Question — When is an independent contractor not an independent contractor? Answer — When they are an employee.

28 February 2022

Engaging a person as a contractor is often a straightforward way of managing access to a certain skill-set for a fixed amount of time. However, it is important to ensure that a contractor is not engaged by a business to perform services in circumstances which otherwise may be characterised as an employment relationship.

This characterisation is important as the Fair Work Act 1994 (SA) regulates the relationship between an employer and employee, including by the grant of various statutory rights to an employee, such as leave entitlements. In addition, an employment relationship creates other statutory obligations on an employer, including the requirement to pay superannuation and payroll tax.

Conversely, an independent contractor is not entitled to the same ‘employment relationship’ rights as an employee, with the trade-off generally being recognised as a higher rate of pay, or fixed fee for the services, and control and flexibility in the performance of those services.

On a practical level, it can, at times, be difficult to appropriately characterise the relationship and things can become ‘unstuck’ for a council or a subsidiary established under the Local Government Act 1999 (SA), in circumstances where it considers it has engaged services on the basis of a contractor relationship, but a Court or Tribunal determines the relationship is one of employer/employee.

In which case, and subject to the duration of the engagement, the organisation may find itself responsible for significant payments in respect of unpaid leave entitlements and taxes, accrued from the commencement of the deemed employment arrangement.

Historically, Courts have applied a number of tests to characterise the relationship, to broadly assess the ‘totality of the relationship’.

However, earlier this month the Full Bench of the High Court handed down two (2) significant decisions in the determination of the contractor/employee dichotomy; in Construction, Forestry, Mining and Energy Union and Anor v Personnel Contracting Pty Ltd[1] (Personnel Contracting) and ZG Operations Australia Pty Ltd & Anor v Jamsek and Ors[2] (Jamsek).

Whilst these decisions delivered different outcomes, in Personnel Contracting an employment relationship was construed; but in Jamsek the independent contractor relationships were confirmed, the Court nevertheless applied a unified approach to the question in each decision, with the majority of the Bench confirming the primacy of the contract between the parties.

That is, the High Court determined where the terms of the contract are comprehensive, and clearly set out the rights and obligation of the parties, the relationship should be assessed on the terms as agreed between the parties.

Notably, in Personnel Contracting, the High Court confirmed that simply labelling an agreement a ‘contractor agreement’, referring to the parties as principal/contractor, and/or relying on a clause defining the relationship as being that of an independent contractor, did not go far enough.

Rather, the High Court considered the specific provisions under the contract to ascertain the level of control of the parties, in finding there was an employment relationship in existence, principally, based on the control Personnel Contracting had to direct the other party to perform services under the contract.

In Jamsek, the High Court held the applicants were independent contractors, given the comprehensive terms under the written contracts and the actions taken by the parties to meet the obligations under the same.

Unfortunately, and as to be anticipated, these recent decisions do not clarify the position where a written contract may be in existence, but its terms are incomplete or unclear.

It is timely then for any council or subsidiary engaging contractors to carefully review those contracts to ensure they clearly articulate a ‘contractor relationship’ and not one of an employer / employee.

A clear and unequivocal contractor agreement for services supports the characterisation of the contractor relationship and defines each party’s rights and obligations. A clause merely stating the nature of the relationship as one of principal and contractor will be insufficient, the level of control of the parties will be a primary consideration.

[1] [2022] HCA 1

[2] [2022] HCA 2

For more information, please contact:

Tracy Riddle on (08) 8113 7106 or triddle@kelledyjones.com.au

Zinta Docherty on (08) 8113 7112 or zdocherty@kelledyjones.com.au