High Court holds contract is king in deciding employee–contractor relationship

Is it a contract of service or a contract for services?

In its first two judgments of 2022, the High Court has provided welcome clarification in the independent contractor vs employee debate, by redirecting the test back towards the interpretation of the terms of the employment contract and away from a multi-factorial analysis of post-contractual conduct.

Key takeaways 

• The starting point for assessing whether a relationship is one of employee and employer or principal and independent contractor is the terms of the written contract; and, more specifically, whether the parties' express rights and obligations under it indicate that the worker is an employee or an independent contractor.
• Importantly, how the parties describe the relationship in the written contract will rarely have any relevance to determining its true legal character.
• Post-contractual conduct is unlikely to be relevant to the assessment – unless the contract is incomplete, or there is an allegation that the contract is a sham or has been varied by subsequent conduct.
• Companies should carefully review their contracts with independent contractors to ensure that the terms accurately, and comprehensively, reflect the parties' intended relationship.

Background

On 9 February 2022, the High Court delivered two decisions¹ concerning the characterisation of independent contractors and employees, both of which were appeals from the Full Court of the Federal Court (the FCAFC).

(a) Personnel Contracting

The Personnel Contracting appeal was brought by the Construction, Forestry, Maritime, Mining and Energy Union on behalf of a labourer who was engaged on a written contract by a labour-hire company.

The labourer, a 22-year-old backpacker with minimal prior experience, entered into a contract with the labour-hire company, which described him as a 'self-employed contractor'. Under the contract, which afforded the labour-hire company a complex set of rights and obligations, the labourer was allocated work on construction sites run by a host builder, with which the labour-hire company had an agreement. Although the labourer was required to perform tasks assigned by the host builder, there was no contractual relationship between him and the host builder. These trilateral labour-hire agreements have colloquially been known as 'Odco' arrangements, after the decision of Odco Pty Ltd v Building Workers’ Industrial Union of Australia.²

After undertaking a 'multifactorial' assessment of the relationship between the parties, the FCAFC considered that the labourer's manner of work resembled casual employment, in that he was paid by the hour, exercised no independent discretion and operated no business of his own. However, applying previous authorities interpreting similar, factually analogous Odco-style arrangements, the FCAFC felt bound to find that the labourer was an independent contractor. Nevertheless, the FCAFC made it very clear that had it not felt bound to follow these previous authorities, it would have found the labourer to be an employee.

(b) Jamsek

The Jamsek appeal was brought by a transport company, in relation to two truck drivers who were initially engaged as employees but subsequently engaged as independent contractors.

After agreeing with the transport company to 'become contractors', the two drivers had set up partnerships with their wives, purchased their trucks from the transport company and signed new written contracts with the company for the provision of services. The partnerships generally paid all expenses associated with the trucks, which were claimed as deductions for tax purposes. The income from the work performed by the drivers was declared as the income of each partnership, and generally split evenly between the husband and wife. Although the drivers were free to serve other customers under the terms of the contract, in practice this did not occur.

After considering the 'totality of the relationship' between the parties, and, in particular, the day-to-day control exercised by the transport company over the drivers and the practical exclusivity of the work, the FCAFC found that the drivers were employees of the transport company. It also considered the negotiation in which the drivers agreed to become contractors and found evidence that showed they had very little bargaining power in the process. The FCAFC held that this disparity in bargaining power affected the contract, which added to the 'reality' of the relationship between the company and each driver being one of employment.

Previous approach

Before the High Court's judgments, it was common practice to approach the question of whether a worker was an employee or independent contractor by applying the 'multifactorial' approach that had been developed by lower courts following the High Court's decisions in Stevens v Brodribb Sawmilling³ and Hollis v Vabu Pty Ltd.⁴ This approach broadly involved an assessment of the totality of the relationship between the parties, by reference to various factors indicating whether the worker was an employee or contractor, including factors assessed after the formation of the contract. For an example of the application of the multi-factorial approach, see our previous Insight. 

The High Court's decisions

The majority of the High Court held that where there is a comprehensive, written contract and no allegations of sham or variation, the parties' rights and obligations under it will determine whether a worker is an employee or independent contractor. Generally, it will not be necessary to consider how the terms operated in practice.

The key issue for consideration is whether the terms reflect a contract of service or a contract for services (ie an independent contracting arrangement) – or, put another way, whether the worker is carrying out activities for the employer's business or for their own business. If the terms of the contract support the former characterisation, the relationship is likely to be one of employee and employer.

Applying this reasoning to Personnel Contracting and Jamsek, the majority of the High Court found that:

• the labourer in Personnel Contracting was an employee, primarily because of the labour-hire company's high level of control over how, when and for whom he performed the work. The court considered that the labour-hire company held a right of control over the labourer that was fundamental to its business as a labour-hire agency, which was not compatible with the labourer carrying out a business on his own account as an independent contractor. Accordingly, it found that the labourer was an employee of the labour-hire company, notwithstanding that the label the parties had chosen for the relationship was 'contractor'; and
• the truck drivers in Jamsek were independent contractors, mainly due to the contractual obligation for them to provide, operate and maintain their own trucks to carry the transport company's goods, and be responsible for all expenses associated with the trucks. The High Court considered that this was a clear indicator the contract was one focused on the provision of services, rather than one of service. The transport company's superior bargaining power was not relevant to the characterisation of the relationship as one of principal and contractor.

Although the High Court in Personnel Contracting was somewhat divided on whether post-contractual conduct is relevant in assessing when a worker is an employee or an independent contractor, what employers can take from the judgment is that post-contractual conduct will likely only need to be taken into account if the parties do not have a comprehensive written agreement. Where there is a comprehensive written agreement, and there are no allegations the agreement is a sham or otherwise ineffective, post-contractual conduct is likely to have limited (if any) relevance in determining the nature of the relationship.

What's next?

While acknowledging that many companies will have relied on these decisions in arranging their affairs, the High Court has shed doubt on the ongoing validity of the Odco line of authorities, with the majority in Personnel Contracting suggesting that these decisions erred in placing such significance on the parties' description of the relationship. Accordingly, companies engaging in Odco-style arrangements should seek legal advice on the implications of the High Court's decisions for their contractual arrangements.

The High Court also remitted a question relating to whether the drivers in Jamsek were covered by the expanded definition of 'employee' under the Superannuation Guarantee (Administration) Act 1992 (Cth) back to the FCAFC for determination.