Let’s get real about the employee/contractor debate

It’s somewhat difficult to understand why the two “contracting cases” handed down by the High Court have generated such panicked commentary about entrenching insecure work.

Unions are outraged and calling for legislative change. Opposition IR spokesperson Tony Burke has pledged increased regulation around the use of contract workers, lamenting “that if you’re found to be a contractor your rights fall off a cliff.”

The scene is set for the issue to squarely become one that is front and centre of IR policy in the lead-up to this year’s federal election. But the rhetoric is largely misplaced. The proof of this (or at least a reasonable indication) is in the pudding itself. 

The first case (CFMMEU v Personnel Contracting), considered a “triangular” contracting model, which operates in a similar way to traditional labour hire. The relevant worker in the case, Mr McCourt, was a relatively unskilled backpacker who signed up as an independent contractor to perform labouring work for Personnel Contracting. Personnel Contracting was in the business of supplying the labour of its contractors, such as Mr McCourt, to other client businesses.

This model is not new nor unique, and has received substantial judicial support of the past 30 or so years. Under these types of arrangements, there is a contract between the worker and the labour hire firm, and another between the labour hire firm and the ultimate client business which receives the labour, but each of the three parties are contracting independently and there is no relationship of employment at all.

Nonetheless, and despite the fact that the written contract between Mr McCourt and Personnel Contracting had some relatively compelling indicators that their relationship was not one of employment, six out of seven Justices of the High Court were prepared to conclude that he was an employee of Personnel Contracting.

This was largely because other features of the contract between Mr McCourt and Personnel Contracting were more consistent with him being an employee. He was, for example, subject to the type of direction and control of Personnel Contracting that typifies an employment relationship. Further, he was performing work as part of Personnel Contracting’s business rather than as part of his own independent enterprise.

The Court’s conclusion does not easily square with the idea that the recent decisions create opportunities for exploitation and entrenching insecure work.

The second case handed down by the High Court (ZG v Jamsek) was somewhat different. It concerned a simpler two-party contracting model, involving transport “owner drivers”. Under their contract with ZG Operations, they were obliged to provide and maintain the necessary vehicles and other equipment to carry out the transportation services they had contracted to provide, and had outlaid substantial capital to do so. They had also established partnership structures through which to carry on their businesses, and enjoyed the taxation benefits associated with setting up their operations in the way that they did.

In that case, it was readily understandable why the Court found that an employment relationship did not exist, and the owner drivers were in fact independent contractors.

Of course the importance of these cases is not so much their outcome, but the path of reason adopted by the Court. This too has been overstated.

It is true that the Court’s focus in both cases was on the written contractual terms agreed between the parties, and not the reality of their relationship thereafter. Having said that, the Court was not concerned with the way the parties described their own relationship; it was the substance of the parties’ rights and obligations to one another as set out in the written contract that was determinative.

But lest the consequences of their reasoning be misunderstood, the Court saw fit to repeatedly restate a critical feature of the cases before it: neither involved any challenge to the validity of the relevant contract; an assertion it was a sham; or any argument that it had been varied by the parties, or superseded by a second collateral contract arising out of the parties’ conduct.

The Court expressly adverted to the fact that in some cases the conduct of contracting parties over the life of their relationship might deviate from their written contractual terms and give rise to an employment relationship by assuming and accepting different rights and obligations. Three Justices in the first case described this as “almost a textbook description of a variation of contract by conduct.” But these issues were simply not argued in these cases.

So, in simple terms, if the written contract accurately describes the substantive rights and obligations between the parties, then character of the relationship can be ascertained by considering the terms of that contract alone. If it does not, and the parties conduct themselves in a manner at odds with the contract between them, it may be that their conduct gives rise to a relationship of employment.

Clearly enough, these decisions do not create some unbridled opportunity to mischaracterise employees as contractors using a sneakily worded contract without risk of a challenge. Rather, they serve as a reminder that, as always, contractual terms must accurately reflect the intentions of the parties. But in the running towards a Federal election with industrial relations reform high on the ALP agenda, those seeking change will not pass up any opportunity to justify the need.