A recent Australian High Court case (ZG Operations Australia Pty Ltd v Jamsek [2022] HCA) has dramatically changed the way courts view the distinction between employees and contractors. Contractor agreements are now more important than ever.
Prior to this case, a ‘multifactorial’ approach was used to determine whether a person was an employee or a contractor, which involved an examination of the substance of the relationship.
However, the judgement that was handed down by the High Court on 9 February 2022 has departed from the multifactorial approach and has moved towards an approach that is more contract-focussed.
Previous approach
Previously, determining whether a person was an employee or a contractor involved looking at a range of factors, including but not limited to:
- Do they get to choose when and where they work? Or do they have set hours?
- Do they provide their own equipment? Or does the company provide the equipment?
- Do they get paid per task? Or do they get paid a salary/per hour?
- What does their contract describe them as?
The contract between the parties did play a part in the classification, but it was not the primary focus. Instead, the courts would look at what actually played out in practise and if it contradicted what the contract said, then the substance of the relationship would override the contract.
The approach now
The Court in ZG Operations Australia Pty Ltd v Jamsek found that:
“Where parties have comprehensively committed the terms of their relationship to a written contract, the efficacy of which is not challenged on the basis that it is a sham or is otherwise ineffective under general law or statute, the characterisation of that relationship as one of employment or otherwise must proceed by reference to the rights and obligations of the parties under that contract.”
In simple terms, this means that if there is a contract, then the terms of the contract will prevail unless there is something about the contract that makes it invalid (for example, if the contract is a sham contract or is challenged as being invalid for any other reason).
The phrase “by reference to the rights and obligations of the parties under that contract” is an important phrase because it indicates that all the terms of the contract should be considered, not just the label of the contract.
So, if a contract is called a ‘contractors’ agreement’ but the rights and obligations of the parties under the contract are consistent with an employee/employer relationship, then it is very likely the person will be deemed an employee rather than a contractor.
Ultimately, this recent High Court case has provided authority for the principle that the contract is the primary consideration in distinguishing between an employee and a contractor, whereas previously the contract was only one of a large range of factors that were all considered equally.
Why does it matter?
You may be questioning why it matters so much whether a person is an employee or a contractor. Here are some reasons why:
Superannuation
Employers have to pay their employees superannuation, whereas contractors usually have to manage their own superannuation (save for some exceptions).
Tax
Employees will have their tax deducted automatically by their employer through a system such as PAYG, however, contractors need to pay their income tax directly to the ATO.
Leave entitlements
Employees have leave entitlements such as sick leave and annual leave (and casual employees receive ‘casual loading’ instead). Contractors do not receive leave entitlements.
Commercial risk
An employer legally takes responsibility for the work performed by their employees, whereas a contractor is legally responsible for their own work.
Are your contractor agreements accurate?
In light of this recent High Court case, it is now very important that your contracts are worded correctly and properly reflect the relationship that you intend them to portray.
If you would like your employment or contractor agreements reviewed, or if you would like assistance in preparing any of these contracts, contact Lynn & Brown Lawyers for expert legal advice.
About the authors: This article has been co-authored by Chelsea McNeill and Steven Brown. Chelsea is a lawyer that graduated from Murdoch University. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.
