High Court redefines common law employment test

Last week, two significant decisions were handed down by the High Court that confirmed the approach to be taken for assessing whether an individual is engaged as a contractor or an employee at common law.

On the basis of this approach, the High Court decisions affirm that it will be necessary to predominantly assess the engagement based on contract law, i.e. the rights and obligations as expressed in the underlying contractual arrangement itself, as opposed to looking beyond the contract and identifying the nature of the engagement. In doing so, this position reinforces the supreme importance of good contract drafting which mirrors the intention of the engagement and potentially re-documenting an arrangement, if the engagement changes.

The decisions are limited to determining an individual’s status at common law which in turn will determine whether the individual has entitlements under the Fair Work Legislation and Modern Awards. The authority provided by these decisions, i.e. that the terms of the contractual arrangements themselves are paramount, does not overcome the sham contractor provisions applying. As such, a look through approach for sham contracts is still relevant.

We also note that even if an individual is determined to be a contractor at common law, “deemed employment” can still arise for the purposes of the superannuation and payroll tax regimes. This is because for superannuation and payroll tax purposes, the substance of the arrangement is assessed to identify whether the contractor is actually engaged on an “employment like” basis, despite what may be drafted in the contract.

A summary of each case is set out below.

Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 – common law employee

A labourer was engaged by Construct (a labour hire company) to work on two construction sites located at Construct’s client’s premises pursuant to an Administrative Services Agreement (Agreement). The labourer worked under the direct supervision of a builder, notwithstanding that under the Agreement he was described as a “self-employed contractor”.

The High Court reviewed the Agreement and identified that on its terms, the labourer was an employee. This is because it contained the following features:

1. Construct could determine for whom and where the labourer worked;
2. Under the Agreement, the labourer was obliged to co-operate in all respects in supplying his labour to Construct’s clients (the High Court referred to this as the supply of a “compliant workforce”, which was a key asset of Construct’s business, being a labour hire company); and
3. Construct could terminate the engagement if the labourer failed to obey Construct or the client’s directions in performing the services.

Even though the Agreement itself was positioned as a contractor agreement, the label ascribed to the labourer (i.e. being a “contractor”), did not alter the essential character of the relationship as described in the Agreement. On this basis, the labourer was determined to be an employee at common law.

ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors [2022] HCA 2 – contractor

Two truck drivers were originally employed by ZG Operations Australia Pty Ltd (ZGO) as delivery drivers. In 1986, both truck drivers were advised that there would be a change to their working arrangements and instead of being employees, they would be engaged as contractors by ZGO.

Each truck driver proceeded to establish a partnership with their wives, purchased the truck they were driving from ZGO and provided delivery services using this truck pursuant to a written contract. Revenue earnt from the engagement was returned as partnership income by each of the new entities. This continued until 2017 when the written contracts were terminated.

A dispute arose as to the nature of the engagement and the two truck drivers alleged that they had employee entitlements associated with employment since 1986. The High Court held that neither of the truck drivers were employees based on the contract itself as it lacked the essential terms and conditions, notably the lack of the ability for ZGO to exercise control over the truck drivers and indeed the partnerships themselves. In addition, the High Court held that where the parties had committed the terms of their relationship as to a written contract, the characterisation of that relationship as one of employment or otherwise must proceed by reference to the rights and obligations of the parties under that contract.

This case has been remitted by the High Court to the Full Court of the Federal Court of Australia to determine the question of whether “deemed employment” could arise under the superannuation regime. We will monitor this decision with interest.

If you have undocumented arrangements concerning individuals it is imperative that you ensure that a contract is placed on foot that correctly determines whether the individual is a contractor or employee.

Please contact our office if you would like our assistance in this regard.

We’re here to help.

Ann-Maree Ventura, Director