Contractor vs Employee – High Court rules! Get it wrong at your peril.

As many are already aware, the distinction between if someone is properly classified as an “employee “or a “contractor” is a major matter that can have devastating financial consequences to a business if they get it wrong.

PROS & CONS

Independent contractors may be given far more freedoms and higher payments (although not always), but will not get the same protections that every employee in Australia is entitled to.

There are times when people have paid a higher rate to contractors with the clear intention that this was to take into account that they were only a “contractor”. Then these people would get a nasty surprise when issues later arose with the “contractor” and the matter was when tested found that  the person was actually an “employee”. The resulting being you may have to  promptly find and pay for various additional benefits, have to keep that person on when it was not intended to be a long term arrangement and/or you otherwise need to meet additional legal obligations that may not be viable for your business. Some business models rely upon the ability to have contractors and may not survive without this flexibility.

On the other hand, there are cases where a contractor arrangement has been done to unfairly pressure someone (especially where the person previously was an employee). The person may not be moved into a better position, rather forced into a worse position with  various of their rights removed.

Another point to note, is that someone being your employee as opposed to a contractor may mean your business is actually better protected in certain areas. For example, if a contractor agreement is not properly drafted, you may be risking ownership of your intellectual property (even if you paid for it if they created it they may actually own all or part of the intellectual property),  the secrecy of your confidential information and/or you could even be helping to create a new competitor.  

PRIOR POSITION

Generally it was a balancing act, a number of written factors and conduct behaviours  needed to be analysed each time for each situation and person, and a change in either agreement terms and/or the conduct of parties, could change the answer to the question – is this person a contractor.

Usually if the proper legal questions have been asked and answered, a good contractor agreement prepared  for the particular situation and person, with the business following their business lawyers recommendations on how to deal with and treat the person, the business should be safe. However,  after the agreement is prepared people can change their conduct, and sometimes the role is not as clear cut and/or factors outside the business owners control changes changing what had been intended to be a contractor into an employee classification.

SO WHAT IS THE EFFECT OF THE HIGH COURT DECISIONS

The rulings on two different cases  essentially have made it easier to bring on people as contractors rather than employees, and not face this being overturned later.

One of the cases involved two truck drivers initially employed then later changed to contractors at the business’s insistence (ZG Operations Australia Pty Ltd & Anor v Jamek  & Ors [2020] HCA 2). The other case was a labour hire company who put on as a contractor an individual a working holiday visa holder (Construction, Forestry, Maritime, Mining and Energy Union & Anor b Personnel Contracting Pty Ltd [2022] HCA 1). Both contractors later sought to claim an employment relationship. 

With the truck driver case the court looked towards the mutual intention of the parties and whether the contractor then conducted their operations as you would have expected a business. They found that this all supported a contractor relationship.

With the other case, it was found that the contract terms were in lines with an employment relationship so it was deemed the person was properly classified as an employee.

So what’s the difference between the past and now, previously we looked more at the substance of the parties relationship rather than the contract’s specific terms. Now the focus is instead on the contract terms. Just to clarify this is the contract’s actual terms, not it’s label as a contractor agreement.

This means the contract is now even more important!

What’s next – well if you have or are seeking to create contractor relationships – you need to ensure your contract is not only properly labelled a contractor agreement, but the contract’s actual terms reflect this and include the various other business protections necessary in contractor arrangements. We also suggest it is still important that parties conduct also reflects a contractor relationship – just remember a contract is not always set and stone, and can potentially  be varied.

If you want to learn more, or want to make sure your business is properly protected then book a call now!