The process of engaging contractors versus employees, and the payment obligations required for each arrangement, continues to be a complex area for business owners to navigate. While there are now some pretty clear guidelines in place as to the types of payments that should be made to each type of worker, determining whether a worker is in fact considered a contractor or an employee remains something that is not so clear cut. As more cases are heard before the courts we can build a framework of precedents that help to bring some clarity as to what constitutes an employer/employee relationship compared to that of a principal and contractor. But even with that information, each case will be different from the next and will continue to be ruled on based on it’s individual circumstances.
In 2022, two cases were heard in the High Court regarding the employee and contractor distinction, with the outcomes creating some very important implications for workers and employees alike. Clarifying a contested area of common law, these cases have highlighted the significance of written contracts in discerning between employee and contractor relationships.
The First Employee or Contractor Case: Two Truck Drivers
The first employer or contractor case was ZG Operations Australia Pty Ltd v Jamsek, which involved two truck drivers. The two started working at the company ZG Lighting in 1977 as employees, and became delivery drivers in 1980. However, around 1985 or 1986, the company said it would no longer employ them and it would continue to use their services only if they purchased their trucks from the company and entered into contracts to carry goods for the company.
Both men agreed, and they set up partnerships with their wives. They used their partnerships to purchase the trucks from the company and they executed written agreements with the company for the provision of delivery of services. They only delivered goods for that company. They had no other customers.
Through the years, the agreements were updated every so often to account for rising expenses and living costs. But, in 2017, the agreements between the two partnerships and the company were terminated.
The two men then began proceedings in the Federal Court seeking entitlements alleged to be owed to them as employees of the company. The High Court ruled that, despite details of an ongoing regular relationship with the company over many decades, the men were engaged as contractors for the company, not employees.
The court acknowledged the reality of the difference in bargaining power between the company and the men. However, it emphasised the written terms of the contracts the men had signed with the company, rather than the “substance and reality” of their daily work routine.
It noted the drivers could have performed delivery services for other customers if they wished, because there were no restrictions in the contracts preventing them from serving other customers outside of the hours which they were contracted to work for the company.
It was a victory for ZG Operations Australia Pty Ltd.
The Second Employee or Contractor Case: Labour Worker – Construction
The second employer or contractor case heard in the High Court was Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd, involving a British Backpacker.
He had travelled to Australia on a working holiday visa.
In 2016, seeking a source of income, and with limited work experience as a part-time brick-layer and in hospitality, he obtained a “white card”, which enabled him to work on construction sites.
He contacted a labour-hire company in Perth, trading as Construct, and told the company, in an interview, that he owned a hard hat, steel-capped boots and hi-vis clothing, which he’d bought for less than $100 in the hope of finding construction work.
He was offered a role and given paperwork to sign. Among the documents he signed was an Administrative Services Agreement, which described him as a “self-employed contractor”. The next day, Construct contacted him and offered him work at a project site of a major client, Hanssen (a builder of high-rise residential apartments and offices), for the following day.
When he arrived on the Hanssen site, he was told he’d be supervised, primarily by a leading hand employed by Hanssen. He worked on the site for between three and four months, from July to November. His basic labouring tasks included emptying bins, cleaning workspaces and moving materials. He was paid by the hour and, when at work, was told what to do and how to do it.
In November 2016, he finished work on the Hanssen site and left Perth. However, he returned again in March 2017 and, that same month, restarted work on the Hanssen project.
Then, in June 2017, he started work on a different Hanssen project, doing practically identical work. However, four days later, he was told he was not to continue working on that second Hanssen project. Thereafter, he did not receive any more work from Construct.
Eventually, the young man and the Construction, Forestry, Maritime, Mining and Energy Union began proceedings in court against Construct, seeking orders for compensation and penalties. Their claims were made on the basis that Construct had not paid the man his entitlement, as an employee of Construct, in accordance with the Building and Construction General On-site Award 2010.
The crucial question in the court proceedings was whether the man was an employee of Construct, rather than a contractor. The High Court ruled that the man was employed by Construct.
It emphasised the fact that, under the contract, Construct was entitled to control who the man worked for and that, once the man was assigned to a client (i.e., Hanssen), he had to do what the client told him to do. He was simply not permitted to do otherwise.
The judge said the marketability of Construct’s services as a labour-hire agency turned on its ability to supply compliant labour and, without that subservience, the labour would be of no use to Construct’s clients.
That judge concluded that right of control was a key asset of Construct’s business and that the young man had no right to exercise any control over what work he was to do and how that work was to be carried out. And that being so, the man’s relationship with Construct was characterised as a contract of service rather than contract for services. Therefore, the man was Construct’s employee, not a contractor.
The Importance of Written Contracts – More Clarity for Employee or Contractor
These cases bring even further clarity to the often contested area of common law. They also serve to further highlight and emphasise the importance of written contracts. If someone has undertaken to do some work on the basis of a comprehensive set of written terms, it’s those terms which will be the basis for determining whether or not they are an employee or an independent contractor, not the day-to-day reality of the working arrangements.
For this reason, it is critical that all involved parties, whether it is employers, business owners, contractors or employees, seek independent professional legal advice to ensure that they fully understand, and are happy to accept, the written terms of the agreement. As can be seen in the above examples, it is the written agreement that will ultimately determine the nature of the working relationship and the applicable conditions and entitlements.
Our team of employment law experts at The Quinn Group provide professional employment law advice such as preparing or reviewing employment or contractor engagement contracts, or any other employment law matter. Contact us by calling 1300 QUINNS, +61 2 92269166 or submit an online enquiry to schedule an appointment.
Contractors & Employees Taxation Liability Reference Guide
To assist with navigating the often uncertain terrain of payment obligations to contractors versus employees, our team of experienced tax accountants have developed the Contractors & Employees Taxation Liability Reference Guide.
Download our FREE Contractors & Employees Taxation Liability Reference Guide now.
**the guide is for reference purposes only. The experts at The Quinn Group can provide professional legal and tax advice to ensure that you have the right contracts and agreements in place and are making the correct payments to your workers.