Whether a worker is classified as an employee or contractor is a legal issue which keeps on evolving. Disputes and claims have risen over the years in relation to contractors who should have been classified as employees missing out on entitled paid benefits.
Recent High Court rulings have shown a bit of a change in how the relationship between worker and employer is legally defined. This article explores those changes and how employers will need to shift their thinking going forward.
Moving away from relying on the multi-factorial test
The case of Stevens v Brodribb Sawmilling (1986) laid the initial groundwork in establishing the ‘multi-factorial’ test for determining the working relationship of a contractor and an employer.
It was ruled in this case that, to test the definition of the relationship;
- The whole of the relationship is to be considered when determining the relationship and secondly,
- The level of control which is exercised between the parties is also an essential element that needs to be taken into account.
Using the multi-factorial approach of evaluating the relationship, the general characteristics (but not an exhaustive list) of an employee vs a contractor relationship can be defined as per the below.
|Right to control
|Performs work for others
|Right to suspend or dismiss
|Emanation of business
|Has a separate place to work
|Paid by periodic wage or salary
|Advertises to or performs services for the world at large
|Right to delegate or subcontract
|Has significant business expenses
|Has a risk of making a loss
The multi-factorial approach of taking into account all of the circumstances to determine the legal characterisation of the worker still applies today. But High Court rulings in the past few years now increasingly require employers to also consider the legal rights and duties as established by the written contract between the parties where one exists.
Recent High Court findings
The High Court has refined the multi-factorial test that was first established in Stevens v Brodribb Sawmilling. The up-shot of recent cases has prompted employers to define the nature of worker relationships through a more contractual lens.
A summary of common findings in these cases is as follows:
- The starting point for defining the relationship should be a written contract if one exists. The specific terms of the contract define the relationship, not how the worker is currently carrying out work or how things might change in the future.
- When contracts are not wholly in writing – employers should identify terms then characterise the relationship based on the terms established.
- The indicia of employment/independent contract remains relevant as per the multi-factorial test
- Control remains one of the surest indications of employment. The “own business” dichotomy may assist in analysis.
- Labels are not determinative. The fact that it is called an independent contractor agreement does not necessarily make it one.
- Post-contractual/non-contractual is only relevant to determine variation, vitiating factors or sham, statutory invalidation.
Contact Harrisons if you need help with the formation of your employment or independent contractor agreement.
Let’s take a look at two recent cases to get a better understanding of how the rulings were reached and why.
Ruling – worker was an employee
A British backpacker in Australia on a working holiday was employed by a labour hire company, with the contract describing him as a “self-employed contractor”. The backpacker was deployed by the labour hire company to work on two construction sites run by its client, where he performed basic labouring tasks under the supervision and direction of supervisors employed by the client. After some time, the worker was instructed by the hire company to cease working. There was no contact between the client and the backpacker.
The CFMMEU and the worker took the labour hire company to court for underpayment of wages, annual leave and recovery of other employee entitlements. At first instance, the judge, and, later, the Full Court, held that the worker was not an employee as per the multi-factorial test.
However, the High Court overturned the Full Court’s decision and held that the worker was an employee of the labour hire company. The High Court found that on a proper analysis, the terms in the independent contractor agreement amounted to an employer/employee relationship, regardless of the “self-employed contractor” label being used.
It was ruled that the multi-factorial test could not be relied upon solely for determining the relationship. The relationship of employment is distinct from the contract under which it is established and maintained. That the parties chose the label “contractor” to describe the backpacker did not change the character of that relationship which was properly one of employer and employee.
Ruling – workers were contractors
This case involved two truck drivers that were engaged as independent contractors for over 30 years via several contracts with ZG Operations. The drivers were initially employees, but later agreed to become independent contractors and had written contracts detailing this arrangement. The drivers set up partnerships with their spouses, purchased their own trucks, and were responsible for the costs of the vehicles.
The drivers claimed to be owed superannuation and long service entitlements on the basis that they had worked for ZG Operations for three decades and took the company to court. In making their ultimate finding, the three separate judgements of the High Court:
- Held that the express terms of the written contract between the parties should be given weight, not the parties’ conduct over the 30 year relationship.
- Stipulated that, in this case, the rights and responsibilities allocated in the contracts were clearly that of a contractor arrangement.
- Emphasised the fact that the drivers’ contracting entities were partnerships and that the drivers provided and maintained their own trucks, which were significant tools of their trade.
The High Court applied the same approach as in CFMMEU v Personnel Contracting by giving primacy to the contractual terms. Since the creation of the partnership, the parties had clearly entered into an employer/contractor relationship.
What do these recent case rulings mean for employers?
The High Court had made it clear that the written contract is key in determining the true relationship between worker and employer. Importantly, the multi-factorial test remains highlight relevant in determining if the relationship is employee or contractor.
However, the Court has also determined that the relationship/title given to the worker as per the written contract is not as important as the actual terms of the nature of the employment. A contract that designates an individual as a contractor may be held to not be so if the relationship does not reflect the definition of a contractor relationship using the multi-factorial test.
Unsure about the differences between an employee and a contractor? Contact the team at Harrisons for advice.
Claire Harrison is the Founder and Managing Director of Harrisons, a flourishing HR consulting business that sprouted in 2009 from Claire’s passionate belief that inspiring leaders and superstar employees are the key success factor to any business. With over 20 years’ experience, Claire has worked as a HR Director of multi-national organisations, as a Non-Executive Board Director, and a small business owner. Claire’s corporate career includes working with companies such as BHP, Westpac, Fonterra and Mayne Nickless.