Employee or independent contractor?

The distinction between whether a worker is properly characterised as an employee or an independent contractor can be difficult – and has important consequences.  In two significant decisions in 2022 the High Court clarified the test for determining the relationship between a business and its workers.  It means that businesses should ensure they have clear written contracts with their workers that comprehensively set out their relationship.

In 2022, two significant decisions by the High Court clarified the test for determining whether a worker is an ‘employee’ or an ‘independent contractor’.  That distinction can have significant consequences for businesses in many areas – including in relation to legal liability and obligations regarding payment, taxation and superannuation.

In determining the issue of whether someone is an employee or independent contractor, the court looks beyond the label applied by the parties or contained in the contract.  For the past 30 years, the accepted test in Australia for determining the true nature of a workplace relationship was the ‘multifactorial test’.  This stemmed mainly from two decisions of the High Court in 1986 and 2001: Stevens v Bodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 and Hollis v Vabu (2001) 207 CLR 21.  Essentially, the Court would look to the totality of the relationship between the parties and multiple factors, such as the business’ control over the person, the mode of payment, whether tools and equipment were provided, and so on.

However, two recent decisions of the High Court have somewhat moved away from this accepted approach.  Those decisions are: Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.  Essentially, those decisions gave more weight to the written contract between the parties in determining the workplace relationship.  The key takeaway from those two cases is that where the relationship is clearly demonstrated in the contract, that the court should apply the contractual terms and not go on a wide-ranging review of the facts of the relationship.

By way of example, in Personnel Contracting, a British backpacker was working in Australia as a ‘self-employed contractor’ with a labour-hire company, Construct, who sent him to work on constructions sites for their clients.  The Court held that the worker was in fact an employee of Construct.  This was due to several reasons, including that under the written agreement Construct had the right to control the work, the worker had an obligation to work for Construct’s clients, and the worker had the right to be paid by Construct.  (As an employee, the worker would be eligible for benefits including casual rates and leave.)

It is therefore important for businesses to understand whether their workers are employees or independent contractors.  The label that businesses apply to workers does not always hold up in court.  It is essential that businesses have clear written contracts which accurately reflect the true nature of the relationship with their workers.

Without a well-written contract, as the above cases demonstrate, businesses risk subjecting themselves to lengthy and costly disputes and potentially adverse court outcomes.  Further, businesses that knowingly or recklessly enter into a ‘sham contracting arrangement’ (such as misrepresenting to someone that they are an independent contractor when in fact they should be an employee, often to avoid paying them legal entitlements), can be fined large monetary penalties.

SWS Lawyers have extensive experience in employment law, including in the drafting and negotiation of employment contracts.  Should you require any assistance in this area please do not hesitate to contact us.

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  Please contact us if you require advice on matters covered by this article.