What’s a contract got to do with it? (Absolutely everything): The High Court affirms approach to determining employment relationships in Personnel Contracting and Jamsek

Two recent decisions handed down by the High Court have stressed the primacy of contractual terms in determining employment relationships.

In an approach that will provide certainty to some businesses, in Personnel Contracting the High Court held that where the parties have comprehensively committed the terms of their relationship to a written contract it was ‘unnecessary and inappropriate’ to undertake a detailed review of the work practices of the parties. In doing so, the High Court limited (but did not abolish) the application of the well-known ‘multi-factorial’ test.

The High Court confirmed that where a contract is wholly in writing, the question of whether a worker is an employee or a contractor is to be determined based on the terms of that written contract.

And while many businesses will welcome the simpler approach to determining whether a worker is an employee or a contractor, the likely effect of the High Court’s decision in Personnel Contracting on labour hire organisations that rely on the ‘Odco’ model of tripartite agreement structure is chilling.

Below we discuss the relevant cases, as well as the practical flow on effects for business.

Background to the decisions

Personnel Contracting

In Construction, Forestry, Maritime, Mining and Energy Union (CFMMEU) & Anor v Personnel Contracting Pty [2022] HCA 1 (Personnel Contracting) the High Court found that a labourer engaged by a labour hire provider purportedly as a self-employed contractor was an employee.

Mr McCourt was offered a role as a labourer with a labour hire provider (Construct) and signed an Administrative Services Agreement (ASA) which characterised Mr McCourt as a ‘self-employed contractor’. Mr McCourt was assigned to two construction sites run by clients of Construct, including Hanssen and performed labouring tasks under the supervision and direction of Hansen’s supervisor. A Labour Hire Agreement was in place between Construct and Hanssen pursuant to which Construct commercialised ‘its right to control the work that Mr McCourt would do and how he would do it’.

The tripartite arrangement – an independent contractor agreement between Construct and Mr McCourt as a contractor, and a labour hire agreement between Construct as the provider and Hanssen as the client – is known as an ‘Odco’ style arrangement and, as a result of some historical cases appearing to affirm the lawfulness of such relationships, has become a common feature in some labour hire businesses.

The CFMMEU and Mr McCourt commenced proceedings against Construct for penalties and compensation under the Fair Work Act 2009 (Cth) (FW Act) on the basis that he should have been treated as an employee.

Jamsek

In ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek), the High Court found that two truck drivers were independent contractors despite the drivers having minimal time to undertake work for third parties.

From 1977, Mr Jamsek and Mr Whitby were employed as truck drivers of a business run by ZG Operations Australia Pty Ltd (ZG). In or around 1985 or 1986, ZG decided that it would no longer employ Mr Jamsek and Mr Whitby but instead offered to continue to engage them as contractors to carry goods if they purchased their trucks. Mr Jamsek and Mr Whitby accepted this proposal, established partnership arrangements with their respective wives, executed contracts for service of delivery of goods, purchased, maintained and paid for the operational costs of the trucks and invoiced ZG for the delivery of goods.

In 2017, Mr Jamsek and Mr Whitby commenced proceedings against ZG for a declaration for certain entitlements including under the FW Act, superannuation contributions and long service leave on the basis that they should have been treated as employees.

What did the High Court decide?

The High Court majority held in Personnel Contracting that Mr McCourt was an employee and not an independent contractor. The High Court held that where parties have committed the terms of their relationship to a written contract, not in dispute, the characterisation of the relationship proceeds by reference to the rights and obligations of the parties under the contract.

The High Court applied this principle in deciding that the terms and conditions under the ASA, including most importantly, Construct’s right of control over Mr McCourt, were determinative in finding that Mr McCourt was an employee of Construct.

Applying the principle in Personnel Contracting, the High Court in Jamsek unanimously held that Mr Jamsek and Mr Whitby were not employees but independent contractors. Notably in the the Jamsek decision, the partnership nature of the relationship between Jamsek, Whitby and ZG meant that there was no direct relationship for personal services between ZG and either of the would-be employees. Rather, there was a relationship between ZG and the respective partners in each partnership arrangement.

Further, the contract between the parties did not distinguish supply of the relevant trucks from the supply of labour. As such, the High Court held that the contract for service for the delivery of goods between the partnerships and ZG (including the context in which it was first entered into) was not a relationship of employment.

Our business engages contractors – what do we need to know?

Both High Court decisions provide a degree of clarity for businesses that engage independent contractors. The principle outlined in Personnel Contracting and affirmed in Jamsek provides that the Court will look to the terms and conditions of the written contract to determine the nature of the employment relationship where the parties have comprehensively committed the terms of their relationship to a written contract.

And while the multi-factorial test is still relevant, its application in such cases will be limited to an analysis of the written terms of the agreement rather than the day to day working arrangements of the parties through the term of the contracting arrangement.

Having said this, the Personnel Contracting decision confirms that there is still a place for a wider analysis of day to day working arrangements – including where the validity of the contract is challenged as a sham, where the terms of the written contract have been varied, and where a contract is wholly or partly oral.

The different outcomes in both decisions highlight the importance of independent contractor agreements, and the underpinning structure, being carefully evidenced to ensure that the relationship is correctly characterised.

Considerations for engaging with labour hire providers

An analysis of existing arrangements between labour hire providers, workers and host businesses should be undertaken in circumstances where a worker is engaged as an independent contractor. In these circumstances, the agreement between businesses and workers should be cautiously reviewed and carefully analysed to ensure that the rights and obligations extending from the agreement and that the underpinning structure reflects the intentions of the arrangement between the parties.

In Personnel Contracting, the level of control able to be exercised by the labour hire provider over the worker under the underpinning agreement was determinative in that decision.

The Personnel Contracting decision itself gave attention to Odco relationships and the impact that the Personnel Contracting decision would have upon many businesses in Australia.

Businesses that have engaged in Odco style relationships should obtain advice in relation to historical risk and protection for their businesses moving forward, particularly in circumstances where workers may be able to seek significant entitlements in the circumstances.

What do we do next?

• Ensure your independent contractor agreements are drafted carefully and reviewed regularly to reflect a genuine contracting relationship.
• Before entering into a new contractor agreement, carefully consider the corporate structures under which contractors will provide their services, if any.
• Ensure that day to day working arrangements reflect the terms of the agreement – this will assist in the event that the contract is challenged as a sham.

Gadens is able to assist you with any queries you have in respect of engaging employees or independent contractors, drafting or reviewing written agreements and advice on how best to mitigate risks.

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Authored by:

Deivina Peethamparam, Partner
Diana Diaz, Special Counsel
William Marshall, Senior Associate
Nakita Rose, Lawyer