When is a contractor really an employee?

Hans Christian Andersen’s fable, the ‘Emperor’s New Clothes’, tells the notorious tale of the vain emperor tricked by conmen and reminds us that just because we say something is the case does not mean that it actually is the case.

Courts are concerned to look beyond the labels that parties attach to their contractual documents in order to determine the real or substantial nature of the relationship for themselves. Such an approach is particularly relevant to the vexing question of whether a worker is an employee or independent contractor.

The dichotomy between employee/contractor is recognised by the courts as, to quote a 2006 High Court case Sweeney v Boylan Nominees Pty Ltd [2006] HCA 19, being “too deeply rooted to be pulled out” of the law. Despite the often-difficult task of determining which is which, the distinction between employee/contractor is here to stay.

The distinction between employee and contractor remains important because it recognises that some types of ‘workers’ are engaged under a contract of service, generally one of personal service in which obligations of fidelity exist and someone else, colloquially put, is the ‘boss’.

It acknowledges that others are engaged under a contract for services in which generally the contractor, as part of his or her own business, performs certain tasks for the principal and is the ‘boss’ of themselves.

Read more: Focus should now turn to workplace reforms

The former enjoys the status of being an employee and the various protections that come with that status including potentially (relative) job security, entitlement to legislative benefits, such as annual leave and long service leave, and legislative protection for unfair dismissal, workplace rights and so on.

The latter enjoys less security but greater freedom and, if running a successful business, often greater reward.

The question human resources professionals will ask themselves is how can one tell the difference between an employee or contractor?

A recent decision of the Full Court of the Federal Court, Jamsek v ZG Operations Australia Pty Ltd [2020] FCAFC 119, has emphasised the importance of how the working relationship operates in practice in determining whether a ‘worker’ is an employee or contractor.

Jamsek concerned two truck drivers, initially employed by the relevant company from around 1980. Around 1986, the drivers were told by the company manager that if they did not agree to becoming ‘contractors’, a job would not be guaranteed for them. They decided to become ‘contractors’.

The drivers were required to provide a truck, which they purchased from the company, and to pay the running costs of the vehicle. In their initial contract as ‘contractors’, they earnt $600 per week, more than the $410 per week they had been earning, an increase understood to compensate for the provision of the truck and not simply labour. In short, the drivers provided their own capital.

Ordinarily, the ownership of expensive equipment, including trucks, may tend to show that the contractor is truly an independent contractor, a general principle which the Court did not question. In Jamsek, however, the first trucks were purchased from the company itself, the company’s logos were placed on the trucks for most of the relationship and there was no significant additional expertise in their operation. The Court considered the drivers not to be undertaking entrepreneurial activity.

Read more: Tread carefully when collecting employee data

In the old language, the working relationships of the drivers smacked of a master-servant relationship.

Applying the multi-factor test, the Court found that the drivers were in fact employees. Of significance was their exclusive relationship to the company for a “long and uninterrupted period”. The company asserted day-to-day control over the drivers. They were required to make themselves available for nine hours a day during the working week for almost 40 years. Their trucks, as noted above, and their apparel carried the company logo. In addition to their driving duties, they undertook other miscellaneous tasks for the company and were limited to four weeks’ leave each year. They represented the company.

As a case study, the decision is important in illustrating the willingness of courts to look behind contractual labels to see for themselves what the reality of the relationship is.

It is of possibly greater significance in how courts in future will determine the status of lorry-owner drivers (LODs ‑ generally considered a special class of contractor) and the nature of their relationship with their principal/employer.

Some question whether the decision will upend the settled arrangements in the transport industry, where it was thought that it was enough for a driver to own his/her own truck. Drivers will argue that, despite owning their own truck, they are in reality employees and so entitled to employee status. Others will argue that the facts in Jamsek were highly unique; the Court itself said the characteristics of the relationship were “perhaps peculiar”. The ‘employer’ in the case has sought special leave in the High Court for it to hear an appeal against the decision so watch this space.

Jamsek demonstrates that the answer to the question of whether, specifically, a LOD or, more generally a ‘worker’, is an employee is highly fact specific. No simple rule, such as a LOD owning his/her own truck, will dispose of the case. Instead, the courts will look at the totality of the relationship.

A mistaken assessment by an adviser to a company can be highly costly, especially if there is a long-term relationship in place. Accordingly, it is prudent to take advice.

David Collits, Associate, Australian Business Lawyers & Advisors