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The legal difference between an employee and an independent contractor has been blurred for some decades, leading to plenty of confusion and complaints from each of employers, contractors, and employees. The lack of clear guidelines has led to potential exposure for employers to litigation and prosecution.
Historically, so-called “multifactorial” tests were used by Courts to assess whether an individual was engaged as an employee or independent contractor with a business. These common law tests looked at different characteristics of the engagement and how it interacted with the business which was engaging the “contractor”.
Common examples of these tests included:
- Measure of control exercised over the contractor (or employee),
- Ability or right of the contractor to delegate work to others,
- Responsibility for risk and rectification of faults,
- Which party supplies the tools and equipment,
- Control over hours worked,
- Leave entitlements and obligation of the individual to seek approval,
- Regularity of payments and whether invoices were issued by the “contractor”,
- Method of engagement, and
- Whether the individual was more part of the business of the principal, or a business in their own right.
Criteria concerning whether the “contractor” was in a business for itself included aspects such as the true nature of the contractual relationship (if any), the level of discretion and flexibility over the work performed and factual circumstances such as whether the “contractor” advertised its services, as a business might.
The fact that the nature of the relationship between the parties could often be up to a court to decide, rather than what the parties agreed, meant that there was often confusion around the relationship. To avoid this uncertainty, the parties needed to be diligent in how they conducted their affairs to make it clear they were really in a true contractor-principal relationship, not an employee-employer one.
The New Test
In February 2022, the High Court overturned previous Federal Court decisions in the cases of ZG Operations v Jamsek and CFMMEU v Personnel Contracting Pty Ltd. In these High Court cases it was determined that multifactorial tests will not be the primary method to determine whether someone is an employee or independent contractor. Furthermore, the High Court emphasised the contractual relationship between the parties, meaning if an agreement is in place, it will usually determine whether a person is an employee or independent contractor.
Put simply, the High Court assessed the following to determine whether a person is an employee or independent contractor:
- Identify the contract and assess its terms.
- Challenge the enforceability of the contract
What Does This Mean for Businesses?
The courts will no longer consider an assessment of the conduct of parties after a contract has been entered into or the terms and conditions of their contractual relationship, to decide whether someone is a bona fide contractor or employee. However, where there is ambiguity of the terms and conditions between the parties, the Court may examine the conduct of the parties to determine what these are. This could involve the multifactorial approach.
However, for the time being, it remains that the new contractual assessment is key, with the following results –
- When engaging independent contractors, it must be properly recorded in written contracts that accurately reflect the nature of the engagement;
- In the absence of written (or a partially) agreement, a contractor can challenge the validity of the contract and parties’ conduct may be examined;
- Businesses should review and update their contractor agreements to reflect such changes. This can include ensuring all legal rights, duties and obligations are clear and consistent with a contractor agreement and reflective of such a relationship.