Many businesses and workers experience difficulty classifying workers as independent contractors or employees. Being able to properly discern whether a person is an independent contractor or an employee is of vital importance. This is because the relationship between a business and the worker will determine whether the business owes the worker any particular rights, obligations and entitlements.
Independent contractors are individuals or legal entities which carry out their own business or trade and are engaged by a third party to work in accordance with a relevant contract for services which usually involves the achievement of a specified result.
Conversely, an employee is an individual who performs work for a business under the control and discretion of the business, and in accordance with a contract of employment.
The recent High Court decisions of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd  HCA 1 (Personnel decision) and ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors  HCA 2 (Jamsek decision) shed light on the issue of classifying workers as either employees or independent contractors.
The Multifactorial Test
Prior to the Personnel and Jamsek decisions, the Courts applied a “multifactorial test” in order to determine whether a worker was in fact an employee or an independent contractor. The multifactorial test involved assessing the circumstances of the relationship between the business and the worker by reference to a number of factors. These factors all varied in their relative importance to the determination of the relationship between the business and the worker.
The Court would make an assessment on whether the classification of the worker was weighted more towards being an employee or an independent contractor.
The Personnel and Jamsek Decisions
However, the Personnel and Jamsek decisions from earlier this year changed the approach of the Courts.
In the Personnel decision, the worker entered into a contract with Personnel, which operated a labour hire business. The contract stated that the worker was a contractor and Personnel would provide work opportunities to the worker after consultation with its clients. The worker would then provide his services to the client, but be paid by Personnel.
Personnel offered the worker an opportunity to provide his services to a client construction site. The worker supplied basic manual labour services to the construction site. Personnel then paid the worker at an hourly rate. The CFMMEU argued that the worker was a casual employee and not a contractor, and therefore, Personnel owed him entitlements pertaining to casual employees, including a casual loading to his pay. A majority of the High Court held that the worker was an employee.
The Court stated that where there is a complete and valid written contract, the nature of the relationship will be determined by the rights and obligations set out in the written contract, rather than the subsequent conduct of the parties during the life of the contract. However, it will still be necessary to consider the totality of the relationship as expressed in the contract. This includes the assessment of factors such as some of those included in the multifactorial test, such as control, delegation, tools, equipment and taxation.
The Court found that Personnel had a right to control over the worker’s work, including whether the worker was provided any work at all. The worker was also obligated to work for Personnel’s client, and it was for this work that he was paid his salary. This type of arrangement was pivotal to Personnel’s business of labour supply to its clients. The worker’s provision of labour to the client construction site was ancillary to Personnel’s business.
The reasoning for the Jamsek decision was similar. In that case, two truck drivers had been employed in that capacity by the ZG’s predecessor company since 1977. In 1985, the company told the truck drivers that it could not provide them with further work unless they agreed to become independent contractors. The truck drivers subsequently entered into partnership arrangements with their spouses, and bought new trucks so that they could continue to receive work from the company. The partnerships then entered into a “Contract Carriers Arrangement” with the company.
The contract stipulated that the drivers were responsible for maintaining the trucks. However, the trucks also displayed the company’s logo and the truck drivers wore the company’s uniforms. This arrangement continued when the company changed ownership. In 2017, ZG terminated the contract with the truck drivers, who subsequently argued that they were employees and sued ZG for employee entitlements.
The High Court ultimately held that the truck drivers were independent contractors. The Court found that the rights and duties of the parties under the contract needed to be considered. In this case, the truck drivers had not entered into the contract with ZG, rather it was the partnerships which had entered into the contract. Therefore, the truck drivers had set up a business of their own, and it was their businesses which earned income and incurred expenses with regards to their work.
Lessons for Employers
Both the Personnel and the Jamsek decisions tell employers that whether or not a worker is an employee or an independent contractor is determined by the terms of the contract. However, the fact that a worker is described as an “employee” or a “contractor” in the contract is not determinative of the relationship (although it is an important consideration). Rather, an objective assessment of the status of the relationship when viewing the contract in totality is what is required.
An objective assessment of the terms of the contract can be aided by considering some of the factors from the multifactorial test, including: the level of control the worker has, their ability to delegate work, whether they needed to provide their own tools and equipment, and the worker and business’ obligations regarding taxation. Another useful indicator of a worker’s legal status is whether they contracted as an independent business or as themselves. If they contracted with the business as an independent business, this will be more likely to indicate that they were a contractor.
In most cases, it is not appropriate nor necessary to assess the conduct of the parties after the signing of the contract when determining their status as employees or contractors.
Furthermore, the only cases where the terms of a contract will not be determinative of a worker’s status as an employee or independent contractor are cases which involve a sham contract, or cases in which the contract is ineffective under the law. In such cases, the multifactorial test may be useful in assessing the legal status of the worker.
In order to avoid possible confusion with contractors about their legal status as contractors, businesses should consider the following:
- Ensure that the worker does not perform substantially the same duties as an employee would at your business. Having a degree of separation between employees’ duties and the duties required to be performed by the contractor will help distinguish between the two roles.
- Ensure that the worker is aware of the level of control they have over performing the work, including their ability to delegate work and decide how they will perform the work. Reflect this in the contract for services with the worker.
- Pay the worker once they have performed the required work at a satisfactory quality. Include terms in the contract that they must meet certain standards or achieve specified outcomes before they are paid. Avoid paying at a set rate of pay.
- Require the worker to provide their own tools and equipment for performing the work. Reflect this in the contract for services with the worker.
- Ensure that tax obligations with the worker reflect that of a contractor-principal relationship. Reflect this in the contract for services with the worker.
- Try to avoid contracting with individual persons, and instead contract with incorporated entities (for example, those using an Australian Business Number).
PH Solicitor understands that it may be difficult for businesses and workers to discern the differences between an independent contractor and employee. If you would like to discuss your employment rights or your business’ rights in the workplace investigation process, we are here to help. Call our office on (03) 9642 0435 or email email@example.com for a confidential discussion with our team.
Nothing in this article should be relied on as legal advice. The contents of this article should be regarded as information only, and for specific legal matters, independent advice should always be sought.