Contract conquers conduct: The High Court decides the contractor/employee question
Yesterday, the High Court published two decisions addressing the “central question” of whether the workers involved were contractors or employees. The decisions could not have come at a better time. With the rise of unconventional contracting businesses like Uber, and companies often engaging individuals rather than a corporate entity with key personnel, the line between contractor and employee has perhaps never been so blurred.
For many businesses, engaging contractors presents an opportunity for reduced costs, increased flexibility and administrative simplicity. Employees are entitled to a range of minimum entitlements and protections set out in legislation and industrial instruments such as modern awards. That has led to some businesses being over-eager to classify workers as contractors (or consultants).
Courts and tribunals are attuned to that risk, and regularly deem ‘contractors’ to actually have been employees. For businesses, having the rug pulled out from beneath them can have catastrophic consequences. Businesses can be ordered to make back-payments of wages, superannuation and other entitlements to former workers re-classified as employees, as well as being liable to significant civil penalties. Hence getting the contractor/employee test right is key to ensuring legislative compliance and minimising liability.
What is the current test?
There is no straightforward test set out in legislation to determine whether a worker is a contractor or employee. Instead, it has been necessary to consider the ‘totality of the relationship between the parties’, which involves weighing a broad range of factors, with no one factor being decisive. For example:
|Factor||Typical Contractor||Typical Employee|
|Taxation||Tax is not withheld from payments by the business. Collects and remits GST.||Tax is withheld by the business and remitted to the ATO.|
|Control||Exercises significant control over when, where and how they work.||Is told when, where and how to work, and has less autonomy.|
|Tools and equipment||If substantial tools/equipment are required, they provide their own (e.g. a delivery truck).||Uses the tools and equipment of the business.|
|Uniform||Wears the uniform of their own business, or no uniform.||May wear the business’ uniform or other merchandise.|
|Method of payment||Issues invoices to the business. Is paid on the basis of completed tasks (e.g. number of products sold).||Paid at an hourly rate for attendance at work. May receive bonuses or commissions in addition.|
|Which business do they work within||Works for their own business (though it may be a small business with only one client, and their work may benefit another business).||Works within the business of another.|
In determining whether a person is engaged as a contractor or an employee, courts and tribunals have previously applied this “multifactorial test” to determine the true nature of the relationship and in doing so assessed the parties’ conduct over the whole course of their dealings with each other, beyond the written contract itself. The High Court’s decisions have curtailed that approach.
What did the High Court say?
The High Court’s ruling in both matters was that the terms of the contract are key. That does not mean businesses can simply call workers ‘contractors’ and resolve the matter. Rather, it is necessary to determine the ‘legal rights and obligations’ established by the contract, and then consider whether that arrangement is one of contracting or employment by reference to the totality of the relationship.
The High Court said in Personnel Contracting:
 Where the parties have comprehensively committed the terms of their relationship to a written contract the validity of which is not in dispute, the characterisation of their relationship as one of employment or otherwise proceeds by reference to the rights and obligations of the parties under that contract. Where no party seeks to challenge the efficacy of the contract as the charter of the parties’ rights and duties, on the basis that it is either a sham or otherwise ineffective under the general law or statute, there is no occasion to seek to determine the character of the parties’ relationship by a wide-ranging review of the entire history of the parties’ dealings. Such a review is neither necessary nor appropriate because the task of the court is to enforce the parties’ rights and obligations, not to form a view as to what a fair adjustment of the parties’ rights might require.
That approach of prioritising the terms of the contract is consistent with the High Court’s 2021 decision in Rossato, which concerned the definition of casual employment. The High Court in Personnel Contracting also endorsed a view, previously expressed tentatively in Rossato, that whether a person is engaged to work for another as an employee or an independent contractor “may depend upon the extent to which it can be shown that one party acts in the business of, and under the control and direction of, the other”.
Unfortunately, the High Court has not delivered a complete panacea to the employee/contractor confusion. The outcome in both cases reflect an inconvenient reality: contractors and employees take all shapes and sizes, and what “label” the parties may choose to describe the relationship is no silver bullet that can conclusively separate the two in every instance. Importantly it is still necessary to weigh all the relevant factors, in the context of determining whether the contract between the worker and the business creates a contracting engagement or an employment relationship.
The High Court’s decisions underscore the value of a comprehensive and tailored contractor agreement that exclusively determines the relationship between the parties. Without it, businesses remain vulnerable to claims by current or former workers seeking employment benefits.
For more information about the two cases, or for strategic advice about navigating contractor/employee issues, including drafting or updating contractor agreements, contact our team here.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.