Employment Contracts – the terms and conditions are omnipotent
- February 28, 2022
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Written by Natalie Lenwood, Trainee Solicitor
Recent High Court decisions in Forestry, Maritime, Mining and Energy Union & Anor v Personal Contracting (Personal Contracting) and ZG Operations & Anor v Jamsek & Ors and Construction (Jamsek) indicate an important shift in ascertaining if an individual has been engaged an employee, or independent contractor.
For the past 30 years, the courts have relied on a ‘multi-factorial’ analysis in this determination, providing that both the terms of the contract, and rights and obligations arising after contractual formation, are considered. This approach insists the courts consider the totality of the employment relationship, beyond that which is contained within the contract. This process has been criticised for struggling to maintain objectivity, integral to the role of the law. Additionally, this approach fails to provide clarity for business in attempting to prescribe specific employment roles and responsibilities.
However, the recent High Court rulings decisively demonstrate that whether a person is an employee or an independent contractor relies wholly on the legal rights and obligations contained within the relevant contract. The decisions of the High Court earlier this month confirm the approach applied in WorkPac Pty Ltd v Rossato, decided in August 2021.
In the first case, Personal Contracting, Daniel McCourt, an English backpacker, entered a contractual relationship with a labour hire company, Construct. This contract referred to McCourt as a ‘self-employed contractor’. McCourt was assigned to work on construction sites run by an external construction company, Hanssen, primarily performing labouring duties. Following the cessation of his employment, McCourt commenced proceedings against both Construct, and Hanssen in the Federal Court. McCourt claimed breaches of the Fair Work Act 2009 (Cth), on the basis that he was not paid, or treated according to the Building and Construction General On-Site Award 2010, consequently seeking both compensation and penalties. It was agreed that McCourt would be entitled to be paid, under the award, if he was classified as an employee, however he would have no such entitlement if found to be an independent contractor.
At first instance, a single judge, and Full Court held that McCourt was an independent contractor, following application of the ‘multi-factorial’ test. This conclusion was founded on both the contractual terms, and successive conduct following contract creation. Despite this, Lee J noted in his judgement that this conclusion was not ‘intuitively sound’, however, was not prepared to depart from the precedent established in similar cases.
This finding was subsequently overruled, with the majority of the High Court concluding that McCourt was an employee of Construct, and that the subjective consideration of the totality of conduct, facilitated by the ‘multi-factorial’ approach, is not necessary. The High Court clarified that the correct approach was the utilization of established contract law principles, only having regard to what is contained within the written contract. Consequently, characterisation of employment is to be determined by legal rights and obligations arising purely under the contract, as it has been entered into. It must be noted that this principle may not be adopted if there is any allegation of sham contracting, and that it is still subject to contractual invalidity and principles of waiver.
The finding of McCourt as an employee was owing to the fact that McCourt’s contract allowed Construct to determine his pay rate, directly pay wages, retained a ‘right of control’, and termination rights over McCourt. Additionally, the High Court clearly noted that any use of the labels ‘employee’ or ‘contractor’ between themselves is wholly irrelevant to this determination, as is the individual right to accept or reject offers of work for external companies.
This approach was unanimously confirmed in Jamsek, whereby the High Court only examined the terms contained in the relevant contracts, in determining the employment status of two truck drivers. As the contractual terms did not indicate that the truck drivers ceded any right of control or autonomy, the High Court held that they were independent contractors, rather than employees.
These recent High Court decisions have important implications for companies hiring workers. As it appears that a comprehensive written contract will be the sole consideration in determining if an individual is an independent contractor or employee, it is crucial that employers and business ensure that their employment contracts are well drafted, and clearly outline the rights and duties that align with the role intended to be bestowed upon the individual. Additionally, these judgments emphasize that it is immaterial how a relationship has been labelled between parties, or how parties understand the characterisation. However, with well-drafted contracts, this approach should provide more certainty than the ‘multi-factorial’ test, allowing for greater confidence in relationships arising from contracts that accurately reflect the intended arrangement.