August 4, 2020
In the recent case of Jamsek v ZG Operations Australia Pty Ltd (Jamsek) a Full Court of the Federal Court of Australia has delivered a significant ruling dealing with the distinction between employees and independent contractors. The case concerned two truck drivers who had contractor arrangements with ZG Operations Australia Pty Ltd (Company). The drivers sought unpaid leave and superannuation entitlements after having worked for the Company for nearly 40 years.
Despite the contracts describing them as “contractors”, it was found that the drivers were actually “employees” within the meaning of the Fair Work Act 2009 (Cth) (FW Act), deemed as “employees” by the Superannuation Guarantee (Administration) Act 1992 (SGA Act) and “workers” for the purposes of the relevant long service leave legislation.
What is the background to the case?
The drivers commenced working for the Company in 1977. In 1986 the Company informed the drivers that their ongoing employment could not be guaranteed and proposed that they become “contractors” and purchase the trucks that they had been driving from the Company. The drivers accepted the proposal. In 2017 the drivers’ services were terminated due to cost-cutting within the Company.
During the period they were engaged by the Company, the drivers did not work for any other business or entity.
After termination, the drivers commenced proceedings in the Federal Court seeking declarations and orders relating to certain statutory entitlements. Although at first instance the drivers were found not to be employees, this decision was reversed on appeal by the Full Federal Court.
Were the drivers employees or contractors?
Past case law has established that there is no single standard for determining the existence of an employment relationship. As a result, the Court must consider all relevant indicia under a “multi-factor test”. The “factors” considered included the following:
The written contracts
Justice Wigney commented that “aside from the fact that the men took over the risk and expense of owning and operating the delivery trucks, little else changed”. The drivers were required to buy the trucks at a specified price and without negotiation under threat of redundancy, and these circumstances “diminish any suggestion that there was a clear mutual intention to alter the nature and structure of the relationship between the parties”. In other words, where the drivers had limited bargaining power, it could not be said that the parties all had the requisite contractual intention to be bound.
Justice Perram considered the question of goodwill to be the most important question before the Court on appeal. His Honour considered the absence of goodwill in the contractor’s purported business, noting that the drivers did not undertake work for any other person nor market their services elsewhere. The profit motivated activity of driving was for the benefit of the Company, not the drivers or their respective partnerships. Any goodwill was therefore actually possessed by the Company. Although not determinative, Justice Perram considered this to be a helpful and important aspect in the consideration of the contractor versus employee question.
While the drivers had some self-determination in their day-to-day driving activities, they were generally required to work set hours. The Company required the drivers to display the Company logo on their trucks and sometimes they were required to wear a Company uniform. While the written contracts allowed the drivers to work for others, the practical result of the requirement for them to work set hours for the Company was that they could not.
Ownership of equipment
While generally the investment in expensive equipment such as trucks would indicate a relationship of independent contractor, the circumstances under which that investment occurred (under threat of redundancy) was significant, as was the requirement for the trucks to bear the Company logo.
Ultimately, the Court in applying the multi-factor test conducted a balancing act and viewed the substantive relationship between the drivers and the Company as a whole, with Justice Anderson finding that:
“a proper consideration of the long relationship between the [the drivers] and the company reveals that the [the drivers] were in fact employees, not independent contractors, during the relevant period. Although there are various factors supporting the characterisation that the [the drivers] were operating an independent business, these factors are outweighed by an appreciation of how the relationship operated in substance.”
What are the conclusions of the case?
The decision meant that the Company was exposed to liability for entitlements under the FW Act, superannuation and long service legislation.
The case has been remitted to the primary judge to determine the questions of compensation, breaches of legislation and penalties.
The key points to be taken away from Jamsek are:
- Where a written contract expresses that the relationship is not an employment relationship, this is not determinative;
- All the surrounding circumstances will be considered when determining the true nature of any contractual relationship;
- Strong indicators of an employment relationship include factors such as contractors having little opportunity to work elsewhere, deriving their sole income from the arrangement and carrying the company’s logo on their equipment and clothes;
- If a worker has no independent capacity to generate goodwill, this may be an indication of an employment relationship, as the goodwill is likely possessed by the employer;
- If someone is mistakenly regarded as an independent contractor, an employer may be subject to civil penalties in addition to liability for employment entitlements; and
- This case creates confusion and the potential for “double dipping” claims where state “owner driver legislation” already provides for employment-style benefits for transport owner-drivers who are engaged as contractors.
If the distinction between independent contractors and employees is unclear or you consider there may be a borderline case in your business, you should seek further advice.
What can businesses do to limit their exposure to superannuation liability?
There is a potential for businesses to be exposed to superannuation liability even though the relevant indicia suggest that the person performing work is truly a contractor. Although this perennial issue is often overlooked, individual contractors engaged for their labour may be considered to be an “employee” for superannuation purposes and if so, are entitled to superannuation contributions.
Fortunately, the Federal Government has introduced an amnesty which allows for the back payment of unpaid superannuation without the payments attracting certain penalties and charges. In addition, payments of superannuation under the amnesty arrangements may be tax deductible. However, with the amnesty expiring on the 6 September 2020, businesses should take action as soon as possible to assess their potential superannuation liability for individual contractors.
You can listen to our podcast ‘Is a contractor truly a contractor?’ which discusses the implications on engaging independent contracts, by clicking here.
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