Contractors vs Employees – Are the lines always clear?

In recent years, there have been an increasing number of companies who engage individuals to work as independent contractors as an alternative way from employing individuals as employees.

Two recent cases have demonstrated that the distinction between an employee and a contractor may not always be clear. Companies who have existing agreement with the independent contractors may want to consider revisiting the terms of the contracts with their contractors to determine whether any terms and conditions in the contacts need to be updated to ensure that the terms outlined in the contracts reflect the relationship with the contractors.

Landmark high court decisions might change the landscape

The high court has recently handed down its rulings on two landmark cases in relation to whether an individual is an employee or a contractor. The two cases are CFMMEU v Personnel (Personal Contracting) Contracting Pty Ltd (2020) and Jamsek v ZG Operations Australia Pty Ltd (2020) (ZG Operations).

We outline below a high-level summary of both cases, looking at the sequence of events and the ensuing ATO ruling.

Construction, Forestry, Maritime, Mining and Energy Union (CFMMEU) v Personnel Contracting Pty Ltd (2020)

• Mr McCourt came to Australia on a working holiday visa and he was engaged by a labor-hire company (Personnel Contracting Pty Ltd trading as Construct) to work for its client Hanssen.
• He signed an Administrative Services Agreement (ASA) with Construct where the ASA described Mr McCort as a “self-employed contractor”.
• He was assigned to work as a general labourer for several months in 2016 and 2017 on two construction sites in Perth under a Labour Hire Agreement (LSA) between Construct and Hanssen. There was no contract between Mr McCourt and Hanssen.
• He was engaged for performing basic labouring tasks where he takes out the bins, cleans workspaces and moves materials. He is paid by the hour, and when at work, is told what to do and how to do it by employees of Hanssen. He does not own a business.
• Based on the terms of the contract, Mr McCourt’s payments were approximately 75% of that which he would be entitled to under the Award for the work he did over the time he did it if he was an employee.
• Mr McCourt will have to provide short notice in order to leave work at the site (Similar to the arrangement of an employee (casual or not).
• The CFMMEU which is the union representing Mr McCourt, argued he was an employee of Construct and should be entitled to rates and benefits under the applicable Award.
• The Federal Court and Full Federal Court held that McCourt was an independent contractor despite not running his own business. The courts had relied on the multi-factorial test to determine the “totality of the relationship” weighing on various indications (control, delegation, complying with PAYG withholding requirement etc..) and the terms of the ASA.
• On appeal, the High Court overturned the Full Federal Court’s decision. The High Court by majority held that Mr McCourt was an employee.
• The High Court has determined the nature of the relationship based on the rights and obligations under the contract as they held that all parties have comprehensively committed to the terms in the contract.
• Based on the contract, Construct had the control to determine Mr McCourt’s place of work and work duration. In order for Mr McCourt to be paid by Construct under the ASA, he is expected to perform work by providing his labour to construct’s client (i.e. Hanssen). The clause gave Construct the central role and control over key aspects of work to be performed by Mr McCourt – when, where and how. There was no contract between Mr McCourt and Hanssen.
• The label of “Contractor” in the relationship does not change the character of the relationship between Mr McCourt and Construct.

ATO’s Decision Impact Statement on CFMMEU v Personal contracting

ATO’s Decision Impact Statement on CFMMEU v Personal contractingThe ATO has issued a decision impact statement for the case and outlined that the High Court’s decision has not disturbed the well-established practice of examining the totality of the relationship when determining if an individual is an employee or a contractor.

Although the high court has rejected the multifactorial test, the ATO notes that the court may still look beyond a written contract to consider the conduct of the parties in circumstances where:

• The contract is an oral contract or partly written partly oral and the contractual terms that were agreed;
• The terms of the written contract have been varied;
• The terms of the written contract are being challenged as invalid (e.g. sham contracts)
• A party to the contract asserts rectification, estoppel or any other legal, equitable or statutory rights or remedies.

The ATO acknowledged that the case reflects their view and understanding of the legislation that focuses on the contractual terms to determine whether an individual is working as an employee of a business.

Jamsek v ZG Operations Australia Pty Ltd (2020) (ZG Operations)

• Between 1977 and 2017, Mr Jamsek and Mr Whitby were engaged as truck drivers by ZG Operations.
• They were initially engaged as employees of the company. From 1986, due to a restructuring exercise, the company advised that they would continue to use the services of both individuals only if they work as contractors of the company and purchase their own trucks. Both individuals agreed to the new arrangement and set up partnerships with their respective wives.
• Those partnerships purchased trucks from the company and executed a written agreement with the company for the provision of delivery services. Revenue earned were used for operating of the truck and net revenue for income tax purposes was declared as partnership income and were subsequently split among both individuals and their wives.
• The agreement between the partnerships and the company was terminated in 2017. The individuals then commenced proceedings in the Federal Court seeking for entitlements owed to them as employees of the company pursuant to the Fair Work Act 2009 (Cth), the Superannuation Guarantee (Administration) Act 1992 (Cth) and the Long Service Leave Act 1955 (NSW).
• The primary judge considered the totality of the relationship and concluded that Mr Jamsek and Mr Whitby were not employees of the company. The judge considers that the individuals who are required to provide and operate their own trucks/utes, bore the risks of providing their services which would favor a conclusion that they were independent contractors.
• The full court referred to the principal in CFMMEU v Personnel Contracting and made reference to the substance and reality of the relationship that is different to the face value of the agreements between both parties.
• The full court consider that the individuals were not in a position to bargain when they entered into an agreement with the company in 1986. The trucks owned by the individuals had the company’s logo for most of the period of engagements.
• The individuals were expected to devote 9 hours each day, 5 days a week working for the company which would give them very minimal amount of time to undertake work in other companies.
• In addition, they were not able to generate goodwill for their partnerships as they were not able to sell their vehicles and continue to provide services to the company.
• Due to the factors above, the full court reverses the decision of the primary judge.
• Following ZG Operations appeal, the High Court unanimously held that the respondents were not employees of the company. The decision is consistent with the approach adopted in CFMMEU v Personnel Contracting Pty Ltd where both parties have comprehensively committed to the terms of their contracts (i.e. entering into a contractual relationship when the company no longer wants to employ them as employees, providing their own vehicles, providing delivery services to the company’s customer etc..).

Key takeaways

Both cases have proven that the courts have restored their focus on the terms outlined in the contracts between the individuals and the companies rather than the nature of the working relationship between both parties. The rights and obligations outlined in a contract are more important than the label of the relationship with an independent contractor.

Businesses that intend to engage contractors will have to ensure contracts are clearly written and ensure that all parties clearly understand their respective rights and obligations outlined in the contract. This will help companies to minimize conflict and exposure on potential liability on various employer obligation in the future.

Please also refer to our article on how to distinguish whether an individual is an employee or a contractor for more information.