CONTRACTOR VS EMPLOYEE – WHY CLEAR CONTRACTS ARE VITAL

Contractors and employees are two completely and entirely different business relationships, and when it comes to differentiating between the two, as a business owner it is absolutely essential that you understand the difference. Failure to do so could see you end up in a costly and time-consuming legal battle, with those who you thought were your contractors, seeking unpaid entitlements from you, as they believe they are in fact employees or vice versa.


The ability to clearly understand the difference is also essential with it comes to your business documentation, such as employment contracts, and subcontractor or contractor agreements. These documents should not only accurately outline the details but also stipulate the expectations and entitlements that apply to the relationship. They must be thoughtfully prepared, and they must be accurate.


Recently there have been several High Court decisions that have highlighted the importance of accurate, clear contracts for business owners. We take a look at these cases below and reflect upon how you as a business owner can learn from the mistakes of some of the companies involved in these legal battles.

Contractor vs Employee

Before reviewing the recent decisions of the High Court on this issue it is important to reflect upon the difference between a contractor and an employee. An employee is someone that works for you in your business, whereas a contractor is someone that is running their own business, they work for themselves. Generally speaking an employee when they work for a business will sign an employment agreement, which will outline the details of the role they are to play within the business, their responsibilities associated with the role, as well as details of responsibilities and the details of how they will be paid, such as their salary and entitlements, such as superannuation, annual leave and sick leave. On the other hand, a contractor or subcontractor will sign what is often called a service agreement or a contractor agreement, which will outline the details of their negotiated rate in terms of payment and specify the details of the job that they are complete. They have the ability to negotiate prices and terms of their agreement and provision of services and have the ability to delegate to others at their own discretion. When issues arise, often due to lack of a formal agreement, which correctly and accurately outlines the relationship of the parties, courts will look at the totality of the relationship, the full picture when making a determination as to whether the individual was a contractor or an employee of the business. This involves a multi-faceted test which considers in detail the following six key factors;

  • The ability for the individual to subcontract or delegate

  • The basis of payment

  • Equipment, tools, and assets, do they belong to the company or to the individual? Is the individual paid an allowance for the tools?

  • Commercial risks involved in the relationship

  • Who has the ultimate control over the work involved?

  • The level of independence


Recent decisions – The Jamsek Decision


As stated above when issues arise, the court is required to determine the working relationship of the parties to the despite in line with the written terms of the agreement, and this was exactly what the court relied upon when making the decision in this case. 2G Operations Australia Pty Ltd v Jamsek [2022] HCA2, involved a group of truck drivers who were seeking entitlements from the company after their agreement with the company was terminated in 2017. The truck drivers-initiated proceedings in the Federal Court of Australia claiming that rather than being contractors they were actually employees of the company, and they sought entitlements owed to them under the provisions of the Fair Work Act 2009, as well as other entitlements including superannuation and long service leave.


In the truck drivers initial proceedings before the court the judge sided with the company and found that the truck drivers were contractors and not employees, however this decision was subsequently overturned by the Court of Appeal who found the truck drivers to be employees. The High Court however, relying upon the written agreement between the parties, and paying particular attention to the specific terms of the agreement, found the truck drivers to be independent contractors.


Recent Decisions – CFMMEU v Personnel Contracting Pty Ltd


Another case, similar to the Jamsek case above which paid particular attention to the terms of a written agreement was CFMMEU v Personnel Contracting Pty Ltd [2022] HCA1 which concerned a British backpacker who completed labouring work. The backpacker initially signed an Administrative Services agreement which described him as a self-employed independent contractor. Despite the presence of a written service agreement, the High Court found that the terms of the agreement did not accurately reflect the relationship between the parties, after completing a multifaceted test and considering the entire relationship of the parties. The High Court found that the backpacker was in fact an employee. The written agreement did not accurately or clearly define the relationship, which ultimately led to the High Courts decision. These cases highlight not only the importance that accurate and clear employment or contractor agreements play in business, but also provide a starting point in terms of the courts processes in determining the relationship between employers and employees or employers and contractors. These decisions also demonstrate the importance of accurate and clear agreements, which outline the specific nature of the agreement, and are carefully constructed and considered, rather than just slapped together quickly. Employment contractors and contractor agreements require knowledge, skills, and experience in terms of ensuring the content accurately reflects the relationship between each of the parties. Rather than attempting to do this yourself, engaging the services of a highly skilled and knowledgeable HR professional, like the team at DreamStoneHR, can help ensure you do not end up in court like the companies in the cases above.

Contact our team today on (02) 8320 9320 or info@dreamstonehr.com.au

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