By Stephen Mullette, a Principal, and Keely Wunsch, a Law Clerk of Matthews Folbigg Lawyers in our Insolvency, Restructuring and Debt Recovery Group
The Australian Government has updated the Fair Work Act 2009 (FW Act) through the enactment of the Closing Loopholes Legislation. One element of these reforms specifically rejects two recent High Court decisions which sought to clarify the law on the employee/contractor distinction. The change is likely to exacerbate uncertainty in this area, especially for insolvency practitioners seeking to determine a creditor’s priority either as an employee or an ordinary unsecured creditor.
NAGIVATING THE LEGAL BARNYARD
The question of whether a worker is an employee or independent contractor has engendered much debate in the field of labour law for decades.
Business have generally sought to avoid paying entitlements and so want to classify their workers as independent contractors. Workers, unsurprisingly, generally wish to treated as employees.
These businesses have been criticised as disguising the true nature of the employment through the contract. As famously stated by Black J in Re Porter (1989) 34 IR 179 “the parties cannot create something which has every feature of a rooster but call it a duck and insist that everybody else recognise it as a duck”. In all these cases the court is being asked to navigate this legal barnyard to determine whether the worker is an independent contractor (duck) or an employee (rooster).
THE MULTIFACTORIAL APPROACH
In response to this debate, the courts have over many years applied a ‘multifactorial’ approach to determine whether a worker is an employee or independent contractor. The weight and attention given to each factor depends on the circumstances of the case, however the key considerations to this approach include:
- the control exercised
- method of payment
- responsibility for equipment or resources
- work obligations
- work hours and holiday provisions
- income tax deductions
- the ability to delegate tasks
As stated by Mummery J in Hall (Inspector of Taxes) v Lorimer [1992] 1 WLR 939 at 944 these factors serve as a guide for the court to consider and help “paint a picture from the accumulation of detail”.
SEPERATING THE ROOSTERS AND DUCKS
The unthinking application of the multifactorial approach was heavily criticised in two 2022 High Court decisions, which commented upon the lack of primary importance which had been given in the cases to the actual terms of the contract between the parties. It was the contract, in the High Court’s view, which should primarily identify and separate the independent contractors (ducks) from the employees (roosters). In these cases the High Court sought to re-establish the primacy of contract principle, with the effect that in the absence of a sham, fraud or unconscionable conduct, regard should be had specifically to the ‘rights and duties’ as they appear within the contract. To understand the effect of these cases, a short analysis appears below.
In CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1, the High Court reviewed the case of Mr McCourt, a 22-year-old British backpacker working under a “self-employed contractor” agreement with Construct, a Labour Hire Company. Despite having control over his own work schedule and needing minimal equipment, Mr McCourt worked under the direction of Hanssen Pty Ltd. When denied further work, he sought employee entitlements. Initially, the Federal Court upheld his contractor status based on the contract’s terms. The Full Court held reluctantly it was bound to follow a previous multifactorial decision on very similar terms. However, the High Court ruled that when primacy was given to the terms of the contract as it operated on the parties, McCourt was an employee. . The Court concluded that under the terms of the relevant contract, Construct’s control over McCourt’s Labor meant he “served the business”, making him an employee, not a contractor.
In ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2, the High Court considered the case of Jamsek and Whitby, two truck drivers who had worked in the same business for 40 years (1977–2017). Initially, they had been employees for eight to nine years before becoming “contractors” at their employer’s request. They bought their own trucks and entered into new agreements as independent contractors with their spouses as partners. Despite these changes, their work remained essentially the same. After their contracts ended in 2017, the drivers sought backdated employee entitlements. The High Court held that the driver’s submissions were a disguised submission of sham” (at [63]), made “under the obscurantist guise of a search for the ‘reality’ of the situation” (at [62]). Instead, the Court determined that the partnerships rather than the drivers owned the trucks, managed contracts, earned income, incurred expenses, and enjoyed tax benefits. This amounted to the decision that Whitby and Jamsek were independent contractors.
THE GOVERNMENT RUFFLES SOME FEATHERS
“As a response to the decisions of the High Court of Australia in [Personnel] and [Jamsek]”, the Commonwealth Government has introduced s 15AA of the Fair Work Act 2009 through the enactment of the Fair Work Legislation (Closing Loopholes Act) (No 2) 2024 (Cth). This amendment serves to reject the primacy of contract principle reinforced by these recent decisions and replaces it with the multifactorial approach previously applied by the courts.
This section advises that in determining the status of a worker, regard is to be had to the ‘totality of the relationship’ including the real substance, practical reality and true nature of the relationship.
These amendments have ruffled some feathers among business owners particularly, who have criticised the new amendments as undoing recent authority which had finally provided greater clarity and certainty. Even though Parliament’s intention was to ‘restore’ the position to what it was before the High Court intervened, how are Courts to now apply cases which the High Court found had been wrongly interpreted? While it is unclear how the courts will apply this new legislation, the message is clear that employers need to get their ducks in a row if they want to avoid trouble in the henhouse.
Matthews Folbigg Lawyers has a specialist team dedicated to Insolvency, Restructuring and Debt Recovery.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au
