Civil Law

Most recent commentary on the recent High Court decisions in Jamsek and Personnel Contracting suggests that the Court has confirmed the primacy to be given to the terms of the written contract when determining the nature of the relationship between the parties. Whilst that is a fair observation, there is much more to the story. Key to understanding the real commercial impact of the two High Court cases for business is an appreciation of two matters.

First, neither of the losing parties – the two truck drivers held to be contractors in Jamsek; and the labour hire company held to be an employer in Personnel Contracting – argued at any stage of the proceedings that the contracts in place:

• were not genuine or were somehow a “sham”; or
• should be set aside or held invalid for any one of the many reasons the law recognises that can occur such as unconscionable conduct, undue influence or misleading conduct of the other party.

Second, in both cases, everyone involved (the litigants themselves and their very capable legal teams) agreed that the contracts in evidence recorded the full and complete terms of the contracts and therefore contained all of the relevant terms and conditions between them. No party argued, for example, that the contracts had been superseded by fresh unwritten contracts or that they had been varied in some way, whether in writing or, as can happen, orally or by conduct.

Let us explain why these two points matter so much.

Much of the media, academic and legal coverage of what happened in these cases, and the result, positions the outcomes as extreme or somehow, not what should be the expected result. Critics of the outcome in Jamsek, for example, put forward the view that two hard working truck drivers working for the benefit of the same company for decades, in a way that looks like employment should be recognised as employees and receive all of the benefits – annual leave, long service leave, minimum hourly rates, etc., that truck driving employees are entitled to. So, the argument goes, a conservative and “black-letter” High Court has given the contract terms primacy over the “reality” of how things actually operated, to the detriment of real working people who, so the thinly veiled criticism goes, have little bargaining power when they enter into contracts and have been outsmarted by companies and clever lawyers.

Critics of the outcome in Personnel Contracting argue that the tri-partite Odco style arrangements that took off particularly in the early 1990’s are now dead. They say that this is because the finding that the individual concerned was an employee of the labour hire company (rather than an independent contractor as labelled in the contracts), means that settled industrial arrangements that have been in place for 30 years have now been undermined, probably fatally. In fact, the one Judge who dissented in the outcome of the case, formerly an elite tax specialist barrister no doubt experienced in seeing tax rulings chopped and changed after clients had made business decisions relying on them – described the damage that the decision of the majority Judges would do, not only to Personnel’s business but to the businesses of many others, as “undesirable”. There is more than a little bit of wisdom in these observations. The CFMMEU has, if recent newspaper reports are accurate, launched a $ 60m backpay case as a result of the Personnel Contracting decision.

In our view, these decisions have been subjected to more than their fair share of misguided criticism and the commercial implications are both modest and manageable. Here’s why:

The Court in both cases re-iterated a number of principles that are not new – that Judges should not go on wide-ranging inquiries after a contract is made to help interpret the contract (but making these inquiries for other reasons – such as deciding on an argument about whether the contract has been varied – is perfectly permissible); and that amorphous arguments about concepts like “unequal bargaining power” shouldn’t be countenanced unless the argument is that an established legal remedy is being sought. On the latter point, it did not go without comment in Jamsek that by entering into independent contracting relationships, the two truck drivers were able, through partnership agreements, to split 50% of their income with their wives, who played no active role in the business, and on top of that, paid tax on income at much lower rates (the corporate rate rather than employee marginal rates). The decision does not indicate the tax savings over the decades and whether they were more or less than the employment benefits (leave, etc.) that the truck drivers would have been awarded had they won the case. But one can see how the argument that the drivers were exploited or treated unfairly can wear thin when the full circumstances are considered – they enjoyed material financial advantage by virtue of these arrangements which they presumably did not intend to pay back if they won their claim for employment benefits foregone.

The idea that Courts must strictly apply contracts ignorant of the way things work in practice doesn’t square with either decision or the way the parties litigated their cases. There are a myriad of reasons a Court can look beyond the written contracts which have been signed – for example, on the basis that the contracts have been superseded, varied or terminated, or should not be enforced because of the way they were negotiated or made. In other cases, the terms of the contracts are so ambiguous or amorphous that it is necessary to look at how the contracts were performed to try to understand what the contracts’ terms meant in the first place. All parties in these cases were represented by experienced legal teams who did not go near any of those arguments – we assume for good reason. To take this point a step further, the criticism of Jamsek to the effect that the Court is too “black-letter” in its interpretation overlooks the decision in Personnel Contracting, where the Court held that the individual concerned was an employee of a labour hire agency rather than, as described in the contract, an independent contractor. The Court said, essentially, that the contract terms will be rigorously scrutinised, but the parties characterisation of or label given to the legal relationship – employee or independent contractor – is not determinative and is something for the Court to ultimately decide. A true and strict “black-letter” approach would have honoured the contract as drafted and held that the individual was a contractor because that was the way the parties had described the relationship.

With all that said, what are the commercial implications?

1. Right it is, that robust, well-written contracts which accurately capture the arrangements between the parties are more likely to be upheld and will be the focal point of the analysis – the idea that a Court could apply a “multi-factor” test to assess whether a contractor was really an employee, with the contract playing a relatively minor role in the analysis, is out of favour. But the central question – who controls the work and how it is performed, and is the individual running a business on their own account, remain central. It will be critical to ensure that the terms of the contract reflect the parties’ intentions about those matters.
2. For organisations engaging people to provide services or perform work, there is great value in taking steps to ensure that the contracts in place do reflect the totality of the arrangements, and say so. There are different drafting techniques that can be utilised to achieve that objective. Great care will be needed because the terms may be subject to significant scrutiny – as was the situation in Personnel Contracting, the contract terms themselves may show that one party has such a high degree of control over the individual on the other side of the contract, and that the individual could not be said to be running their own business, such that the individual is an employee not a contractor.
3. With the above in mind, at a practical level, when entering into agreements for individuals to perform work or supply services, organisations will need to think carefully about the degree to which they actually want or need to control the manner in which the relevant work is performed – and the consequences of that decision for the nature of the relationship between the parties. Contracts which give the “principal” a high degree of control over the manner in which work is performed by the individual are likely to carry a higher risk that the individual is doing such work as an employee, and that employment obligations are owed to them.
4. The part of the labour market most sharply and negatively affected by these cases is likely to be labour hire companies engaging individuals as contractors, and then on-hiring them to other organisations. We don’t think it’s right to say that Odco style arrangements are dead, but they are certainly more vulnerable to legal attack. One issue that the Court did not consider was whether the outcome in Personnel Contracting would have been different if the individual didn’t contract directly with the labour hire agency, but did so through a company – a very common arrangement in our experience. Following the logic set out, the labour hire agency could not control the individual’s work – it would engage a company that would in turn do so. Absent an argument that the intermediary company involved a “sham” or some other invalidating aspect, such an arrangement may have made a difference to the outcome.
5. Having said all of this, the terms of the contract will not (despite what some commentators have suggested) be the start and end of the analysis. These cases say nothing about the situation where the arrangements in place are not fully captured by the written contracts in evidence or there is an effort to invalidate or set aside the contracts. What has occurred during contract negotiations or after the contracts were signed can become highly relevant to the litigation outcome for many reasons, as described above. We think future litigation in this area will focus on these aspects.

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