside the FW Act – you face significant exposure to claims for underpayment of wages and other entitlements down the track, usually when the relationship is ended. Plus, you might be prosecuted under the sham contracting provisions of the FW Act. 

Determining who is an employee 

The common law hasn’t made it easy to work out who is an employee. Over the past 30 years, courts and tribunals have developed a kind of ‘checklist approach’, for which you run through various indicia relating to aspects of the relationship. When, as is inevitable in most cases, this doesn’t produce a conclusive outcome, you must ask the ultimate question: Is the worker providing services as part of the business of the putative employer or are they providing services in the course of carrying on their own business?

The difficulty with the checklist approach is that it doesn’t provide any guidance on the weight to be given to various factors, which will vary in each case. Also, the assessment to be made on whether each factor exists will vary between people. Some of the factors can only be assessed with knowledge of the internal operations of the putative contractor or after the agreement has been in operation. 

More certainty for businesses engaging contractors

Last week, the High Court determined two appeals from the Full Federal Court in cases where workers challenged their legal status as contractors, arguing that they were in fact employees. The decisions in these cases provide more certainty for those engaging independent contractors. 

The key judgement is CFMMEU v Personnel Contracting (2022). The case concerned a labour hire company that supplied a worker to a builder. The agreement between the worker and the labour hire company labelled the employee a ‘self-employed’ contractor. The agreement required the employee to attend the company’s customer’s premises at nominated times and work as directed by the customer.

The High Court agreed unanimously that the worker was an employee of the labour hire company because of the company’s right to control the provision of the worker’s labour. 

Criticism of the ‘checklist approach’

The joint reasons of Chief Justice Kiefel CJ and Justices Keane and Edelman in CFMMEU v Personnel Contracting (2022) criticised the checklist approach, describing it as impressionistic, amorphous and leading to uncertainty. They ruled you should focus on the ultimate question and ask whether the work of the worker is so subordinated to the business of the putative principal as to mean the worker is in fact performing work for the principal’s business as an employee rather than providing their services from their own independent business as a contractor.

In asking this question, you should not be distracted by evidence of how the contract is performed, nor assessments on the substance or practical reality of the relationship. Instead focus on the terms and conditions of the contract, and the rights and obligations they create. In situations where there is a comprehensive written agreement entered into by the parties to govern a legal relationship, look to that document to resolve the legal status of the relationship, rather than be diverted by expectations or requirements that might arise or be imposed during the relationship.

Considering what happens after the contract is entered into 

The Court did recognise circumstances in which you might consider what happens after the contract is entered into, such as to resolve disputes about whether:

the written document does not embody the entire agreement and other terms might be implied or inferred by conduct or course of dealing;

the contract is a sham in that it is entered by both parties with intent to disguise an employment relationship;

the contract has been varied by subsequent conduct of the parties;

subsequent conduct amounts to a waiver or estoppel; or

there is an application for relief under the unfair contracts regime created by the Independent Contractor’s Act 2006 (Cth).

Taking the road to contractor 

In the other decision, ZG Operations Australia v Jamsek (2022), two truck drivers worked for one company for nearly 40 years. For the first 8 years, they worked as employees. 

At the request of the company (and with the threat of redundancy), the drivers set up partnerships and signed respective independent contractor agreements between the company and the partnerships. They also purchased the company’s truck, which they used in providing delivery services for the company. They worked full-time hours and their partnership invoiced the company for their services.

The High Court agreed unanimously that the drivers were not employees of the company because of the contract between the company and the partnership and the use of a valuable item of equipment in providing the services (i.e. the truck), which was owned by the partnership.