The High Court has recently provided clarification on the approach that lower courts and tribunals have frequently taken to distinguish employment relationships from independent contracting arrangements with the result that where there is a comprehensive written agreement a narrow construction of its terms is to be undertaken without consideration of external factors. This provides greater certainty for business and will have a significant effect on employment law by reducing the exposure to claims from so-called independent contractors that they were, at law, employees.
Background on independent contractor arrangements
The classification of a person as an employee or an independent contractor has significant consequences given:
- Employees are entitled to minimum conditions (such as minimum wages, annual leave and paid personal leave);
- Employees have other rights and protections under the Fair Work Act 2009 (Cth) and other statutory instruments such as Modern Awards such as prescribed termination periods or unfair dismissal rights;
- Employers can be liable to third parties for the acts, omissions or negligence of employees in the course of their employment;
- Superannuation payments are made to employees which may not always apply to independent contractors;
- Employers have taxation obligations in respect of payments to their employees;
- Incorrect classification can also attract substantial fines for breaches of the Fair Work Act 2009 (Cth).
Whilst the actual test for determining whether a person is an employee or a contractor has varied from time to time the approaches all previously considered the “totality of the relationship” in order to come to an evaluative judgment of the work arrangement. Up until recently this involved a consideration of a number of factors including but not limited to the way work was actually performed in practice, the control of the business owner over how the work was performed, who supplied the tools required to perform the work or whether the person could delegate/subcontract the work. On this approach, whilst the terms of the written agreement were relevant, they were only one factor to be considered.
A New Approach to independent contractor arrangements
In two recent cases, a majority of the High Court has clarified that in circumstances where there is a comprehensive written contract which:
- is not a sham; or
- has not been varied by the conduct of the parties,
the consideration of factors or conduct which occurs after the contract is formed is not relevant for the purposes of determining whether a worker is an employee or an independent contractor
Where there is a comprehensive written contract, the High court has held that the determination depends only on the written terms of the contract and not on the parties’ post-contractual conduct or dealings. Their reasoning is based on the general rule of construction that a written contract cannot be interpreted in light of the parties’ conduct after the contract was made. This approach means that whilst the totality of the relationship still needs to be considered only those factors evidenced by the rights and duties established in the written contract are relevant.
The High Court has however noted that subsequent conduct may be relevant in determining the nature of the relationship where the contract is oral, or partly oral and partly in writing, a party is alleging the contract is a sham or the conduct of the parties gives rise to an estoppel argument.
Applying this new approach, the High Court found that:
- The written contract established an employment contract in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd  HCA given:
- The worker’s engagement was one of service in that the worker could not sensibly be said to have been carrying on business on his own account;
- The worker had to follow directions under his contract and had no right to exercise any control over what work he was to do and how that work was to be carried out;
- The fact he could reject work or work for others is consistent with casual employment and by itself was not indicative of a contractor relationship;
- The worker’s work was dependent upon, and subservient to his employer’s business.
Importantly this conclusion was reached despite the fact that contracts had labelled the worker an independent contractor.
- In ZG Operations Australia Pty Ltd v Jamsek  HCA 2, the written contracts where for independent contractors on the basis that:
- The workers on the advice of their accountant had entered into the contracts as a partnership;
- under the contracts, the partnership owned the trucks used in the deliveries;
- it was the partnerships who had responsibility for the conduct of the deliveries required under the contract;
- performance of the contracts required both the truck-driving skills of the workers and the trucks owned by the partnerships.
What you need to do
In order to take advantage of the certainty potentially provided by these recent decisions, you should make sure that:
- all contractors you engage execute a formal and comprehensive written contract;
- the terms of the contracts should actually be followed in practice to avoid a worker being able to argue the contract has been varied by the subsequent conduct of the parties; and
- any change in working arrangements should be documented in a new written contract or a variation; and
- the terms of your independent contractor agreements are reviewed to ensure that the rights and obligations contained are consistent with the factors indicative of independent contractors.
To consult with an expert on contract law, contact RCR Lawyers today.