Engaging an Independent Contractor | What the High Court has to say
As Australian business lawyers, we talk a lot about the value of growing your team when running a business. Small business owners are often wearing all the hats and doing all the things. Growing the team can be a valuable way to move the business forward in a sustainable way.
Engaging an independent contractor can be beneficial to small businesses – contractors have the specific skills and expertise that a small business often needs, and the contractor arrangement can provide the parties with a level of flexibility that an employer/employee arrangement doesn’t.
But there has been a lot of uncertainty over recent years around the issue of whether a worker is an employee or an independent contractor, and when the law can make a determination on this contrary to the parties’ intentions.
Until now, the courts took the view that it was necessary to look at the totality of the relationship between a business and a worker to determine the nature of that relationship, and it was made clear that the law was not required to accept that an arrangement was an independent contractor relationship simply because a contract described it as such. The courts could look at, amongst other things, the conduct of the parties after a contract was entered into to decide how the relationship was to be characterised.
Recent High Court decisions
In February 2022 the High Court handed down highly anticipated decisions in two cases which changed the approach courts will now take to decide whether a worker is an independent contractor or an employee.
These cases are ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek) and Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting). In short, the High Court rejected that the parties’ actual conduct after entering into a contract is relevant to working out if an employment or contractor relationship exists. It held that subsequent conduct is only relevant to:
identifying the contractual terms (for example, where the contract is not wholly or partly in writing); or
challenge the enforceability of the contract (including where the contract has been varied by the conduct of the parties or is a ‘sham’).
The High Court decisions make it clear that to determine whether a worker is an employee or independent contractor it is necessary to look at the written contract between the business and the worker and the legal rights and obligations agreed to in that contract.
The written contract will determine if the legal rights and obligations are those of an employee or an independent contractor and it is no longer necessary to examine the totality of the relationship and the conduct that occurs after the contract is entered into.
That said, let us be very clear here. You cannot contract out of the law. These decisions don’t change that. This means that you can’t enter into a contractor agreement with a worker who is a genuine employee and expect that to be ok. That is not the intention of these decisions and to try to circumvent the law in this way is futile and will backfire.
The importance of a well drafted Independent Contractor Agreement
Now more than ever it is vital that employers ensure that their contracts are properly drafted, properly tailored and sufficiently detailed. This is not the time to take short cuts (is there ever a time to take short cuts with legal documents? We don’t think so). Now is the time to work closely with an Australian business lawyer to ensure you have everything in order.
An independent contractor agreement that is not comprehensive and well drafted (by a small business lawyer) and/or is not followed in practice will still be open to challenge by a worker and the courts may then look beyond the contract and look at the totality of the relationship to determine the correct classification of a worker.
Whether you are entering into a contractor agreement or an employment agreement, you need to ensure that the relationship is a legitimate one.
This means:
A contractor must be a contractor according to the law (see our resource here to learn more: A Legal Checklist for Engaging Independent Contractors).
Contracts with independent contractors need to be in writing and well drafted to accurately and comprehensively document legitimate independent contractor working arrangements.
The terms of the contract must be followed through in practice.
Any changes to working arrangements also need to be in writing in a new contract or a variation to the original contract.
The legislation in the areas of payroll tax, workers compensation and compulsory superannuation that imposes ‘employer-like’ obligations on businesses in independent contractor relationships still applies. It is likely that an approach that looks beyond the contract to the nature of the relationship in assessing whether the relationship comes within the scope of the legislation will still be applied.
What can you do now to protect your business?
As a business owner you should now take steps to:
Talk to your business lawyer and arrange to review your independent contractor agreements. Your business lawyer will be able to provide advice to ensure the contracts are adequate and comprehensive so they can withstand scrutiny or any suggestion that the contract is a ‘sham’ contract.
ensure your independent contractor arrangements are being followed through in practice
Have a process in place to record changes to arrangements with your independent contractors as you move forward - things change and that’s ok! Just be sure you know how to deal with your contractors when they do (again, your business lawyer can help with this).
Want to know more?
If you are keen to understand more about outsourcing and engaging independent contractors in your business, you might find some of our other resources helpful: Outsource with ease in your small business and Legal Advice For Small Business.
As always, please reach out if you have any concerns at all about anything we have shared above. If you would like support with reviewing your existing contracts or drafting new ones, we are always happy to help.
