Employee or contractor

Issued: 4 March 2022

Employee or independent contractor status is a matter of contractual construction

In two recent decisions, the High Court held that when determining if a person is an employee, the central (and usually sole) role for the Court is to examine the rights and obligations in the contract governing the relationship between the parties: Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.

These decisions highlight the importance of closely considering the terms of any contractual agreements reached between government agencies and independent contractors. 

Key points

  • Where the parties have comprehensively committed the terms of their relationship to a written contract (and there is no dispute as to the validity of the contract or suggestion that it is a 'sham' agreement), the characterisation of the relationship as one of employment or otherwise proceeds by reference to the rights and obligations of the parties under that contract.
  • It is rare that the parties’ description of their status or relationship (i.e. 'employee' or 'contractor') will assist a Court in ascertaining their rights and duties.
  • The rights and duties of the parties under a written agreement are not altered by any inequality of bargaining power, nor by any non-contractual expectations.

The decisions

CFMEU v Personnel Contracting Pty Ltd, the Court found that a man working on construction sites purportedly as an independent contractor for a labour hire company was in fact an employee of the labour hire company. This was because the contract, despite using the language of contracting, in substance provided for an employment relationship.

In reaching this conclusion, the Court had regard to the fact that the terms of the contract provided that the employee had no right to exercise any control over the work performed, that he was obliged to comply with all directions of the labour hire company, and that the labour hire company could fix the employee's remuneration.

In ZG Operations Australia Pty Ltd v Jamsek, the Court applied the same legal test but reached the opposite result. The Court found that two men had ceased to be employees when they (upon the insistence of their former employer) each purchased their own trucks and, in partnership with their respective spouses, entered into a contract to provide delivery services to their former employer. 

Whether the parties in each case were employees was significant for determining the whether certain entitlements were available, including under the Fair Work Act 2009 (Cth) and Long Service Leave Act 1955 (NSW).

In both cases, a majority of the Court emphasised that the focus of the enquiry is on examination of the rights and obligations of the parties under contract. The majority criticised the approach of the courts below, which involved undertaking a wide-ranging review of the parties’ dealings in order to determine if the workers were employees: CFMMEU at [33], [52], [186]-[189]; [43]-[44], [162]; Jamsek at [51].

For example in Jamsek the majority held that the non-contractual expectation that the drivers wear a company uniform or display a company logo on their vehicles did not alter the contractual rights or obligations between the parties or render the drivers employees: [52]-[58].

Implications for employers 

Labels (e.g. 'employee' or 'contractor') used by parties in contracts to describe their relationship are not determinative or often even relevant to determining whether an employment relationship exists: CFMMEU at [63]-[66], [79], [86], [184].

The task for a court is to identify whether the 'totality of the relationship' between the parties, as embodied in the contract reflects an employment relationship: CFMMEU at [61]. 

The decisions are significant when dealing with the status of employees and contractors, clarifying that circumstances outside the contract between the parties are of limited relevance.

Government agencies who engage independent contractors to perform work should closely consider the terms of any contractual agreement to ensure that they could not be interpreted as indicating the existence of an employment relationship.

Contacts

Marina Rizzo, Director
marina.rizzo@cso.nsw.gov.au
02 9474 9156

Sophie Roden, Senior Solicitor
sophie.roden@cso.nsw.gov.au
02 9474 9546

Last updated:

16 Nov 2022

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