Employee vs Independent Contractor: An important dichotomy

The distinction between an employee and an independent contractor has long been the subject of judicial consideration, and indeed legal commentary.

Recently, the High Court delivered two judgements that marked a new approach to determining whether a person is an employee or an independent contractor.

The High Court held that “where parties have comprehensively committed the terms of their relationship to a written contract, the efficacy of which is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute, the characterisation of that relationship as one of employment or otherwise must proceed with reference to the rights and obligations of the parties under that written contract.”

It is an important distinction for business owners and individuals alike.

Failure to understand the difference between employees and independent contractors could have significant consequences, such as liability for years of unpaid superannuation and PAYG tax.

The High Court decisions and their implications will be discussed below.

The High Court decisions

CFMEU v Personnel Contracting Pty Ltd

In CFMMEU v Personnel Contracting Pty Ltd (“Personnel Contracting”), the Court considered the terms of an administrative services agreement (“ASA”) between Mr McCourt and Personnel Contracting, a labour-hire company. The ASA described Mr McCourt as a “self-employed contractor”.

Under the ASA, Personnel Contracting was imbued with a right of control over Mr McCourt. Further, Mr McCourt agreed, under the ASA, to comply with any direction by Personnel Contracting in respect of the supply of his labour. The provision of Mr McCourt’s labour was controlled by Personnel Contracting and Personnel Contracting paid Mr McCourt for that labour.

The level of control over, and compliance by, Mr McCourt was considered instrumental to Personnel Contracting’s business as a labour-hire company. The fact that Mr McCourt was described by the ASA as a “self-employed contractor” was given little weight.

The High Court made the distinction between a “contract of service” and a “contract for services”, and determined Mr McCourt and Personnel Contracting had entered into the former. It was held that Mr McCourt was an employee of Personnel Contracting.

 

ZG Operations Australia Pty Ltd v Jamsek

The second case, ZG Operations Australia Pty Ltd v Jamsek (“Jamsek”), involved two men, Mr Jamsek and Mr Whitby, whose respective partnerships had entered into contracts with ZG Operations Australia Pty Ltd (“ZG Operations”) for the provision of delivery services (the “Contracts”).

Mr Jamsek and Mr Whitby were previously employed by ZG Operations as truck drivers. ZG Operations gave the men the option to purchase the trucks they drove and enter into the Contracts. Despite having entered into the Contracts, the two men argued that they were entitled to superannuation payments, among other entitlements, for the entire duration of their engagement with ZG Operations.

The Contracts clearly stipulated that Mr Jamsek and Mr Whitby each were to provide delivery services to ZG Operations by using the trucks they had purchased from the company, that they were to maintain those trucks themselves, obtain independent insurances and invoice the company for their services.

Like in Personnel Contracting, the characterisation of the relationship between each of the men and ZG Operations was determined by reference to the rights and obligations created by the Contracts. By contrast, the High Court found in this case that the men had entered into “contracts for services” rather than “contracts of service.”

It was held that Mr Jamsek and Mr Whitby were not employees of ZG Operations.

What does it all mean?

The High Court decisions of Jamsek and Personnel Contracting provide guidance for business owners engaging both employees and independent contractors.

In deciding whether the relationship is one of employment or of independent contracting, the Court will first consider the rights and obligations of the parties as set out in their written contract, provided the validity of that contract is not challenged. The day-to-day relations of the parties are only considered where the contract is unclear.

Careful drafting of contracts will provide clarity to the nature of the relationship, may prevent future claims and offer business owners with a level of certainty.
If you are concerned about the nature of the relationship between you and your employer, or you are a business owner concerned about your contractor agreements, contact our office for a confidential discussion about your matter.

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