High Court finesses the test for employer/contractor relationships - April 2022

ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2

CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1

In February 2022, two decisions were handed down by the High Court which have changed the way courts interpret employer relationships with employees or contractors.

Material facts:

CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1

Personnel Contracting Pty Ltd (‘Construct’) operated as a labour-hire business providing labour to construction clients. Mr McCourt was offered a role by Construct and signed an Administrative Services Agreement (‘ASA’) which described Mr McCourt as a ‘self-employed contractor’. From July to November 2016 he worked at a Hanssen’s site, but did not sign a contract with them despite being under the supervision and direction of the Hanssen supervisors. After completing this project, he commenced work on another Hanssen construction site but in June 2017 was requested by Construct to stop working and was provided with no further work from Construct.

The CFMMEU commenced proceedings seeking compensation and penalties pursuant to the Fair Work Act, 2009 (Cth) on the basis that Mr McCourt was an employee of Construct. The primary judge treated the description of Mr McCourt in the ASA as ‘the Contractor’ decisive of this question and found him not to be an employee but an independent contractor.

The primary judge’s decision was upheld on appeal by the Full Court of the Federal Court of Australia. The Full Court adopted the reasoning in the Western Australian Industrial Appeal Court in Personnel Contracting Pty Ltd v CFMEU (2004) 141 IR 31 in finding that Mr McCourt was an independent contractor.

This was then appealed to the High Court and heard in conjunction with ZG Operations.

ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2

Mr Jamsek and Mr Whitby were initially engaged as employees of ZG Operations and drove trucks provided by the company. The company insisted that it would no longer employ the respondents but would continue to use their services if they purchased their own trucks and became contractors. The respondents agreed to the new arrangement and set up partnerships, purchased the trucks and signed written agreements with the company for the provision of delivery services.

The agreements between the partnerships and the company were terminated in 2017. The respondents commenced proceedings in the Federal Court of Australia seeking declarations in respect of statutory entitlements alleged to be owed to them as employees, pursuant to the Fair Work Act 2009 (Cth) and other leave legislation. The primary judge concluded the respondents were not employees but independent contractors.

The Full Court of the Federal Court held, on appeal, that the respondents were employees. The Full Court focused on the ‘manner in which the parties actually conducted themselves over the decades of their relationship’ looking at the totality of the relationship together with the inequity in the bargaining positions of the parties.

Decision of the High Court:

In CFMMEU v Personnel Contracting, the High Court recommended against the use of the multifactorial approach in determining a person’s status (long used since Hollis v Vabu and Stevens v Brodribb Sawmilling where certain indicia of employment were identified and considered). The elements of the indicia were not to be provided with equal weight. The Court recommended moving towards the test of ‘own business/employer’s business’, which focused attention on the ‘relationship defined by contract’.

The High Court moved towards placing more weight on the validity of the contract, where it is not in dispute, to determine the nature of the relationship. ‘There is no reason why the legal rights and obligations so established should not be decisive of the character of the relationship’ (at [43]). The High Court held that it was a dispute about a ‘legal’ relationship and the common law that required careful consideration of the wording of a contract that was not in dispute by the parties. The majority of the High Court moved towards the approach adopted in WorkPac Pty Ltd v Rossato (2021) 392 ALR 39 (determining casual versus permanent employment) which included significant weight being placed upon the wording of the written contract.

The High Court held that it was more important to distinguish between a labourer conducting his or her own independent business and serving in the business of the employer, as providing a more meaningful framework to guide the characterisation of the relationship between the parties. Construct was found to exercise a great degree of control over Mr McCourt pursuant to the ASA including where he worked, how he was paid and when he was paid. The description of Mr McCourt as a ‘contractor’ in the ASA did not change the nature of the relationship and the rights that flowed therefrom. Mr McCourt’s work was ‘dependent upon, and subservient to, Construct’s business’ and therefore he was found to be an employee.

In ZG Operations, the High Court held that the Full Court devoted too much attention to the manner in which the parties conducted themselves and there was insufficient attention given to the written agreement. The workers were in partnerships. There was no suggestion of sham contracting. The High Court adopted its reasoning in CFMMEU v Personnel Contracting that ‘the character of the relationship between the parties….was to be determined by reference to the rights and duties created by the written agreement which comprehensively regulated that relationship’ (at [8]).

The Full Court’s conclusion the respondents were employees was rejected and the High Court held that the character of the relationship between the parties was to be determined by reference to the rights and duties created by the written agreement.

What does the decision mean for employers?

Although the High Court has stated that it is not moving away from the Hollis v Vabu indica test of employment, there is a clear shift towards a more commercial approach of interpreting ‘employment’ contracts by giving weight to the wording of the agreement itself when applying the ‘own business/employer’s business’ test. This means that the wording of the agreements has been elevated to a crucial criteria considered by the courts when determining the nature of a relationship.

What should you do?

As there is new emphasis on the wording of contracts when determining the nature of the relationship, employers should review all their current contracts to ensure that there is no ambiguity. Clear and unambiguous terms in the contract are required.

Reach out to us if you have any questions regarding the formulation or adaptation of your contracts to fit this new approach.