Employee or Independent Contractor?
Employers often like to use independent contractors to avoid expenses associated with employees such a taxes, insurance, and employee entitlements. However, unless the terms of the agreement between the parties properly reflect a principal/contractor relationship, there is a risk that the worker will be considered an employee at law.
When determining whether a working relationship is either principal/contractor or employer/employee, the established position is that courts will look to the totality of the relationship between the parties. It is not enough to merely express an intention to engage a worker as an independent contractor. Instead, the court will have regard the rights and obligations of the parties as they are expressed in the written contract. The terms of any written contract will act as the starting point for establishing the character of the relationship, however the contract is not definitive and can be varied as a result of the parties’ conduct.
Two recent rulings from the High Court of Australia (Court) regarding the common law distinction between an employee and contractor have reaffirmed this position.
ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2
Here, the Court decided that two truck drivers engaged by ZG Operations Pty Ltd (the Company) for more than 30 years were not employees, but rather genuine independent contractors as was consistent with the terms of their contracts.
The men had entered into respective written contracts with the Company for the provision of delivery services which characterised them as independent contractors. The men’s working relationship with the Company was as follows:
Whilst the men only delivered goods for the Company, their contracts did not restrict them from performing delivery services for other customers if they wished.
The men were supplied with uniforms bearing the Company’s logo, though they were not required to wear a uniform.
At various times, the men were asked to install tarpaulins bearing the Company’s logo on their trucks.
On occasions, the men were asked to perform tasks beyond their core delivery duties, such as cleaning up behind the warehouse.
In their decision, the Court emphasised the written terms of the contract, rather than the substance and reality of the men’s daily work routine. The Court held that where parties have comprehensively committed the terms of their relationship to a written contract and the efficacy of that contract is not challenged, the characterisation of their relationship, be it employment or otherwise, will be by reference to the rights and obligations of the parties under that contract.
Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1
This case concerned a labour-hire company (Construct) which engaged the services of Mr McCourt by a written Administrative Services Agreement (ASA). By the ASA, McCourt was described as a “self-employed contractor”. Notwithstanding this, McCourt performed labouring services on Construct’s site, was paid by the hour and was, at all times, under the direction and supervision of Construct. Under the ASA, Construct controlled who McCourt worked for and how he performed that work.
Having primary regard to the terms of the ASA, the HCA held that Construct was an employer and McCourt was its employee. Importantly, Construct’s right to control McCourt was a key asset to its business and McCourt was not, in any meaningful sense, in business for himself. The fact that the parties chose the label “contractor” to describe McCourt did not change the character of the relationship which was properly one of employer/employee under the ASA.
The Impact
Both decisions have reaffirmed the primacy of contractual terms in determining the relationship between contracting parties. Designating an individual as a ‘contractor’ will not be enough if the terms of that contract do not reflect a true principal/contractor relationship.
However, the judgments have not disturbed the well-established practice of examining the totality of the relationship. In this respect, only where the contract is a clear, accurate and accepted record of the agreement between the parties will it be determinative of the character of the relationship.
Thus, there is an inherent risk for employer/principal parties who fail to ensure that their contractual terms properly reflect their intended relationship with worker parties. In circumstances where an employer/principal contracts with an individual who is found to be an employee, the employer/principal will be liable to repay to that employee any entitlements dating back to when it first contracted with them. In addition, penalties for sham contracting may apply.
How can we help you?
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