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High Court re-defines the Contractor vs Employee test

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Focusing on Contractual Rights and Duties instead of Post-Contract Conduct

Author:  Chao Ni, Principal

On 9 February 2022, the High Court of Australia handed down two decisions:

  1. Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (“PCP)
  2. ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek)

Both cases were heard jointly and dealt with the question of whether a worker should be legally characterised as an employee or as an independent contractor.

The remarkable feature of these decisions is that the High Court appears to have deviated away from the multi-factorial test (i.e. taking into account all of the circumstances to determine the legal characterisation of the worker) in favour of looking only at the legal rights and duties as established by the written contract between the parties where one exists.

Background facts

Mr McCourt was a 22-year-old British backpacker who signed a contract with PCP in which McCourt was described as a “self-employed contractor”.  PCP then deployed McCourt to work for one of its customers, Hanssen Pty Ltd.  After some time, McCourt was instructed by PCP to cease working.  McCourt and the CFMMEU then commenced a claim against PCP to recover alleged employee entitlements under the Fair Work Act 2009.

Mr Jamsek and Mr Whitby commenced employment in 1977 with the predecessor of ZG Operations and, from 1980 until 2017, worked full-time as truck drivers.  During these initial years, Jamsek and Whitby drove trucks provided by the company.  Around 1985-86, the company informed the truck drivers that they would no longer be hired as employees, and that their services will only be used if they purchased their own trucks and became contractors for the company.  The two drivers then agreed to do this, and this arrangement was captured by various written documents called a “Contract Carriers Arrangement” until 2017 when the working relationship ceased.  Jamsek and Whitby then made a claim against ZG Operations to recover employment entitlements under the Fair Work Act, Long Service Leave Act and Superannuation Guarantee laws.

In both cases, the central question was whether the workers were employees or independent contractors at law.

Initial Proceedings in the Federal Court

Both at first instance, and on appeal to the Full Court, the Federal Court applied a “multifactorial test” in characterising the true relationship between the workers and their purported principals.  

In PCP, the initial judge found that the facts were evenly balanced, but ultimately found McCourt to be a contractor because the written contract between the parties had referred to McCourt as a “self-employed contractor”.  On appeal in PCP, the Full Court again applied the multifactorial approach, where the findings of the primary judge were upheld.

In Jamsek, the initial judge found that both Jamsek and Whitby were contractors and not employees for reasons that:

  1. The company had less control over the work attendance of these two drivers than was typical in an employment relationship. For example, the drivers were free to go home after finishing deliveries early instead of being required to return to the warehouse to perform other work;
  2. The drivers owned their vehicles (and therefore provided substantial capital equipment); and
  3. The taxation affairs between the drivers and the company were conducted in a business-like manner and that the drivers had purchased assets, claimed deductions, made decisions about expenditure which affected profitability and conducted their affairs as one would expect of a business.

On appeal in Jamsek, the Full Court of the Federal Court also applied the multifactorial test but, instead, found the two drivers to be employees.

High Court appeal

The High Court found that the Federal Court had misapplied the multifactorial test in both the PCP the Jamsek cases.

The High Court found that in attempting to characterise the relationship between two parties, only the legal rights and duties should be considered, and that consideration should not be given to post-contractual conduct.

The multifactorial test, however, remains relevant. What needs to be considered is the totality of the relationship within the confines of the contractual terms, not the “totality of the relationship requiring a consideration of how the parties’ contract played out in practice”.

How a party is labelled in a contract will also not be relevant.  A party referred to as a “self-employed contractor” may not necessarily be a self-employed contractor – the actual legal rights and duties of each party must be analysed to determine whether that label is true.

Additionally, the fact that one party has superior bargaining power than the other, cannot colour the meaning of any contractual term, unless it is contended that the contract was a sham.

In PCP, the High Court found that McCourt was an employee of PCP because even though he was ‘labelled’ as a self-employed contractor, his duty to follow the directions of PCP to work for its customers, indicated an employment relationship. 

In Jamsek, the High Court found that both truck drivers were independent contractors because their contractor agreements were valid and had correctly captured the legal character of the relationship; namely that the drivers had previously been employees who had subsequently agreed to purchase their own trucks to continue to work in a principal and contractor relationship.

What this means

The decisions in these two cases represent a significant change in judicial thinking. In conjunction with the prior case of WorkPac v Rossato, these cases emphasise the primacy of contracts. While the Courts were formerly more willing to deviate from the traditional principles of contract law to ameliorate any unfairness which may arise out of a disparity in bargaining power, the current bench of the High Court has instead preferred the certainty provided by an approach which is purely grounded in contractual rights and duties.

The decision in PCP, in particular, will have broad industry implications for all labour hire providers that rely on independent contractor agreements.  Businesses such as ZG Operations, who engage owner truck drivers as contractors, can breathe relief.

The MST Lawyers’ Employment Law team can assist with any questions you may have about this article or its subject matter.  Please contact us today by email at workplace@mst.com.au or by phone +61 3 8540 0200.