This is an employee versus contractor Employee v Contractor - ZG Operations - High Court Case.

Discover why the written contract is important and why the multifactorial approach no longer applies.

This is part of March 2022 - Monthly Tax Updates series by John Jeffreys.

Date published: 27 April 2022

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TRANSCRIPT

The second case considered by the high court in relation to whether individuals were employees or conducting their own business was ZG Operations Australia Pty Ltd.

It involved the question of whether certain individuals continued to be employees of a company after they had changed the structure of their arrangements into a business.

The individuals, which I will refer to as “the drivers”, were originally employees of a company. They were employed as delivery drivers and drove the company’s trucks in this process. It transpired in the mid-1980s that the company put an ultimatum to the drivers that they would need to purchase the trucks, conduct their own businesses and serve the company in that way, otherwise they could not be guaranteed any future employment.

After taking advice from accountants, the drivers decided to create a partnership with their wives. The partnership purchased vehicles from the company and from that point on the partnership provided the delivery services in much the same manner as when the individuals were employees. However, the partnerships invoiced the company for the delivery services that were provided. Further, all of the maintenance and running expenses of the trucks were borne by the partnerships.

The partnerships entered into a contract with the company where the partnerships were referred to as contractors. Although the drivers were told what to deliver, they were left largely to agree amongst themselves on their respective delivery areas. The drivers were asked by the company to install tarpaulins bearing the company logo on trucks. The drivers sometimes wore uniforms that bore the company logo and at other times they did not.

This business relationship endured from 1986 through to 2017 when the agreements between the company and the partnerships were terminated. The drivers then commenced proceedings in the federal court seeking declarations that they were owed statutory entitlements as employees under various pieces of legislation.

The Federal Court Decisions

This matter started off before a single judge of the Federal Court. That judge decided that the drivers were not employees.

The matter was then appealed to the Full Federal Court where that court unanimously overturned the decision of the single judge and held that the drivers were employees. The Full Federal Court analysed the issue by reference to the substance and reality of the relationship rather than focusing on the specific terms of the contract between the partnership and the company. Its conclusion was that the relationship was more akin to one of employment rather than independent businesses contracting with each other.

The High Court Decision

The High Court unanimously overturned the decision of the Full Federal Court. It applied the same reasoning as in the CFMMEU case. The High Court said that the approach of the full federal court was erroneous in point of principle.

The full federal court concluded that the partnerships between the drivers and their wives should not be seen as proper partnerships as the wives were partners in name only. The high court rejected this reasoning and said that there was no reason to view these partnerships differently from any other type of partnership.

The high court said that taking an expansive approach to determining who is an employee or contractor, that is, taking into account all of the factors that impacted on the relationship involved an unjustified departure from orthodox contractual analysis.

The high court went on to say that the services provided by the partnerships involved, together, both the truck driving skills of the drivers and also the use of the trucks which are owned by the partnerships. According to the high court, the provision of such services has consistently been held, both in Australia and in England, to have been characteristic of independent contractors, not employees. The high court saw no reason to reach a different conclusion in this case.

Superannuation Liability

One important issue that remains unresolved in relation to this case is the question of whether the company had a liability for superannuation contributions in respect of the drivers.

Before the High Court, the drivers cross-appealed against the company and argued that the drivers were within the expanded definition of "employee" under subsection 12[3] of the Superannuation Guarantee Administration Act. That subsection provides:

"If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract."

The primary judge rejected the contention that the drivers fell within this provision. The decision of the Full Federal Court that the drivers were employees meant that it did not have to consider this question.

The High Court did not decide this issue but noted that the arguments by the drivers were “not insubstantial”. The High Court said that these arguments could not be dismissed out of hand. However, the High Court said it would be inappropriate for the High Court to determine the issue where the Commissioner of Taxation was not a party to the proceedings due to the potential impact on the revenue. Accordingly, the High Court remitted the issue back to the Full Federal Court to enable the matter to be determined with the Commissioner of Taxation being joined to the proceedings.

The Commissioner has issued Superannuation Guarantee Ruling SGR 2005/1. This ruling deals with the question of who is an employee for the purposes of the superannuation guarantee legislation. In my view, when the Commissioner is joined to the proceedings in the Full Federal Court, if the Commissioner is being consistent with his ruling, he will say that there is not a superannuation guarantee liability.

In paragraph 14 of the ruling the ATO says "If a partnership has contracted to provide services, then the person who actually does the work is not the employee of the other party to the contract. This is so even if the worker is a partner and even if the contract requires the partner to do the work."

Because the High Court considered the contracts between ZG Operations and the partnerships to be valid, the commissioner, if he is true to SGR 2005/1, should say that the contract is between ZG Operations and the partnerships and not between ZG Operations and the individual drivers. This would mean that there is no liability for superannuation contributions under the extended definition of "employee" under subsection 12[3].

The outcome of the decision on this matter by the Full Federal Court will be watched with interest.

Amendments to SGR 2005/1?

While on the topic of SGR 2005/1, I consider it highly likely that the ATO will need to amend this ruling in light of the two High Court decisions. For example, in paragraph 9 of the ruling the ATO states "Defining the contractual relationship is often a process of examining a number of factors and evaluating those factors within the context of the relationship between the parties. No one indicator of itself is determinative of that relationship. The totality of the relationship between the parties must be considered."

This approach seems to be the multifactorial approach which the High Court has now disavowed in these two cases. Accordingly, I expect the Commissioner to amend SGR 2005/1 with a view to giving more weight to the contractual relationship that exists between the parties.

There are also likely to be amendments to a number of other ATO rulings. For example, TR 2005/16 which deals with pay as you go withholding from payments to employees is likely to be amended as this ruling discusses when a person is being paid as an employee.

Implications

The key implication is that if a written agreement exists in relation to the engagement relationship, provided that contract is not a sham or otherwise ineffective, the words of that contract will be given primacy over what the parties actually do. Accordingly, the multifactorial approach that was thought to be the correct approach in determining this issue, is no longer the correct method of analysis if there is a valid binding contract between the parties.

Another way of stating this is that the High Court has disavowed the "checklist" approach to determining whether an individual is an employee or contractor. This refers to having a list of factors that can be considered and weighted in relation to each particular labour engagement situation. The High Court has set aside this approach and has said that an engagement of labour is a contractual relationship and if there is a written contract that comprehensively covers the terms of the engagement, the terms of that contract will determine whether the relationship is one of a contract of service or a contract for services, provided the contract is not a sham or ineffective.

Small and Medium Enterprises

This is a notable issue for the small and medium enterprises market. As we know, many arrangements in the SME sector that engage the services of individuals are either not set out in a contract or what is written about the role is minimal and vague. For those that want to be clear that an individual is not an employee but is in fact a contractor or a person conducting their own business, the High Court has given support for the view that if the contract conditions stipulate there is a contractor relationship, the words of the contract will be upheld by the courts and other factors that are not in the written contract will be unlikely to be examined.

However, I should make it clear, that just because a contract states that a person is not an employee or, alternatively, is a contractor, that does not necessarily mean that they are what the contract stipulates. The terms of the contract must be examined to determine whether the person is in fact an employee or contractor. A mere label as to the role of an individual in a work situation is not sufficient to determine the role of that individual. The terms of the contract must support the label placed on the individual's role. The label given to the relationship does not override the substance of the contract.

Another matter that I should also mention is that the High Court made it clear that it is irrelevant in determining if a person is an employee or a contractor whether a person is free to accept or reject offers of work from another party. This is a common feature of casual employment and does not necessarily point to the person being a contractor.

Greater Certainty

A benefit of this decision by the High Court is that those who engage the services of individuals should, in theory, be able to obtain greater certainty in relation to the type of engagement that is being contracted for by the acquirer of the services. The acquirer of the services and the provider of the services can agree on an arm's-length written contract that comprehensively sets out the terms of their relationship without fear of it being disturbed by a court or attacked by the ATO.

As a general statement, these decisions by the High Court seem to represent somewhat of a challenge to the ATO's position in relation to what types of engagement relationships constitute an employment relationship.

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