The High Court of Australia issued 2 decisions in February 2022 addressing this very question. The decisions provide greater clarity to businesses in how to hire an independent contractor correctly.
Business owners need to urgently review their independent contractor contracts they have in place to ensure they are comprehensive and meet the requirements established by these 2 decisions.
If you would like assistance in reviewing a current independent contractor contract you have in place, or require a comprehensive contract or have a situation where you may be terminating an employee to then rehire them as an independent contractor, please contact us at email@example.com or 1300 632 247
1. The Cases
The Jamsek case was about 2 truck drivers who had been hired as employees who were then subsequently hired as independent contractors.
The Personnel Contracting case was about an individual engaged as a “self-employed contractor” and placed by Personnel Contracting with a host company under a labour hire agreement.
In both cases, there was a dispute around the individuals’ entitlements at the end of the engagement, with each individual claiming they were an “employee”. The High Court had to determine whether they were employees or individual contractors.
2. Previous Approach
Prior to these 2 cases, courts were assessing the actual conduct of parties, to determine whether an individual was an employee and would look at the day-to-day reality of the contractual relationship (multi-factorial approach). Some of the factors included:
- The intention of the parties
- Level of control over the individual
- Arrangements for payments and taxation
- Whether the individual can delegate the work to another (sub-contracting)
But the High Court, in the Jamsek case and the Personnel Contracting case stated that it was unnecessary and inappropriate to review the conduct of the parties using the multi-factorial approach where the contract is valid and comprehensive.
3. Approved Approach
The High Court proposed another methodology, where parties have a comprehensive contract. The High Court stated it would use the contract to determine the legitimacy of the relationship (without relying on the day-to-day dealings).
It is important to note, that just because an employer labels the contract an “independent contractor agreement” that does not mean the relationship is automatically considered to be an independent contractor. Instead, the courts will look at the rights and obligations established in the written contract to determine the legal status of the relationship. Therefore, factors such as the individual’s ability to have control over how the work is performed, subcontract the work to others, refuse to do certain work, etc will be given weight. So, if the contract contains clear provisions around this, the courts will give it great weight.
4. When can the OLD multi-factorial approach be used?
The previous approach of assessing conduct using the multi-factorial approach, although deemed unnecessary by the High Court, can be used in the following ways:
- Where there is no comprehensive contract or where the contract’s validity is disputed;
- If the parties varied the written contract through their own conduct after entering into the agreement;
- If the contract is a ‘sham’. i.e., the individual in reality is being treated as an independent contractor. So, where an individual brings a sham contracting claim at the Federal Court, the multi-factorial test could be utilised.
5. What should you do?
- Ensure your business has a comprehensive written contract for independent contractors. You can use the multi-factorial test to adopt the appropriate clauses into the contract.
- Ensure that you are treating your independent contractors as such, rather than as an employee
- Keep track of any variations to the independent contractor’s contract;
- Where an employee is terminated and is re-engaged as an independent contractor, ensure to carefully review the circumstances in case it was viewed as sham contracting.
For further information, please contact us at firstname.lastname@example.org or 1300 632 247