What’s emerging? Contractor or Employee: High Court decisions mark directional shift in analysis

10 February 2022

Personnel Contracting and Jamsek - what do these landmark High Court decisions mean for organisations contracting labour?

On Wednesday 9 February 2022, the High Court of Australia released its judgments in the cases of CFMEU & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek). Both cases dealt with the question of common law employment, the first time in 20 years that Australia’s highest court (and the final court of appeal) has had to consider this question in depth. 

This article summarises the outcomes, the main reasons for the decisions and the key takeaways resulting from these matters. We highlight upfront that these judgements are likely to have a significant impact on the way in which contracting relationships - and the consequential obligations of each party - are evaluated.  

In both cases, the Court set aside the earlier decisions of the Full Federal Court, as follows:

• In the case of Personnel Contracting:
  • An employee-employer relationship was present between a backpacker on a working holiday visa (engaged as a contractor) and a Perth-based labour-hire company that was in the business of supplying workers to builder clients (the “principal”); and
  • No employment relationship existed between the contractor and the principal’s client, being the business in receipt of the supplied services.
• In the case of Jamsek, “contractor” truck drivers (owner drivers) providing services through partnership entities were not employees of the principal company that the partnerships had contracted with (having historically transferred from employment agreements to contractor agreements at the company’s initiative, with agreed contractual terms). 

Relevantly, in coming to their view in Personnel Contracting, Kiefel CJ and Keane and Edelman JJ affirmed that, where a comprehensive written contract has been executed without subsequent variation of the rights and obligations of the parties (or other legal challenges to the contract’s efficacy), the nature of the relationship is to be determined primarily by reference to the terms of the contract.  

This approach is in contrast to the “multifactorial test” that has traditionally been employed in common law analyses, which involves an in-depth analysis of facts and circumstances pertaining to the arrangement - often extending to the conduct between the parties in order to supplement the terms of the contract. Relevantly, with respect to this test, their Honours clarified that this analysis remains appropriate, however only in the context of the rights and duties established by the contract, rather than for assessing how the arrangement plays out in practice more broadly. For many, this will present itself as a subtle and perhaps unclear distinction, which is nonetheless critical in light of the High Court’s decisions.

Three key takeaways for organisations contracting labour

First, the majority in both judgments emphasised the primacy of contractual terms setting out the rights and obligations of each party when characterising an employment relationship. That is, the parties’ subsequent conduct is not relevant in determining the character of the legal relationship between the parties.  The relationship between the parties is the relationship established by the contract.  

Where a contract is oral or partly oral and partly written, then an assessment of conduct may be necessary, to determine when the contract was formed and the terms agreed. However the conduct assessment should be for the purpose of ascertaining the full terms of the contract being made, varied or discharged, rather than serving as a “roaming inquiry” of conduct to supplement the terms of the contract. Organisations will need to exercise caution when conducting such assessments, so as to avoid placing ‘incorrect’ reliance on what has transpired in practice. The court noted, however, that in neither case was there an argument that the relevant contract was a sham, or that there had been a formal contractual variation to the contract.  Therefore, whilst the decisions make it clear that the contract itself is the source of the legal relationship, that contract itself can be challenged by other mechanisms that might be available, such as the sham contracting provisions in the Fair Work Act, or other legal challenges to the contract’s efficacy. 

Second, a point that was particularly stressed in the Court’s judgments was that contractual clauses that seek to definitively “label” an arrangement as that of “contractor” or “employee” will not change the character of the relationship, especially where it would be inconsistent with the rights and duties established by the parties’ contract. In this way, whilst the importance of contractual terms cannot be understated, one should not confuse this with a notion that the relationship will be categorically defined by the label that the parties give it.  

Third, businesses should be aware that the issues with respect to the extended definition of “employee” for superannuation guarantee purposes post-Moffet¹ (which many view as expanding the arrangements caught by the “wholly or principally for labour” test beyond those outlined in current Australian Taxation Office guidance) remain unresolved. In particular, the majority in Jamsek sought to remit this issue to the Full Federal Court for consideration to allow the Commissioner of Taxation to join as a party to the proceedings. Accordingly, organisations looking for clarity in this respect will need to wait a little while longer.

What's next?

With these new decisions, businesses should review their independent contractor agreements to ensure that they are tightly framed.  However, whilst the High Court emphasised the primacy of the written contract, there are other avenues to challenge that contract, such as where the contract is a sham, or where the terms of the contract have been legally varied or waived, or subject to an estoppel. Therefore, whilst it is more important than ever that businesses have well drafted contracts, they must also ensure that the terms of those written contracts reflect the actual intended working relationship and that the working relationship is structured as a true contractor relationship.   

Additionally, whilst these decisions do provide guidance as to how the common law concepts of “employee” and “contractor” should be assessed, it should not be forgotten that these concepts may be otherwise defined through statutory schemes. Relevantly, a number of taxation and other legislative frameworks contain extended definitions of “employer” and “employee”, bringing common law “contractors” into the net. Examples of such tests include the “wholly or principally for labour” test for superannuation guarantee purposes and the “relevant contract” provisions contained within the State payroll tax legislation. 

We await commentary from State and Federal regulators in relation to the impact of these decisions on their public guidance, as undoubtedly, organisations will benefit from any guidance on offer which sheds light on how this directional shift should play out in practice.

Finally, whilst organisations should also ensure that their worker base is characterised appropriately, with comprehensive documentation and substantiation in place, these decisions should serve as a prompt to ensure the judicial pivot in workforce characterisation is adequately reflected in contractor-related processes and procedures. 

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¹ Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118