The rights and obligations of workers will differ depending on whether they are an employee or an independent contractor.

It is therefore important that they be correctly classified. In two recent decisions which are likely to have far-reaching implications, the High Court has clarified decades of debate about how workers should be correctly classified. So what has the High Court determined and why does it matter?

In two significant recent decisions the High Court has considered the question of how to correctly classify workers as either employees or independent contractors. The decisions follow decades of debate about what factors should be considered, and given weight, in the classification process, including the terms of the contractual arrangements between the parties or how the relationship actually operated from day to day (that is, the parties’ post-contractual conduct).

The High Court has held that the terms of any written contract between the parties should be given the most weight when classifying a worker as either an employee or an independent contractor, in that:

  • where the terms of a valid written contract (that is, a contract that is not a sham, has been varied or is otherwise inoperative at law) deal comprehensively with the rights and obligations of the parties;
  • the relationship between the parties should be determined by reference to the rights and obligations under the contract (applying the multifactorial test previously established by the courts within the context of the contractual terms) and not any “label” that the parties might seek to attach to the relationship; and
  • it is unnecessary and inappropriate to examine other aspects of the relationship between the parties, including their post-contractual conduct, in determining the legal relationship between them.

How did the High Court apply these principles in the two cases before it?

CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1

In CFMMEU v Personnel Contracting, the High Court held that a labourer engaged by a labour hire company was an employee of the labour hire company and not an independent contractor, despite the services agreement into which the parties entered identifying the labourer as a “contractor”.

Critical to the High Court’s reasoning was that the services agreement provided for a “complex suite of rights and obligations” between the labour hire company and the labourer, including terms that allowed the labour hire company to retain a right of control over the labourer and the performance of his work through:

  • determining for whom the labourer performed work and what he would be paid. The services agreement also included a reciprocal commitment from the labourer to work as directed by the labour hire company or its client; and
  • the right to terminate the labourer’s engagement should the labourer fail to follow the directions of the labour hire company or its client.

The effect of these terms of the services agreement was to allow the labour hire company to supply its clients with the “subservient labour” essential to the business of labour hire in which the labour hire company was engaged, which the High Court held was reflective of the relationship being one of employer/employee despite the label attached to it.

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

In Jamsek, the High Court held that two truck owner-drivers who provided transport services to the company pursuant to independent contractor agreements between the company and partnerships established by the drivers claimed to be employees, and therefore owed certain employment entitlements, were independent contractors.

The drivers were, before entering into the independent contractor agreements, employees of the company. The independent contractor agreements were entered into with the drivers’ respective partnerships after the company resolved not to employ drivers, but offered these drivers the opportunity to continue to work for the company under contracts to carry goods.

In holding that the drivers were not employees of the company, the High Court relied on the drivers having established partnerships and the partnerships and the company being the contracting parties to the independent contractor agreements.

The High Court also had regard to the terms of the contract (noting the terms relating to the provision of delivery services, the purchase, maintenance and operation of delivery trucks at the partnerships’ expense, and the invoicing and payment arrangements) and  context in which the independent contractor agreements were entered into.

So why does it matter?

If there is a dispute about a workers’ rights and obligations, you need to be clear about what your legal relationship is before you can resolve that dispute. Failure to properly classify a worker as either an employee or an independent contractor can also potentially lead to underpayment of employment entitlements, prosecution and the imposition of pecuniary penalties against the business who engages the worker.

In CFMMEU v Personnel Contracting and Jamsek the High Court has given primacy to the contractual terms between the parties in determining whether a worker is an employee or an independent contractor, reinforcing the importance of parties clearly and comprehensively documenting their rights and obligations (and any variation to those rights and obligations) in a written contract to minimise the risk of any later disputes about the nature of their legal relationship.

The decisions are likely to have far reaching implications for business and workers, particularly those who engage or work as independent contractors.

If you want to review or develop your contracts (and in particular your independent contractor agreements) to ensure that they properly reflect the legal relationship the parties intend to create, please contact MV’s Employment Lawyers.