It was recently clarified by the High Court of Australia that when determining whether an individual is an employee or independent contractor, it is the rights and duties provided under a contract that are primarily considered.

For the past 30 years, a ‘multi-factorial’ test has been the accepted approach for making this distinction. This considered elements such as:

  • Whether tax was deducted from the income of the individual
  • Whether tools were supplied
  • If holidays were permitted
  • Whether one party is represented by the other
  • If wearing of a uniform is required

A recent Federal Court hearing Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022) initially applied this multi-factorial approach in its ruling and determined that an individual employed to a company through a labour hire service was an independent contractor. Upon appeal, however, the High Court of Australia ruled to the contrary, citing the below as the prevailing factors:

  • The company determined how much the individual was paid
  • The individual was paid directly, not through their labour hire company
  • The company retained a ‘right of control’ over the individual
  • The company was able to terminate the individual’s engagement if they failed to obey their directions

It was further clarified that how the parties chose to label their relationship was irrelevant to this assessment, as was whether the individual was able to accept or reject offers for work externally.

The multi-factorial approach is still the common law method for determining whether an individual is an employee or an independent contractor. However, these recent decisions have provided clarity that the primary factors involve the legal rights and obligations contained within the contract between the two parties, as opposed to the actions that follow.

With this in mind, contracts with employees and independent contractors should be reviewed to ensure their arrangements reflect the intended nature of the relationship as understood upon commencement. With well-documented contracts that accurately detail these arrangements, all parties will have greater confidence that a Court will not later rule it to be different than originally intended.