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Employee or contractor – High Court focuses on contract v. multi-factors – Part 2

Daniel Butler and William Fettes, DBA Lawyers
26 May 2022 — 8 minute read

The law in relation to who is an employee or independent contractor has developed over many years both here in Australia and overseas. Several recent Australian High Court decisions provide greater clarity on this distinction.

Employee v contractor – PAYG & SG – Part 1

Note that this is the second article in a series designed to outline some of the issues relating to this important topic. First, we provide a snapshot of the topics we covered in ‘Employee or independent contractor –– PAYG & SG –– part 1’ dated 1 February 2022:

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  • Relevant background to the employee v contractor distinction.
  • What payments the Pay As You Go (PAYG) withholding rules cover.
  • How the superannuation guarantee (SG) rules apply to contractors especially where there is a payment that is ‘wholly or principally for the labour of the personand caught by s 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA). 

CFMMEU v Personnel Contracting –– employee v contractor

The High Court in Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMMEU v Personnel Contracting) examined whether a labourer engaged by a labour-hire firm (Personnel Contracting trading as ‘Construct’), who was directed to work for a building client, was an employee or a contractor of the labour-hire firm. There was no contract between the labourer (Mr McCourt) and the builder (Hanssen). 

The primary judge of the Federal Court held that Mr McCourt was an independent contractor and the appeal to the Full Federal Court was dismissed. In both cases, the court applied a multi-factorial test by reference to the terms of the contract between Construct and Mr McCourt, as well as the work practices that were imposed by both Construct and Hanssen.

However, the High Court gave primacy to the written agreement and, by majority, held that Mr McCourt was Construct’s employee. The following are key extracts from the majority decision:

[44]  … The "only kinds of rights with which courts … are concerned are legal rights". The employment relationship … is … a legal relationship. …

[59]   Where the parties have comprehensively committed the terms of their relationship to a written contract, the validity of which is not in dispute, the characterisation of their relationship … proceeds by reference to the rights and obligations of the parties under that contract. Where no party seeks to challenge the efficacy of the contract … on the basis that it is either a sham or is otherwise ineffective …, there is no occasion to seek to determine the character of the parties' relationship by a wide-ranging review of the entire history of the parties' dealings. Such a review is neither necessary nor appropriate because the task of the court is to enforce the parties' rights and obligations, not to form a view as to what a fair adjustment of the parties' rights might require.

The High Court confirmed that the factors that are applied in a multi-factorial test of the relationship can be considered to determine whether an employment or contractor relationship exists. However, the multi-factorial analysis must have regard to the rights and duties established by any contract between the parties (see [61]). Under the relevant agreement, Construct could dictate who the labourer worked for and the employer’s ability to supply a compliant workforce. These factors were key to Construct’s business, and thus, an employer-employee relationship existed despite the use of a “contractor” label in the contract. 

ZG Operations v Jamsek –– employee v contractor

The High Court in ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 examined whether two truck drivers, Mr Jamsek and Mr Whitby, were employees or contractors.

Mr Jamsek and Mr Whitby were initially employed directly by ZG Operations from 1977. However, in 1985/86 the company negotiated a new arrangement with each driver and their wife as separate partnerships. Each partnership purchased a truck from the company and thereafter maintained their own equipment. Each partnership was paid for the delivery of goods via an invoice. Each driver argued they were placed under pressure to enter into these arrangements.

Each truck driver on departure from the company in 2017 claimed they should be paid their ‘employee entitlements’ that they had missed out on, including annual leave and SG contributions. (This is not an uncommon claim for a departing purported ‘contractor’ where the person may consider that they missed out on these entitlements — thus, employers need to be mindful of this risk when considering the apparent advantages of hiring a contractor, in contrast to an employee.)

The primary judge of the Federal Court concluded that the drivers were independent contractors. However, the Full Federal Court overturned this decision and held that, having regard to the "substance and reality" of the relationship, they were employees.

The High Court unanimously held that Mr Jamsek and Mr Whitby were not employees. In reaching this conclusion, the High Court gave primacy to the written agreement. The following are key extracts from the majority decision:

[8] This appeal was heard together with the appeal in … CFMMEU v Personnel Contracting … The circumstance that entry into the contract between the company and the partnerships may have been brought about by the exercise of superior bargaining power by the company did not alter the meaning and effect of the contract …

[48] … this [totality] approach is erroneous in point of principle for the reasons given in CFMMEU v Personnel Contracting … 

[51] It is necessary to note in these observations of the Full Court the expansive approach taken to determining the "substance and reality" of the relationship between the parties, and especially the significance attached to the disparity in bargaining power as itself affecting the meaning or effect of what the parties had agreed. This expansive approach accords with that which has been taken in the United Kingdom. For the reasons stated in WorkPac Pty Ltd v Rossato and in CFMMEU v Personnel Contracting, this expansive approach involves an unjustified departure from orthodox contractual analysis.

[62] The circumstance that this state of affairs was brought about by the exercise of superior bargaining power by the company weighed heavily with the Full Court; but that circumstance has no bearing on the meaning and effect of the bargains that were struck between the partnerships and the company. …

The majority High Court decision in ZG Operations v Jamsek is consistent with the views of the majority decisions of the High Court in Workpac v Rossato and CFMMEU v Personnel Contracting. There are now three recent High Court decisions where the rights and obligations of the parties under the contract take primacy over the multi-factorial test where a comprehensive written agreement exists. The High Court has also clarified that the multi-factorial test has a considerably limited application than previously considered. 

High Court focuses on the contract versus the multi-factorial test

The multi-factorial test has been regarded as a key test in determining whether a person is engaged as an employee or contractor over many years as reflected in the following cases: Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1, Hollis v Vabu [2001] HCA 44, On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366 and Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118. The ‘master-servant’ control test was the key test relied on before the shift towards the multi-factorial test.

However, the three High Court decisions discussed above (ie, Workpac v Rossato covered in Part 1, CFMMEU v Personnel Contracting and ZG Operations & Anor v Jamsek) reflect a significant shift towards placing the primary focus on the contract in question and a decreased reliance on the multi-factorial test to determine whether a person is an employee or a contractor. However, the multi-factorial test still has a role to play as reflected in the three recent High Court decisions. 

Firstly, it assists with deciding whether an employment or contractor relationship exists having regard to the rights and obligations of the parties under the contract. 

Secondly, the multi-factorial test can be applied where:

  • There is no comprehensive written agreement.
  • The agreement is partly oral and partly written such as in the On Call Interpreters decision.
  • The agreement can be set aside or side-stepped, eg, due to sham, invalidity, statutory override or due to an estoppel argument.

The above three High Court decisions highlight that contractual analysis and factual evidence is key to establishing the terms of each contract and the rights and obligations of the parties under the contract. Subsequent factors that may arise after a contract is formed may be irrelevant unless, for instance, there is a valid variation to the contract such as in ZG Operations v Jamsek when the employees purchased trucks in 1985/6, set up in partnership with their respective spouses and each husband and wife partnership agreed to deliver goods for a fee; despite the superior bargaining position that ZG Operations held over each truck driver.

Why does the above matter so much?

The employee versus contractor divide is critical and all employers, principals engaging contractors, employees, contractors, sub-contractors and their families and advisers need to be aware of the numerous ramifications that flow from the particular type of relationship that exists. Unless the right determination is made, the employer or principal may end up with PAYG, SG, payroll tax, workcover insurance, employment law, vicarious liability and further legal and tax issues. Conversely, a contractor may miss out on valuable employee entitlements including leave entitlements, SG and protection against unfair dismissal.

There are also substantial risks associated with getting it wrong, as amounts that may be owing from an incorrect application of the law plus applicable penalties could easily sink a business. As noted above, the ‘contractors’ in both Dental Corporation v Moffet and ZG Operations v Jamsek were both seeking employee entitlements following their departure from the business including unpaid SG contributions.

The state and territory revenue offices are also undertaking more checks on payroll tax issues, especially where a relevant contract exists, such as what exists in many professional settings, where a professional is engaged in a business and is supplied with services by the business the costs of which are deducted from the fees that the professional charges the end-user client or Medicare.

Thus, we recommend that every business review all its employee and contractor arrangements, and revise any structures or contracts as needed. Broadly, we generally recommend that a business does not engage an individual contractor unless it is abundantly clear that they are a true independent contractor and a comprehensive written agreement exists.

One point of lingering uncertainty is the far reach of the SG rules in respect of contractors under s 12(3) of the SGAA. We covered the decision of Dental Corporation v Moffet [2020] FCAFC 118 in our Part 1 article, and we still await the appeal from the Full Federal Court decision in Jamsek v ZG Operations Australia Pty Ltd [2020] FCAFC 119 on this (s 12(3) SG) point. Note that this point was referred by the High Court to the Full Federal Court for hearing with the ATO to be joined as an interested stakeholder. This was after the primary judge of the Federal Court had rejected this point, and the Full Federal Court concluding the truck drivers were employees and therefore the Full Federal Court did not deal with s 12(3). 

Conclusions

There are still many arrangements where a person/service provider may be being treated as a contractor that give rise to serious questions about the true nature of the relationship, and whether the purported contractor status would withstand scrutiny by the revenue authorities or against a potential employee entitlement claim.  

In many ways, it is unfortunate that there is so much complexity and uncertainty relating to a distinction with such economic importance, particularly in relation to the compliance burdens and risks this imposes on small to medium enterprises (SMEs) as the major employers in Australia. 

Indeed, the risks and penalties including reputational damage in getting this (employee v contractor) distinction wrong are substantial and can readily result in some businesses going under. Thus, we consider that a greater focus on getting this right is well-justified. 

By William Fettes (This email address is being protected from spambots. You need JavaScript enabled to view it.), Senior Associate, and Daniel Butler (This email address is being protected from spambots. You need JavaScript enabled to view it.), Director, DBA Lawyers

 

Employee or contractor – High Court focuses on contract v. multi-factors – Part 2
william fettes daniel butler 200 smsf
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