Workplace Insights | Contractor or Employee? – A new decision

Whether a worker is a contractor or employee has long been contemplated by the Courts. Recently it was revisited in the recent proceedings of Pruessner v Caelli Constructions Pty Ltd [2022] FedCFam2G (“Pruessner v Caelli”).

Naturally, the desire to save cash by cutting corners can encourage some to be careless when documenting working contracts. But this heedless gravitation towards informal workplace agreements inevitably lands many businesses in Court, defending their position in the great contractor or employee debate.

Thankfully, two 2022 High Court decisions provide some clarification on this very topic – ZG Operations Australia Pty Ltd v Jamsek [2022] HCA (“Jamsek”) and Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (“Personnel”).

Notwithstanding that the contentious contractor or employee issue has been repeatedly dissected by the Courts, the method adopted to distinguish contractor and employees has been quite a contentious topic. Pruessner v Caelli proved to be no exception.

Jamsek and Personnel – Contractor or Employee?

Both Jamsek and Personnel concerned yet another contractor or employee dispute. Prior to these cases, the Court’s approach to these disputes were somewhat complex, to say the least. For more than 20 years, the Courts implemented variations of the “multifactorial test”, which involved an evaluative judgment of the parties’ working arrangement, looking to the “totality of the relationship”.

This translates to the Court looking to elements of the working relationship in practice. Some considerations included:

1. The amount of control a principal/employer has over the worker;
2. Whether the worker can refuse work;
3. Whether the worker is entitled to take paid leave;
4. Whether the worker operates under an ABN;
5. Whether the worker issues invoices; and
6. How integrated the worker is in the business (for example, whether the worker must wear a uniform).

Over the years, this approach has received criticism, because the uncertainty of the weight that is applied to each of the considerations can inevitably result in inconsistent outcomes.

While the decisions reached in Jamsek and Personnel did not strictly kill the multifactorial test, the High Court certainly removed its primacy… The High Court clarified that, if the parties are bound by a valid written agreement which clearly outlines their rights and obligations, the characterisation of their relationship (i.e. contractor or employee) will not be impacted by the conduct of the parties, as long as they are acting in conformity with the provisions of the written contract.

However, it is also important to note the clear commonality in both Jamsek and Personnel… that there was a written contract. A commonality which was not shared by Pruessner v Caelli.

In both Jamsek and Personnel, the High Court held that it is flawed for the Court to apply the multifactorial test, with reference to the totality of the parties’ relationship, where the parties have signed a comprehensive written contract. Confirming the primacy of contract law principles, the High Court held that it is nonsensical to look at the conduct between the parties, where the rights and obligations are clearly written in a contract.

What Pruessner Says About the Contractor or Employee Debate

In 2012, Mr Peter Pruessner (“Mr Pruessner”) entered into an agreement with building company, Caelli Constructions (“Caelli”), regulating the work Mr Pruessner was to perform. However, for reasons unknown, the parties did not exchange an executed, written agreement. Some eight years later, it became very apparent the parties did not see eye to eye on the terms of Mr Pruessner’s engagement. When Mr Pruessner’s engagement with Caelli came to an end, Mr Pruessner claimed he was an employee and sued for his employment entitlements (payment of annual and long service leave, a redundancy payment, superannuation contributions and the like). But Caelli was not so agreeable – stating that Pruessner was engaged solely as an independent contractor.

In handing down the March 2022 decision, the Court echoed Caelli’s sentiments that Pruessner was not an employee. This decision was made, despite the Court being cognisant to the facts that Pruessner:

1. Worked on a regular, full-time basis of, on average, more than 38 hours per week;
2. Was paid hourly, not per each completed job;
3. Was authorised to engage labour, purchase goods and supplies for Caelli;
4. Was represented as a member of the construction business; and
5. Took directions from members of Caelli.

Although there were quantitative indicators in support of both parties’ position, the Court relied heavily on the High Court’s decisions in Jamsek and Personnel. As remarked when deciding Pruessner v Caelli, the Court was “fundamentally…bound to follow the approach taken by the High Court – despite the significant differentiating factor within Pruessner v Caelli – that there was no written contract in existence.

In handing down the decision, the Court emphasised that how the parties themselves characterised the working relationship at the time the contract was formed must be given considerable weight. This is a significant departure from the approach adopted by the Courts pre-Jamsek and Personnel. Although it remains uncontroversial that there was no written employment contract in Pruessner v Caelli – the Court held that the contract as originally charactierised by the parties is determinative. Despite relying almost entirely on Jamsek and Personnel in reaching the decision, the Court failed entirely to distinguish the very significant fact that the case it was dealing with did not have a written contract and therefore the test expounded in Jamsek was not appropriate.

On 8 March 2022, the Fair Work Commission sided with the High Court while delivering the decision of Waring v Hage Retail Pty Ltd (2020) FWC 540 (“Waring v Hage”). The Fair Work Commission held that, by nature of the decisions in Jamsek and Personnel,

“The Court has stated that contractual terms and not performance, where those terms can be ascertained and where the contract is not a sham, will determine the true nature of the relationship…”.

Interestingly, the implications of Jamsek and Personnel have not yet been explored in sham contracting matters before the Court. However, given the manner in which lower Courts and tribunals are now dealing with this issue, the question of sham contracting has become far more vexed and difficult to establish.

What Does This Mean for You?

While the Court’s rationale for heavily relying on Jamsek and Personnel in handing down the decision in Pruessner v Caelli may raise some eyebrows, the three cases certainly have great implications for employers and workers. Importantly, now and going forward, the Pruessner decision indicates Courts will accept the parties’ own characterisation of their contract as at the time when the contract was formed. It is evident from Waring v Hage the Fair Work Commission has already adopted such a view.

Jamsek and Personnel Contracting provide a timely opportunity for organisations to review their existing arrangements with independent contractors. Specifically, to:

• Ensure there is a written agreement in place which clearly sets out both the nature of the relationship as well as the parties respective rights and obligations under it;
• Confirm the rights and obligations of the parties specified in the agreement accurately reflect the nature of the relationship. Simply labelling the agreement as an “independent contractor agreement” or relying on a clause which provides that the parties agree there is an independent contractor relationship in existence between the parties is not enough; and
• Consider how any potential mischaracterised relationships could impact obligations in respect of payroll tax, workers compensation insurance and compulsory superannuation contributions.

As mentioned, the implications of the three cases where there is an accusation of sham contracting is still unclear. Because Pruessner did not make allegations of sham contracting, the Court did not undertake an in-depth analysis of the day-to-day activities of the parties. Following, businesses and workers will have to watch this space, to see how Jamsek, Personnel and Pruessner will be applied in sham contracting matters.

At the very least, the decisions act as a timely reminder of why you do not want to be taking shortcuts, for example, not having a written employment or contractor agreement.

Where to from here?

Potentially, the decisions also open the door for more relationships, including those in the gig-economy, to be contractually characterised as independent contractors, provided the rights and obligations of the parties specified in the agreement reflect a contractor rather than employment relationship.

Ultimately, time will tell as to the true impact of Jamsek and Personnel noting neither decision addressed:

1. What approach should be taken in the absence of a written agreement or where the validity of the written agreement was challenged (for whatever reason); and
2. How the multi-factorial test should be applied in these circumstances.

Until these questions concerning whether a work is a contractor or employee are resolved, Jamsek and Personnel Contracting make it clear that the devil is in the detail.

TIMELY TIP

Without a clear written employment contract or contractor agreement, it can become confusing for both employers and employees to know what their rights and obligations are in the workplace. Most importantly, businesses without written agreements for their workers often find themselves in difficult situations when the workplace relationships deteriorate and there is a dispute about entitlements. With that being said, it is uncontroversial why unambiguous, written contracts are vital to set clear obligations and expectations for all parties involved.

As contracts can look very different for employees opposed to independent contractors, we recommend the following for both employers and principals:

• Ensure there is a written agreement in place which clearly sets out both the nature of the relationship as well as the parties respective rights and obligations under it;
• Review your employment contracts and contractor agreements regularly to ensure the business’ operational requirements are being met;
• Consider the practical requirements of your business before offering employment or contract work, for example:
  1. Would the role be more suited for an employee, or an independent contractor? (Relevantly, consider the insurance, superannuation and taxation benefits)
  2. Are there any particularly important clauses which need to be included?
  3. If employing, does the business need a full time, part time or casual employee?
  4. If contracting, what does the business require of the contractor?
• Where possible, try to have open discussions with your workers about their contractual requirements, particularly where their personal circumstances change.

We regularly prepare varying employment contracts and independent contractor agreements. If you wish to discuss any aspect of this client alert or require specialist assistance or advice, please do not hesitate to contact us.

The article and timely tip is not intended to constitute and should not be treated as legal advice.