Employee/ contractor – two High Court decisions.
On 9 February, the High Court handed down two decisions relating to the issue of whether certain workers were employees. The cases were unrelated but heard on consecutive days, with the decisions released on the same day.
The first was the decision in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (9 February 2022). This looked at whether a labourer engaged as a contractor to a labour hire firm and on-hired to a construction company was an employee of either the labour hire firm or the construction company. The High Court held that he was an employee of the labour hire firm.
This case is significant because it overturns many previous decisions that held than an employment relationship did not exist in these circumstances. Indeed, the one dissenting Justice (Steward J.) did so largely because overturning the Full Federal Court’s decision in this case and previous cases (including Odco, a 1991 decision) would expose businesses to significant penalties on a retrospective basis.
Unsurprisingly, the High Court set out the reasons in considerable detail. The employee/contractor issue has a long history and there was much to consider. The High Court also accepted that there was a contract in writing between the worker and the labour hire company, and that the contract reflected the actual arrangements. The contract explicitly stated that the worker was not an employee.
This decision will have a far-reaching impact on labour hire arrangements nationally.
The High Court noted that the worker, an English backpacker (Mr McCourt), supplied nothing but his labour (and some minor PPE) and that both the labour hire company (Construct) and the construction company had the right to direct him in his work.
There was discussion by the High Court about the concept of contractors working in their own business as distinct from working in the business of their employer. The High Court said:
“That promise (for Mr McCourt) to work for Construct’s customer, and his entitlement to be paid for that work, were at the core of Construct’s business of providing labour to its customers. The right to control the provision of Mr McCourt’s labour was an essential asset of that business.”
Given the nature of the work undertaken by the labourer, the decision seems a sensible one. The main obstacle was the plethora of previous cases which restricted the lower courts in their ability to overturn those decisions.
The second decision was ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (9 February 2022). That case concerned a truck driver who had worked on a contract basis continuously for the one employer for more than 30 years. The contract required him to supply his own vehicle, which he updated over time. The case was an appeal from the Full Federal Court which had held that he was an employee of the transport company.
The High Court overturned that decision and held that he was an independent contractor. Again, the High Court set out reasons in considerable detail. It seems that the supply of a significant vehicle was the critical factor for the High Court. It was also noted that, from the very beginning of the arrangement, the driver had been engaged via a partnership he had with his wife.
The High Court noted:
“The services provided by the partnerships involved, compendiously, the truck‑driving skills of the respondents and the use of the trucks owned by the partnerships. The provision of such services has consistently been held, both in Australia and in England, to have been characteristic of independent contractors, not employees. In the present case, there is no reason to reach a different conclusion.”
These cases make a couple of things clearer, for us:
- The supply of labour, especially unskilled labour, by an individual where they are told what to do is likely to result in an employer/employee relationship, regardless of any labour hire arrangements and written contracts to the contrary.
- Where a worker is required to provide a significant piece of machinery or equipment to undertake the task, the arrangement will usually be a contract arrangement, even where the work is subject to management controls.
Both cases will provide plenty of background for those considering the employment relationship. Despite this, there continues to be a great degree of uncertainty, which makes it difficult for businesses (see below).
The decision in the CFMEU case will potentially have significant retrospective financial implications for labour hire companies.
Problems in identifying an employer/employee relationship
I note with interest that the Tax Institutes “urgent outstanding tax issues” highlights the issue with determining who is an employee across a range of taxes. That issue is identified as follows.
- Introduce an all-encompassing concept of ‘worker’ that covers both Federal and State Governments, to reduce the compliance costs and keep up with the recent changes and trends in the labour market (such as the ‘gig economy’).
As I recall, the ATO set up a similar project in the late 1990’s, led by an Assistant Commissioner, Graham Harrison.
The result was that it proved too big a task for a mere mortal, but some changes to the withholding regime were undertaken and the Personal Services Income test was introduced. It was also hoped that the introduction of the GST and ABN requirements would alleviate some of the problems.
Many Australian jurisdictions tried to solve this problem with their “relevant contract” provisions for payroll tax purposes. This resulted in many pages of legislation, some black and white rules but not much in the way of clarifying the position of the worker.
As far back as 1991, the Federal Court in the Odco decision noted that it was getting increasingly more difficult to distinguish between an employee and a contractor, and perhaps a third category of worker was required. This is even more so now with workers in the gig economy.
Indeed, the Commissioners of State Revenue look at what they consider “employee-like contractors”.
The problem is the absolute dichotomy between an employee and a contractor. As it currently stands, you need to be either one or the other. Perhaps we need to consider a third category.
The concept of employee (or worker) has its origins in the past, stemming from the master/servant principles. The concept is found in a range of State and Federal laws. It would certainly be better for everybody if they knew exactly where they stood in this regard. As much as anything, the difficulty arises as sometimes the parties are on the same page in wanting an outcome as contractor/subcontractor, and sometimes they are at odds, hence the Sham Contracting legislation as an attempt to overcome this.
Whiles an all-encompassing concept of “worker” is the holy grail, perhaps we need to be more creative in our solutions arising from this binary concept of employee or independent contractor, realising that any solution we may come up with will not be perfect.
Tony Ince, Mostyn Consulting 