contracts – the best vehicle for determining legal relationships

In a significant decision, the High Court has allowed an appeal from ZG Operations Australia Pty Ltd, determining that two truck drivers, based on their contracts, were engaged as contractors rather than employees.

contractors or employees?

Between 1977 and around 1985, Mr Jamsek and Mr Whitby were employed by ZG Operations as truck drivers. However, from around 1985, they agreed with ZG Operations to enter into an arrangement whereby Mr Jamsek and Mr Whitby would be engaged as contractors and would purchase and use their own trucks. As part of this arrangement, Mr Jamsek and Mr Whitby:

• entered into partnerships with their respective spouses pursuant to executed written contracts with ZG Operations for the provision of the delivery of services;
• purchased trucks from ZG Operations;
• paid to maintain and operate the trucks; and
• declared income from the performance of the services as partnership income for tax purposes.

In 2017, the truck drivers commenced proceedings in the Federal Court of Australia, seeking declarations in respect of entitlements they alleged to be owed to them on the basis that they were employees, and not contractors. The primary judge held that the truck drivers were contractors. However, the Full Court later held that, on the basis of the substance and reality of the engagement, they were in fact employees.

high court decision

The High Court agreed with the primary judge, and unanimously held that the truck drivers were contractors of ZG Operations. The court adopted the same approach as in another decision it handed down on the same day, in finding that where parties have comprehensively committed the terms of their engagement to a written contract, and there is no suggestion that the contact is a sham or otherwise ineffective under general law or statute, the engagement will be characterised on the basis of the rights and obligations of each party under that contract.

On the facts, the High Court found that from around 1985, the relationship between the truck drivers and ZG Operations was not an employment relationship because:

• the parties to the contracts were the truck drivers’ partnerships (not the truck drivers personally) and ZG Operations;
• under the contracts, the partnerships provided the services notwithstanding that such services were ultimately met by Mr Jamsek and Mr Whitby driving the trucks;
• the arrangements came about due to ZG Operations’ refusal to continue to engage the truck drivers as employees and insistence that it would only engage them based on a contract for the carriage of goods; and
• the claims made by the truck drivers involved no suggestion that any aspect of the day-to-day performance of the contract superseded the rights and duties established by it.

contract terms of paramount importance

This decision affirms the position that contractual terms are paramount in the characterisation of a relationship between a company and its workers.  As a result, it will become even more difficult for workers – including in the gig economy – to successfully challenge their independent contractor status based on arguments that the factual circumstances differ from the contractual terms.

Consistent with the outcome of the High Court’s finding in Rossato (discussed in this article), the decision confirms the importance of well-drafted agreements for the engagement of labour. A well-drafted independent contractor agreement will now be even more significant in mitigating the risks of individuals claiming employment entitlements when they have been engaged as independent contractors.

If you would like legal advice or to have your independent contractor and employment agreements updated in view of these developments, please contact our Employment, Safety and Migration team.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.