High Court gives green light to independent contractor arrangements

Yesterday the High Court handed down two very significant judgments on test cases about the legal distinction between independent contractors and employees.

In those decisions the High Court:

• decided that (save for very limited exceptions) where there is a comprehensive written contract in place, whether a person is a contractor or an employee must be determined solely by the terms of that written contract;
• clarified the key features of a contract which will determine whether workers are contractors or employees; and
• decided that workers provided under certain commonly used types of labour hire arrangements (who were previously considered to be independent contractors) are in fact employees of the labour hire agency.

This means that:

• businesses involved in, or wishing to enter into, independent contractor arrangements will have much greater certainty (but only if they have properly drafted comprehensive written agreements in place);
• there is likely to be increased scope for businesses to enter into independent contractor rather than employment arrangements; and
• labour hire businesses who provide workers on a contractor basis may be at risk of substantial employee entitlement claims and regulator action unless they have written agreements in place which meet the independent contractor tests clarified by the High Court.

In light of the above:

• businesses should review any existing contractor agreements to identify risks and make any necessary changes so that their agreements meet the High Court tests;
• businesses may wish to further explore their options for independent contracting arrangements;
• any businesses involved in contractor labour hire should obtain advice on their risks and the steps they can take to minimise those risks and restructure their arrangements going forward.

The two decisions are summarised below.

Labour hire “contractors” in fact employees

The first decision of Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 concerned a trilateral labour hire arrangement (commonly known as an Odco arrangement) in which Mr McCourt, a British backpacker entered into a purported service agreement with Personnel Contracting (Construct), who operated a labour hire company.

Under the terms of that agreement, Mr McCourt was described as a “self-employed contractor” and assigned by Construct to work on two construction sites operated by a client of Construct, Hanssen Pty Ltd. Mr McCourt performed his work under the supervision and direction of Hanssen staff.

Based on the terms of the written contract between Mr McCourt and Construct the High Court found that Construct had effective control over how and for whom Mr McCourt would provide his labour who in return received payment from Construct for the work he performed.

On that basis, the High Court held that the relationship between Mr McCourt and Construct was in fact an employment relationship at law, overturning a number of previous decisions which had found that workers under similar Odco arrangements were independent contractors.

In reaching this view, the majority of the High Court was not swayed by submissions of Construct that this type of Odco arrangement has been relied upon by a significant number of businesses and to overturn those authorities would throw those businesses into uncertainty and expose them to significant liability.

Drivers found to be independent contractors

The second decision of ZG Operations Australia Ltd v Jamsek [2022] HCA 2 (Jamsek) is likely to provide clarity to businesses or employees in the owner/driver and gig economy models.

Jamsek involved two truck drivers who were initially employed by ZG Operations as truck drivers driving trucks owned by the company. ZG Operations decided that it would no longer employ drivers and offered the truck drivers the opportunity to purchase their own trucks and to “become contractors”.

The two truck drivers accepted the offer and (in partnership with their spouses) entered into written contracts with the company to provide delivery services, purchased trucks from the company, paid the maintenance and operational costs of those trucks and invoiced the company for delivery services via the partnerships.

Both drivers delivered for ZG Operations 5 days a week from at least 6am to 3pm each day. Both drivers did not drive or deliver goods for any other business and were encouraged to carry the company’s logo on their clothing and trucks.

On the terms of the written contracts the High Court found that these were independent contractor relationships. The fact that 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”. The High Court noted that, while the drivers did not in fact deliver for any other clients, they had the right to do so under the written contracts. This reflected the High Court’s view that the relevant inquiry was as to the rights and obligations of the parties under the written contracts and not the practical outcome.

One matter that was not decided (and was remitted back to the Full Federal Court to determine) is whether the truck drivers were entitled to superannuation under the extended definition of “employee” for superannuation purposes (i.e. whether they were paid wholly or predominantly for their labour).

This article provides general commentary only. It is not legal advice. Before acting on the basis of any material contained in this article, seek professional advice.