Contractors and labour-hire – High Court reinforces importance of written contract, with some twists

Articles Written by Jan Dransfield (Partner), Katelyn Iacono (Associate), Karen Zhu (Law Clerk)

In some good news for businesses that rely on contractors and labour-hire workers to supplement their workforces, the High Court has reinforced the primacy of written agreements in its important and long awaited judgments (delivered on 9 February 2022) in Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd (Personnel)[1]and ZG Operations & Anor v Jamsek & Ors (ZG).[2]

Although separate judgments were delivered, the High Court decisions broadly align with the Court’s recent approach to casual employees in WorkPac Pty Ltd v. Rossato & Ors (Rossato)[3], handed down in August 2021.

Consistent with Rossato, the High Court has found that, where the parties have documented their relationship in a written contract, the question of whether the person is an employee or an independent contractor is determined by reference to the terms of that contract alone, and not by looking at the substance of the parties’ actual conduct and relationship. 

Implications for business

The High Court decisions are likely to be welcome news for many businesses where their contractor and labour-hire agreements are comprehensive and well drafted. However, particularly in situations where contractor agreements or labour-hire terms are not comprehensive, there may still be an ability to rely on factors other than the contract.

These situations may arise, for instance, where:

  • in a tri-partite labour-hire arrangement, the labour-hire company directly engages its workforce as contractors, rather than employees;
  • there is a claim that the terms of a contract have later been varied, waived or the subject of an estoppel; or
  • the validity of the contract is challenged; for example, because it is said to be a ‘sham’.

Many of the risks involved in engaging contractors remain. Particularly, sham contracting claims under the Fair Work Act 2009 (Cth) (FW Act), and many contractors (even if not found to be employees) may be covered by an expanded definition of ‘employee’ under particular legislation (for example, under section 12(3) of the Superannuation Guarantee (Administration) Act 1992(Cth) (SGA Act)).

While the decisions of the High Court afford businesses a greater ability to ‘control’ the question of whether their staff are independent contractors or employees by reference to the terms of their contracts, conversely, the decisions may also expose companies to claims, including class actions. This is because, in order to prove that they are employees (rather than independent contractors), claimants may only need to produce the relevant contracts to establish employment. As a result, claimants will not be put to the cost of producing extensive evidence as required under the ‘multifactorial’ test, which involved consideration of a range of circumstances, including the conduct of the parties during the relationship. With a wave of employment related class actions having recently been filed, this is a risk that should not be discounted, despite the mostly positive implications of the High Court decisions for employers.

What should businesses do now?

          1. Review written contractor and labour hire agreements

Businesses should review written agreements for contractors and labour-hire workers to ensure consistency with the judgments. In particular, agreements with independent contractors should:

  • be well drafted and comprehensive in terms of the rights and obligations of the parties under the agreement;
  • focus on identifying the contracting parties (preferably partnerships or companies);
  • clearly state the level of independence conferred on the contractor and ensure the contract does not reflect a ‘right of control’ over the contractor;
  • fully set out terms for the provision of services and equipment by the contractor;
  • ensure the totality of the terms reflect a contractor relationship and not just label the worker as an independent contractor; and
  • consider including terms to minimise the risk of later variation of the contract into an ‘employment’ contract by means of conduct.

          2. Litigation risk mitigation and management (including class action risks)
Businesses should consider contractor compliance, and claim mitigation or management strategies given the risks identified above regarding potential class actions; as well as other types of claims, for example, sham contracting claims or claims under the Independent Contractor Act 2006 (Cth).

ZG – background and decisions

In ZG, the respondents were initially engaged as employees of the appellant company to drive trucks. However, the company later insisted it would no longer employ the respondents and would only continue to use their services if they purchased the trucks and entered into a contact to carry goods for the company. As a result, the respondents set up partnerships to purchase trucks and the partnerships entered into written agreements with the company for the provision of delivery services.

The respondents commenced proceedings in the Federal Court seeking declarations in respect of statutory entitlements alleged to be owed to them as employees of the company under the FW Act, the SGA Act and the Long Service Leave Act 1955 (NSW).

At first instance, the judge concluded that the respondents were not employees, but instead independent contractors.  

The Full Court of the Federal Court held, by reference to the ‘substance and reality’ of the relationship between the parties, that the respondents were employees.

The High Court ultimately held that the workers were independent contractors, overturning the decision of the Full Court. The High Court remitted the matter to the Full Court of the Federal Court to determine whether the respondents, as contractors, were covered by the expanded definition of employee in the SGA Act.

The High Court held that the character of the relationship was to be determined by reference to the rights and duties created by the written agreement, which comprehensively regulated that relationship.  The High Court held that the Federal Court was wrong to consider the manner in which the parties conducted themselves during their long-standing relationship, including the unequal bargaining power in that relationship.

While the primary judges (Kiefel CJ, Keane and Edelman JJ.) focused on the agreement with the partnership as the contracting party, in a separate judgment Gageler and Gleeson JJ. also considered the equipment element closely, finding that questions of scale in equipment can be important and decisive, and drawing a distinction between ‘substantial’ or ‘expensive’ equipment, such as trucks owned by the respondents compared to bicycles owned by couriers in Hollis v Vabu Pty Ltd[4].

Personnel – background and decisions

In Personnel, Construct was in the business of labour-hire, and engaged workers to supply their labour to building clients. The second appellant (Mr McCourt), a backpacker who sought work as a builder’s labourer, signed a document titled an ‘Administrative Services Agreement’ (ASA) with Construct. Construct contracted Mr McCourt to work at a Hanssen Pty Ltd (Hanssen) building site for two separate periods. Hanssen was at that time a client of Construct. Mr McCourt was supervised by Hanssen but there was no written contract between Mr McCourt and Hanssen.

Mr McCourt commenced proceedings in the Federal Court seeking compensation and penalties pursuant to the FW Act on the basis that Construct had failed to pay Mr McCourt his entitlements as an employee of Construct under the Building and Construction General On-site Award 2010. At first instance, the judge held that Mr McCourt was an independent contractor, and an appeal of the decision to the Full Court of the Federal Court was dismissed.

The High Court held that Mr McCourt was an employee of Construct. Even though Mr McCourt was described as a ‘self-employed contractor’ in the ASA, the Court found that he was an employee. This was demonstrated by the fact that under the ASA, Mr McCourt contracted with Construct, promised Construct that he would work at its direction for the benefit of Construct's business of supplying labour to Construct's customers (for example, Hanssen) and, in return, was paid by Construct.

The primary judgement of Kiefer CJ, Keane and Edelman JJ. was critical of the uncertainties and ambiguities arising from the ‘multifactorial’ test, being a concept considered and applied in Stevens v Brodribb Sawmilling Co Pty Ltd[5] and Hollis v Vabu Pty Ltd[6]. The judges distinguished these cases on the basis that the contracts in those cases were not wholly in writing. Using a ‘totality of the relationship’ approach, the judges found that  ‘for a matter to bear upon the ultimate characterisation of a relationship it must be concerned with the rights and duties established by the parties’ contract, and not simply an aspect of how the parties relationship has come to play out in practice’.[7]

General principles from the High Court decisions

          1. Contract interpretation: The Court held that the legal rights and obligations established by comprehensive written terms should be decisive of the character of the relationship between the worker and the employer, and that employment contracts should be interpreted like any other kind of contract.

          2. Right to control vs actual control: Whether a contract between parties contains a ‘right of control’ assists to determine whether there is an employment relationship. A ‘right of control’ suggests that the purported independent contractor is subservient to and dependent on the ‘employer’ and therefore is an employee.

          3. Label of ‘contractor’ or ‘employee’: The label used by parties in describing the relationship is not conclusive of whether a worker is a contractor or employee: it is the ‘totality of the relationship’ conferred by the rights and obligations expressed under the contractual terms that will determine whether a worker is an employee or independent contractor.

         4. Bargaining power: In ZG, Kiefel CJ, Keane and Edelman JJ. stated that the mere fact the drivers’ entry into the contract ‘may have been brought about by the exercise of superior bargaining power by the company, did not alter the meaning and effect of the contract’.[8]

[1] [2022] HCA 1.

[2] [2022] HCA 2.

[3] [2021] HCA 23.

[4] (2001) 207 CLR 21 at 41-42 [47], 44 [56].

[5] (1986) 160 CLR 16 at 29.

[6] (2001) 207 CLR 21 at 33 [24].

[7] [2022] HCA 1 at 27 [61].

[8] [2022] HCA 2 at 3 [8].

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).