High Court gives primacy to contractual terms over totality of relationship in the employee/contractor dichotomy

In a much awaited decision, the High Court of Australia has allowed an appeal, overturning the decision from the Full Court of the Federal Court of Australia (FCFCA), in determining that Mr Jamsek and Mr Whitby (the Respondents) were not employees of the first and second Appellants, ZG Operations Australia Pty Ltd and ZG Lighting Pty Ltd, and its predecessor companies (the Company).  

Facts and Procedural History

From 1977, the Respondents were initially employed as truck drivers of the Company. In late 1985 or early 1986, the Company advised the Respondents that it would no longer employ them as employees, and would continue to use their services only if they purchased the trucks and entered into new contracts to carry goods for the Company, effectively as independent contractors. The Respondents agreed to the new arrangement and each set up a partnership with their spouses. Under this new agreement, the partnership invoiced the Company for the delivery services provided, was paid for those services and used the net revenue earned for those services as income of each partnership (1986 Contract). The partnership would also pay for the running costs and other expenses associated with the trucks, including public liability insurance and motor vehicle insurance.

In 2017, the agreement between the Respondents and the Company was terminated. The Respondents subsequently initiated proceedings in the Federal Court of Australia (FCA) seeking declarations in respect of statutory entitlements alleged to be owed to them as employees of the Company under the Fair Work Act 2009 (Cth) as well as superannuation and long service leave entitlements.

At first instance, the FCA determined that the Respondents were independent contractors of the Company, and this was subsequently overturned on appeal to the FCFCA, which found they were employees.

Decision

The High Court considered the following two errors in the approach of the FCFCA:

1. significant emphasis was placed upon the characterisation of the totality or substance of the relationship based on the manner in which the parties conducted themselves during their relationship; and
2. the disparity in bargaining power between the parties affected the contract, such that the “reality” of the relationship was one of employment.

It was determined that these expansive approaches involved “…an unjustified departure from orthodox contractual analysis”.  

Accordingly, the High Court held that the Respondents were not employed by the Company but rather, were members of a partnership which provided services to the Company. In so doing, it found, inter alia, that:

1. the partnerships, rather than the individual Respondents, owned and operated the trucks. Accordingly, it was not for the Respondents to say that they were not conducting a business of their own in circumstances where they were jointly and severally liable and “ enjoyed the advantages of splitting the income generated… with their fellow partners”; and
2. when adopting an orthodox approach to interpretation of contract, the 1986 Contract came about because of the Company’s ultimate refusal to continue employing the Respondents and its insistence that the Respondents would only be engaged if they owned and operated the trucks to carry goods for it.

The proposed cross-appeal

The Respondents filed a Notice of Cross-Appeal contending that they fell within the broad definition of “employee” under s 12(3) of the Superannuation Guarantee (Administration) Act 1992 (Cth). The High Court considered that it was crucial for the matter to be remitted to the FCFCA as it was inappropriate for it determine the issues in circumstances where the Commissioner of Taxation was not a party to the proceedings, and a ruling by the High Court could have substantial consequences for it.

Implications

This judgment indicates a departure from the characterisation of the employee/contractor relationship based on the substance and totality of the relationship in practice. In the wake of the High Court’s decision in Rossato, the present ruling is not surprising, ultimately giving primacy to the written agreement to determine the true relationship between the parties. In this instance, the Court did not apply the more commonly used ‘multifactorial approach’ rather, it examined the terms of the contract.

It can be seen from this decision that courts may adopt an orthodox approach to contract interpretation. In this case, it was pivotal that the Company explicitly refused to engage the Respondents as employees- which resulted in the formation of the 1986 Contract, and the consequent finding that they had been members of a partnership providing delivery services to the Respondent.

While it is important to appropriately characterise an employee or contractor based on the totality of the relationship, businesses must ensure that their written agreements accurately and appropriately reflect the true nature of the engagement.

If you require any assistance in reviewing your employment contracts or contractor arrangements in light of these new developments, please contact our employment team.