Business owners and employers in the construction, transport, hospitality and IT industries can find some comfort in the courts again trying to clarify the status of contractors and employees. This week's High Court decisions don't remove all ambiguity, but it is an important step in reducing the uncertainty that businesses face in contracting their workforce.
The High Court has set a new direction for determining the vexed issue of whether an employment relationship or an independent contractor relationship exists at law in its landmark decisions of CFMMEU v the Personnel Contracting  HCA 1 (Personnel Contracting) and ZG Operations Pty Ltd v Jamsek & Ors  HCA 2 (Jamsek).
The High Court decisions mark a significant reversal from the recent trend of Federal Court decisions emphasising a multi factorial approach based on the substance and reality of the parties conduct over the whole course of their dealings with each other. The High Court has acknowledged that this multi factorial test is distinctly "amorphous" in its application, is "necessarily impressionistic" and, thereby, 'inevitably productive of inconsistency" and generates considerable uncertainty for the parties and in the application of the law.
The new High Court approach recognises that 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 as one of employment or independent contracting proceeds by reference to the rights and obligations of the parties under that contract. 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 fairer adjustment of the parties' rights might require. In this respect, the principles governing the interpretation of a contract of employment are no different from those that govern the interpretation of contracts generally.
There will be exceptions where the Court forms the view that what the parties have entered into is a sham or is otherwise ineffective under the general law or statute. It will also remain the case that just because the parties have labelled a relationship as one of an independent contracting that is not binding on the Court. It is still appropriate to consider the totality of the relationship between the parties by reference to the various indicia that have been identified previously in the authorities (such as the right to control, the right of delegation, the provision of material and equipment etc). However, for such matters to bear upon the ultimate characterisation of the relationship, these matters must be concerned with the rights and duties established by the contract and not simply as an aspect of how the parties' relationship has come to play out in practice but bearing no necessary connection to the contractual obligations of the parties.
The new High Court approach is evident in the decisions made by the High Court in these matters.
In Jamsek the Full Federal Court held that two truck drivers who provided services to a freight company for 30 years using partnerships with their wives were employees at law. This was so even though the written agreements provided they were independent drivers and owned their own trucks. The High Court unanimously held that the trucks drivers were not employees of the freight company. It held that the parties had comprehensively committed the terms of their relationship to a written contract and the characterisation of whether that relationship is one of employment or otherwise must proceed by the reference to the rights and obligations of the parties under that contract. The contracting parties were the partnership and the freight company and it was no place of the Court to determine the legal status of the relationship by reference to the substance and reality of the relationship based upon a review of the conduct of the parties over the 30 years.
In Personnel Contracting the High Court applied the same reasoning to reverse the decision of the Full Federal Court and held that a 22 year old British backpacker on a working holiday visa was an employee of a labour hire company which offered his services to its clients on construction sites. The backpacker and labour hire company entered into an agreement styled as an independent contractor agreement. The labour hire company had entered into a further agreement with its builder client to provide the backpacker's services on site. There was no contract between the backpacker and the builder.
The High Court, by majority held that the backpacker was the labour hire company's employee despite the contract stating that the backpacker was an independent contractor. This was because despite the label the parties had chosen for characterising their relationship, the determination as to whether the relationship was as one of employment or independent contractor must proceed by reference to the rights and obligations of the parties ascertained in accordance with the established principles of contractual interpretation. Under the contract, the labour hire company had the right determine for whom the backpacker would work and the backpacker promised that he would cooperate in all respects in the supply of his labour to the building clients. In return, the backpacker was entitled to be paid by the labour hire company for the work performed. This right of control and the ability to supply a compliant workforce, was the key asset of the labour hire company's business of labour hire agency. These rights and obligations constituted a relationship between the backpacker and labour hire company of employer and employee. That the parties chose the label "contractor" to describe the backpacker did not change the character of that relationship as an employment relationship.
The new High Court approach should herald a period of greater certainty and efficacy in the use of independent contractor arrangements in appropriate circumstances. This is to be applauded and marks a reversal from the increased risk and uncertainty of using independent contractor arrangements even in situations where the parties have used interposed third entities such as companies and partnerships to govern their relationships.
However, the High Court was sure to make it clear that this approach is not appropriate where there are elements of sham contracting or unconscionable conduct by one of the parties which is also prohibited under the Fair Work Act.
It will also remain the case that even where parties have chosen to document their contractual relationship or label their relationship as one of independent contracting that will not be determinative of the issue. If the Court forms the view that the rights and obligations to be ascertained by reference to the contract is one of employment even though expressed as being an independent contractor relationship, it will be an employment relationship at law.
Should you wish to further discuss any aspect of this new approach please contact a member of our Workplace Relations and Safety team.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.