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Primacy of the Contract: Crystallising the "Multifactorial" Test

10 February 2022

The High Court handed down two landmark decisions on 9 February 2022, refocusing the "multifactorial" test that has been followed for over 20 years. 

In the decisions of Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations Australia Pty Ltd & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek), the High Court held that where parties have comprehensively committed the terms of their relationship to a written contract and the validity of which is not in dispute, the characterisation of their relationship as one of employment or otherwise proceeds by reference to the rights and obligations of the parties under that contract.

These High Court decisions are significant because the Court has crystallised that upon undertaking an analysis of whether a worker is an employee or contractor, regard must be had first and foremost to the terms of the agreement between the parties. The Court said, only in circumstances where the contract is considered ineffective, e.g. through waiver, estoppel or 'sham', would the analysis require consideration of the conduct between the parties in practice, subsequent to the formation of the contract. 

Personnel Contracting

In this case, the High Court considered an appeal from the Full Court of the Federal Court of Australia (FCFCA) concerning whether a labourer was considered an employee or an independent contractor while engaged by a labour-hire company.

Mr McCourt was offered a role with a labour-hire company trading as "Construct", and signed an Administrative Services Agreement (ASA). Mr McCourt was described under the ASA as a self-employed contractor. He worked on two construction sites run by Construct's client, Hanssen Pty Ltd (Hanssen). Mr McCourt was under Hanssen's supervision when performing basic labouring tasks, however, there was no contract between him and Hanssen. There was however a Labour Hire Agreement between Construct and Hanssen.

The proceedings were commenced against Construct in the Federal Court of Australia (FCA), and sought compensation and penalties pursuant to the Fair Work Act 2009 (Cth) (FWA). The ultimate issue was whether Mr McCourt was considered an employee of Construct for the purposes of the FWA. The primary judge in the Federal Court applied the multifactorial test and held that Mr McCourt was considered an independent contractor. An appeal to the Full Court was dismissed on the same basis.

The High Court has since handed down their decision to allow an appeal from the FCA, determining that Mr McCourt was in fact an employee of Construct. It was held that in circumstances where parties have committed the terms of their relationship to a written contract, and the agreement is not considered ineffective due to a waiver, sham or illegality, the characterisation of such a relationship must be established with reference to the rights and obligations of each party under the contract. Consequently, the multifactorial test, which involves a wide ranging review of both parties' conduct, in these circumstances, is no longer necessary. Instead, the rights and obligations of each party will be determined in accordance with established principles of contractual interpretation.

Jamsek

In this case, similarly to Personnel, the High Court considered an appeal from the FCFCA concerning whether two truck drivers were to be considered as employees or independent contractors.

The respondents, Mr Jamsek and Mr Whitby, were truck drivers for a company between 1977 and 2017. Whilst the respondents were originally engaged by the company as employees and drove company trucks, in or around 1985, they were offered an opportunity to become contractors and to purchase and own their own trucks. The respondents entered into a written contract to this effect, in partnership with their respective wives, and began invoicing the company for their delivery services and paying the maintenance and operational costs of the trucks.

Proceedings were commenced in the FCA seeking declarations with respect to certain entitlements alleged to be owed pursuant to the FWA, the Superannuation Guarantee (Administration) Act 1992 (Cth) and the Long Service Leave Act 1955 (NSW). The respondents argued that they were owed these entitlements as they were employees of the company. The primary judge determined that the respondents were not employees, but independent contractors. This decision was overturned by the Full Court on the basis that the "substance and reality" of the contractual relationship indicated that the respondents were employees.

The High Court has since handed down their decision on the appeal to overturn the FCA's decision, determining that the respondents were not considered as employees of the company. This decision is consistent to the approach adopted in Personnel Contracting, which is that where parties have committed the terms of their relationship to a written contract, and the agreement is not considered ineffective due to a waiver, sham or illegality, the characterisation of such a relationship must be established with reference to the rights and obligations of each party under the contract. Consequently, the contract between the respondents and the company is not a relationship of employment.

Summary

Since 2001, the Court has considered the issue of whether a person is an employee or an independent contractor using the multifactorial test. The test considered a range of factors, including the degree of control an employer had over the employee or independent contractor. In Personnel Contracting, the FCFA, applying the multifactorial test, found that Mr McCourt was an independent contractor. In Jamsek, the FCFCA, applying the multifactorial test, found that the respondents were considered employees of the relevant company.

Ultimately, on appeal to the High Court, these decisions were overturned, and it was found that Mr McCourt (in Personnel Contracting) was an employee, and that Mr Jamsek and Mr Whitby (in Jamsek) were independent contractors.  In clarifying the application of the multifactorial test, the High Court focused upon the written agreement when determining the legal character of the relationship. It was held that if the rights and obligations of both parties in the written agreement point to a person being an employee or independent contractor, and the agreement is not considered ineffective due to a waiver, sham or illegality, then the characterisation of the relationship will not be affected by the way in which the agreement operates.

Importantly, in Personnel Contracting it was confirmed that the "label" ascribed to a worker in a contract is not determinative of the true relationship. Therefore, in assessing the contract between the parties, the Court will look at the substance of the terms and conditions prescribed by it, and not the labels superficially attributed.

Implications

The cases have emphasised the importance of contracts when assessing the character of employee/contractor relationships.

It is imperative that employers ensure that all independent contractors are bound by clear and comprehensive written agreements, and that the terms and conditions of which demonstrate a contract for services as opposed to a contract of service.

To hear more about the impact of these decisions, we will be presenting a webinar on Wednesday, 16 February 2022 at 10am (AEST) and will repeat this webinar on Wednesday, 23 February 2022 at 10am (AEST). Please contact Selina Sawaya to register.

If you require further information or have any queries in relation to this legal update, please contact Matthew Smith or Mason Fettell.

We would like to acknowledge the contributions of Sally Coburn (Graduate) to this article.

Further Reading