Employees vs. Contractors – high court decision gives considerable weight to contract terms

A recent high court decision has determined that contractual terms and rights outweigh subsequent business operations that closely resemble that of an employer-employee relationship. The decision overturns a past determination finding the opposite, and potentially changing the balance of power in principle-contractor arrangements with drivers and the determinative value of agreements. The following article explores the decision and the greater impact.

The Initial Case

In Jamsek v ZG Operations Australia Pty Ltd, 2 drivers were engaged by ZG Operations, a multinational lighting manufacturer, between 1977 and 2017. They were initially employed directly by the business until 1986, when they were given an ultimatum to either become contractors or risk not being offered future work when the business moved. Agreeing to becoming contractors and purchasing vehicles from ZG Operations, the work was substantially the same as before with a few exceptions. One of those exceptions included deciding their daily activities within their chosen delivery areas. It was this degree of control over their day-to-day- activities that, amongst other considerations, lead to an initial finding that the drivers were not employees for the purposes of the Far Work Act.

Initial Appeal

The decision was successfully appealed by the workers* on the basis that the initial finding relied too heavily on irrelevant factors and did not correctly apply the ‘multi-factor test’. The multi-factor test is a set of common indicators that may contribute to determining whether a person is an employee or contractor for Fair Work Purposes. Similar tests exist for Superannuation and Long Service Leave purposes. Of importance, within the test, was the drivers’ degree of control over their day-to-day- activities.

While the test did correctly consider that the drivers had a large degree of control over how they performed their day-to-day activities, it failed to take into account that given both drivers worked for just ZG Operations in what would-have-been full-time hours if they were employees, there was little else they could do with their time, including perform work for any other business. This became further relevant when considering that, for the majority of the time, their vehicles and uniforms each carried permanent logos for ZG Operations businesses.

Several other indicators also needed to be considered including that ZG Operations dictated the rates and that the work performed by the drivers was primarily a service (as compared to knowledge, advice and expertise). How the relationship changed in 1986 at the initiative of ZG Operations, including the sale of the vehicles to the drivers at a price determined by ZG Operations, also required consideration.

High Court Appeal

In appeal to the High Court, the High Court unanimously held that the respondents were not employees of the company. In a statement released after the decision they stated the following:

The court noted that a contract could be challenged if it was a sham, or otherwise not lawful. However, the contract terms will determine the nature of the relationship failing any such challenge. This works in both directions – an employer cannot claim that an employee was an independent contractor, and an independent contractor cannot claim to be an employee.

Regarding the case, the court highlighted the fact that after 1985 or 1986, the contracting parties were the partnerships and the company. The contracts between the partnerships and the company involved the provision by the partnerships of both the use of the trucks owned by the partnerships and the services of a driver to drive those trucks. The only relationship between the drivers and the company was a contract for the carriage of goods. Both parties acted, during the course of the relationship since ’85 or ’86, as though they understood the relationship to be one of principal and contractor. Together, these factors determined the relationship to be that of a principal and contractor.

Impact on the decision

The High Court decision significantly recontextualises how and when the multi-factor test may be applied. The test has, up until now, been a tool available to determine the true nature of a person’s status as either an employee or contractor at any stage during the relationship. This new ruling will potentially limit when the tool can be applied. In particular, the test may not be applied where the “substance and reality" of the relationship is not in question. There may be no question when the parties have acted in line with the expectations of the relationship, e.g. whether or not one party invoiced the other for work.

Alternatively, the how the test is applied may change with the greatest determinative weight being placed into a single indicator - the "Inention of the Parties" and the agreement that describes those intentions.

In either case, this ruling provides greater certainty for now that should a business engage independent contractors, such as owner-drivers, in this capacity through formal agreement, that this relationship cannot be reclassified at a later time.

Importantly, this decision has sparked discussion surrounding the need for legislative changes that would protect vulnerable persons from exploitation, beyond that of current sham contracting laws. It is generally not recommended that any QTA member rush to change their business practices until the dust is settled around this decision.

If you would like assistance with this review or have questions surrounding this article, please contact Ezra Pyers, QTA's Employment Relations Manager, on Phone 07 3394 4388 | M 0411 123 185 | E ezra@qta.com.au.

Note: *One of the workers’ appeal was made by their estate.