Contract is king – Navigating the world of employee contracts

Stephanie: Welcome to TEC Live. Stephanie Christopher here, CEO of The Executive Connection. We connect leaders with a trusted network of people who help them succeed. It feels like a great time, actually, to have our wonderful guest in the studio today, Christa Lenard. Christa is a partner at Kingston Reid, which is Australia’s largest national specialist employment law firm. Christa has over 15 years experience working with clients across a broad range of industries, with a strong and much valued government practice at the Commonwealth and state level, where she is the trusted advisor on many complex employment matters, and while we are here, thinking about small and mid-size businesses what a complex suite of employment matters they have to deal with. Anyway, Christa Lenard, welcome to TEC Live.

Christa: Thank you. It’s a pleasure to be here.

Stephanie: Great. Thank you for joining us. What else is of interest that you think could well be on the minds of CEOs and business owners in that small mid sphere?

Christa: Well, as an employment lawyer, my eyes lighten up at that question so much.

Stephanie: Great.

Christa: We live in a very exciting time, and I think one that there’s always issues at the forefront, whether or not it’s dealing with the changes around sexual harassment and the legislative changes that have come through in the Fair Work Act, and certainly following Kate Jenkins report, Respect at Work Report, that’s something that obviously sits there, and the obligation has always been on employers to create and ensure a safe workplace. So, whilst it’s very much the same old, it’s really an age old issue that needs to be, again, dealt with proactively. So, that’s on the mind of employers, and making sure that staff feel safe speaking up if they do have concerns, and that they’re dealt with confidentially and properly.

The other big thing I think at the moment is, and this follows two decisions of the high court handed down last week, and that’s the question of engaging workers either as an independent contractor or employee. That question has been very topical, and we’ve seen a raft of decisions over the years in the Federal Court of Australia, where I guess the decisions have yielded different results depending on which judge hears the matter, which factors are taken into account as to whether or not someone legitimately is a contractor and therefore has the rights and obligations as a contractor, or whether they later seek to try and say they’re an employee and a court assesses them as such.

The two decisions that the High Court heard recently both dealt with that issue, and both had a fairly finite and very interesting result as a result of those cases. Those cases really dealt with, or the High Court said in those cases that where a business enters into a written agreement and that full agreement sits there in writing, and it’s clear on the face of that agreement that the person being engaged is a contractor, and where there’s no other argument about whether or not, or claim as to whether or not they’re a sham contractor, the sham contracting provisions have been alivened, then the parties are entitled to rely on that written contract as being it, that’s the arrangement. So, what that’s done is essentially it’s shifted the focus from what traditionally has been an emphasis on what the courts have called a multifactorial test, where they’ve looked at a range of factors and assessed the relationship over the span or the lifespan of that relationship, and have come up with a finding that they’re an employee as a result of those factors.

Stephanie: That’s what’s happened in the past.

Christa: Yes. So, to put that into context, if I talk about one of the decisions, it might help extrapolate out that. One of the decisions is a decision of ZG Operations, Pty. Ltd. and Jamsek. Now, Jamsek, Mr. Jamsek and Mr. Whitby were truck drivers who back in 1986 entered into an employment relationship with their employer. After about five years, the company came to them and said, ‘Look, we can’t afford to keep you on as employees, but you’ve got the option of contracting with us.’

Stephanie: Yeah.

Christa: So, Mr. Jamsek, Mr. Whitby ended up forming a partnership with their respective wives, they then entered into a contract for service as contractors, and for the next 20 odd years, they proceeded to provide delivery services exclusively for this company. Over the years, there was evidence led in the Federal Court below that they’d had the benefit of obviously operating as partnerships, so they were able to divide their finances, tax, into trusts and the like, but at the same time, they also at times wore uniforms, at times had the company’s logo on their truck, that they worked exclusively, as I said, for this company, and pretty set hours of the day. So, in 2017, when their contract, Mr. Jamsek’s contract was ended, he brought a claim along with Mr. Whitby to say that they were actually employees and should be-

Stephanie: And made redundant.

Christa: Yeah.

Stephanie: Yeah.

Christa: And should have been entitled to the annual leave, superannuation, and all of the entitlements that employees have. At first instance, in the Federal Court, the single judge of the Federal Court held that they were indeed contractors. In doing that, he applied this multifactorial test and went through and essentially ticked the box of does that look more like a contractor, more like an employer arrangement, formed a view that they were pretty equal, but that these gentlemen were actually running their business, and therefore that swayed it to being a contractor. The full court of the Federal Court of Australia disagreed, and they applied the same test and looked at the relationship over that 30 years, and formed a view that at the end of the day, they were in fact employees.

So, the company ZG operations appealed to the High Court. What the High Court had to look at and what they were asked to look at really was how can you have a dichotomy of saying, ‘Well, yes, we accept that you run your own business, but you’re also an employee,’ and that was the tension. The High Court then said, ‘Well, actually you don’t need, in this case, to apply this multifactorial test,’ and looked at how the relationship ebbed and flowed over that 30 years. That was too onerous. It was not necessary in circumstances, where in this case, their contracts that they entered into, and there was a number of them over the years, clearly identified them as contractors. The court said, ‘That is sufficient. That is enough for us to be satisfied that you’re a contractor.’ So, it’s really simplified in some senses the test that employers-

Stephanie: It’s taken away that multifactorial and that judgment.

Christa: It has. It has. Now, that’s not to say, and this is where there’s always shades in the law, if there’s a claim of sham contracting, as I said earlier, that will trigger a slightly different test, and there may well be an examination of the relationship over the course of the arrangement. But in this case, it certainly wasn’t pled as a sham contracting arrangement.

Stephanie: What does that mean, actually?

Christa: Sham contracting is a concept that is given forth through the Fair Work Act as a penalty provision that says that you can’t knowingly enter into a contract for services knowing that the person you are entering into that contract with is actually an employee. So, it’s designed to stop erroneous situations where you are forcing somebody that really is an employee into a contracting arrangement. Typically, we’ve seen over the years the sham contracting cases have been in lower paid or less skilled industries, where, for instance, there’s cases where there’s been cleaners working in a hotel, they were employed one day as an employee, and the next day they became contractors, forced to sign an agreement, and essentially nothing changed in the arrangement.

Stephanie: Yeah.

Christa: So, obviously those provisions exist to protect workers who should essentially be employees. Indeed, when entering into a contract, you need to be doing it for the right purposes and not for a nefarious purpose of avoiding the Fair Work Act obligations that you’d have as an employee.

Stephanie: Okay. That’s interesting. What are the implications of these two decisions you’re talking about for the gig economy?

Christa: Look, I think it’s going to be really interesting. The Fair Work Commission is just now sitting on a decision for Deliveroo, and they said they wouldn’t actually make their decision until the outcome of the High Court decisions. I think what we’re going to find is that there is now the precedent is where these contractors, these delivery riders have a contract that specifies and stipulates wholly in writing the nature of the arrangement to be as such, then they may well be found to be contractors and not employees. Now, I think in this case, and the second case in the High Court was a case from the CFMMEU and personnel contracting, and in that case, the situation was reversed in the sense that, and this deals with an odd co arrangement where you’ve got a labour hire entity engaging an individual to go and work in another business.

Stephanie: Yep.

Christa: In this case, the labour hire entity had engaged a labourer who was from overseas, and he had a visa, he rocked in and he had bought some steel cap boots and a hi vis vest, and he walked into personnel contracting and said, ‘I can do labouring if you want to place me somewhere.’ So, they placed him with Hansen concrete company, and he proceeded to do work. Now, he was engaged by personnel as a contractor, and went to work with Hansen. Ultimately, he claimed he was, in fact, an employee, and the High Court agreed, not withstanding the Federal Court below had found him to be a contractor.

Stephanie: Yep.

Christa: Confused?

Stephanie: Yes.

Christa: Now, in that case, again, taking contract is king, the High Court looked at the contract that this odd co arrangement existed, and said, ‘Well, the contract between the worker and personnel, the labour hire company, whilst it said he was a contractor, when you looked at the terms in that agreement, it was clear that he had no control. The company would pay him, for his work with-’

Stephanie: With Hansen.

Christa: ‘… with Hansen, and he was under the control, essentially, of Hansen, not of the company when he walked on the labour hire company when he walked on site.’ But ultimately, that arrangement, they said, was actually one of employee, not contractor. So, in that case, what it did was it gives rise to, and it wasn’t certainly a sham, it wasn’t argued on the basis of being a sham contract, but it gave rise to really looking at the assessment of how you engage workers. I think going back to your question on the gig economy, if the gig economy companies can demonstrate that the people that they engage run their own businesses, and many of them do, many of them work on various apps at the same time, it doesn’t matter if they’re carrying a Deliveroo box on their bike or only work exclusively for one company, they may well still be found to be contractors by virtue of the written agreement and them carrying on a business.

Stephanie: So, the implications for an employer across a range of industries, when you say contract is king, what would be the main watch outs?

Christa: You got to have a razor sharp view of your contracts and make sure that if you’ve got independent contracting agreements, that you look at them that you have them reviewed.

Stephanie: Yes.

Christa: And that they’re properly drafted and wholly drafted so that the arrangement is reduced to writing and clearly sets out the arrangement as it exists. That’s the first thing. I think the second is being alive to the fact that whilst contract is king, if there’s a sham contracting arrangement, then how the relationship plays out in this multifactorial test may come into play. So, it is important that you don’t just create a contract or agreement for the sake of it when that person should be-

Stephanie: An employee.

Christa: … an employee. That’s really important as well.

Stephanie: So, there’s intent and set up, and then the contract. It’s interesting because sometimes a contractor agreement can look quite complex, and if you’ve done it properly, it can be four or five pages, and there’s a whole lot of legalities in there, and people say, ‘Can’t we just have just a handshake or just a one pager?’ It’s more important than ever to have these things right, isn’t it?

Christa: It is, and that’s exactly what the High Court said. If you don’t have a properly drafted contract, then you will be assessed on the whole of the relationship using that multifactorial test. So, it just makes it easier, I think. That’s always key. I mean, any of your employment relationships or contracting relationships should be reduced to writing so that you’re clear that there’s no uncertainty as to the arrangement, and that’s going to protect you later on from these types of claims, but also throughout the relationship.

Stephanie: So, there’s three things we’ve talked about today. Back to COVID, won’t it be great when we have you in here and say, ‘Remember that?’ Back to COVID, keep an eye on changes to legislation. What I heard in COVID, what I’ve heard when you were talking about sexual harassment, the importance of just being aware of that, and changes to any workplace health and safety legislation. Then when you’ve talked about this contracting, there’s nothing new here as a business owner, is there? There’s nothing that you have to suddenly start doing something you’ve never done before.

Christa: That’s right. I think that certainly the High Court in those contractor cases have just reiterated that. We’re heading back to the basics. That I think makes for good business practice. Good corporate governance is really have the fundamentals and the basics set up, right? In the first place, and that’s going to save hopefully a lot of time and energy later on.

Stephanie: So, having the basics right, consulting with your team at every opportunity, and also having your head above your business and knowing what’s going on in the world around you and the implications that could have for you as a CEO or business owner.

Christa: Certainly. Very important.

Stephanie: I love your eyes being alive, and so interested in all of this, but it was very helpful, very practical as always. Christa Lenard, thank you very much for joining us.

Christa: It’s a pleasure. Thank you, Stephanie.

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