For years, we thought that we were “astute”, using one-sided professional on-hire contracts that were stacked in the agencies’ favour. Clients wanted compliant professional labour without the costs of employment; and on-hire agencies developed business models that met, and continue to meet, that demand – despite the inherent risks.
It should have changed as the professional contracting sector came under increasing competition from contracting platforms such as UpWork and Fiverr. It should have changed; but it didn’t.
It should have changed in 2016, when the Australian Consumer Law was amended to prohibit the use of unfair terms in standard form, small business contracts, because the independent contractors were supposedly in business on their own account. It should have changed; but it didn’t.
It should have changed in June 2021, when the ACCC granted a class exemption to allow small businesses, including professional contractors, to bargain collectively on price, terms and conditions without breaching competition law. It should have changed; but it didn’t. Though there are some encouraging signs that the bargaining exemption is being adopted by health and medical professionals and by IT professionals.
It should have changed in February 2022, when the High Court said that if you’ve set yourself up as a mere purveyor of subservient, dependent, and compliant labour, and your contractor’s promise to perform work is a “core asset” of your business, then you’re looking a lot like an employer.[i] It should have changed; but it didn’t.
In New Zealand, it should have changed in August 2022, when amendments to the Fair Trading Act, which prohibited the use of unfair terms in standard form, small business contracts, commenced. It should have changed; but it didn’t.
It should be changing as the professional contracting sector is increasingly impacted by AI-driven technologies. Ask any recruiter about the ace-up-their-sleeve against being superseded by AI-driven technology, and they’ll tell you that it has something to do with their human touch and their contractor care programs. Well, if that’s right, it should be reflected in their contracts. It should be changing; but it isn’t.
Perhaps it will change in November this year, when the Australian Consumer Law will once again be amended to increase penalties for having unfair terms in standard form, small business contracts to $50 million.
Perhaps it will change; but my guess is that, unless the professional contracting on-hire agencies wake up to the changes that have taken place in their sector over the past decade, and stop using engagement and supply models developed in the 1980s, it probably won’t … at least not until their clients and contractors also wake up to the political, economic, social, and technological environment in which they’re now operating.
Post Script: Throughout February 2023, I was privileged to conduct a sustained Tuesday TalkAbout Live!masterclass exploration of issues facing professional contracting on-hire agencies. In March, I will be extending that exploration by taking a deeper dive into the Consumer Protection & Fair Trading regulation of the sector in Australia & New Zealand. One of the outcomes of our March masterclasses will be the development of a methodology for conducting a Consumer Protection & Fair Trading self-assessment. In April, we will shift the focus of our exploration into the field of competition regulation and explore ways to take advantage of exemptions and authorisations that facilitate the development of innovative supply models.
I hope you’ll take time to follow our exploration and participate in one of the sessions.
Photo by Sora Shimazaki on Pexels.com. Woman advocate carrying brief, leaving court.
Notre Vie Enterprises Pty Ltd V Saturnian Pty Ltd[i] is a recent VCAT matter that involved a public relations business, which engaged an employment agency to find a personal assistant for it.
The client claimed that the agency recommended an unsuitable candidate, who resigned after two weeks. It also claimed that the agency’s shortlisting decision was biased in favour of the successful candidate because of a prior work relationship between the agency’s consultant and the candidate, which was not disclosed until after the first round of interviews. The client sought a refund of $3,960 based on the misleading and deceptive conduct provisions of the Australian Consumer Law (ACL). It did not contend, and the Tribunal did not find, that the agency breached any of the statutory guarantees in the ACL.
The agency denied the allegations and argued that its shortlisting decision was based on objective evidence.
The Tribunal found that the successful candidate was given preferential treatment due to the former work relationship with the agency’s consultant. It also found that the agency failed to re-advertise the position as it was required to do under the contract.
However, the agency argued that, although the applicant had the benefit of a 100% satisfaction guarantee in the contract, the client chose not to use it and managed to a replacement by itself within 48 hours.
In the circumstances, the Tribunal found that the client did not prove that the agency engaged in misleading or deceptive conduct, and therefore was not entitled to a refund.
The application was dismissed.
The decision serves as a useful reminder that good arguments and correct statements of legal principle do not win cases if they are not supported by the facts.
Andrew C. Wood
[i]Notre Vie Enterprises Pty Ltd v Saturnian Pty Ltd (Civil Claims) [2023] VCAT 95 (31 January 2023)
It’s about time we had a serious conversation about some of the nonsense that’s been creeping in to so-called “payroll services” supply contracts.
Consider this common contractual formula:
Labour Hire Firm has sourced Individual to work as an on-hired physiotherapist for its Client.
Individual means Jo Physio.
Client means the Department of Health.
Payroll Provider must employ Jo Physio.
Payroll Provider must provide Services of Jo Physio to Client.
Services means physiotherapy services.
What do you make of it?
Has the Payroll Provider contracted a primary obligation to supply physiotherapy services to the Department of Health? If so, what authority did Labour Hire Provider have to make the bargain? Is it an obligation owed only to Labour Hire Provider, which Labour Hire Provider holds on some sort of trust for the Department?
Has Payroll Provider accepted a sub-contracted obligation from Labour Hire Firm to supply physiotherapy services to the Department of Health? What if Labour Hire Firm never had a contractual obligation to supply physiotherapy services to the department in the first place; but merely an obligation to supply a physiotherapy worker? Was there ever an obligation to supply physiotherapy services that could have been sub-contracted? Does the contract not mean what it appears to say?
What contracts and arrangements would you need to see if you were asked to untangle this mess – say, in order to identify the “true employer“; or to identify whether Jo Physio is an employee or an independent contractor; or to establish who needs a labour hire licence, or an employment agent’s licence; or to untangle indemnity and liability insurance obligations.
Sadly, I see a lot of “half-smart” contracts that create more problems than they solve because they ignore the basics and seem to be thrown together without too much in the way of legal analysis.
That’s why we need to get talking. And that’s what we’re going to do over the next three weeks as we dedicate a series of Tuesday TalkAbout Live sessions to this topic.
Check the details and make sure you don’t miss out.
A recent decision of Mortimer J in the Federal Court of Australia[i] highlights just how difficult it can be to determine which, amongst several entities within a corporate group, is the actual employer of the employees who work within the group.
However, several lessons appear to be emerging:
The Federal Court (and the Fair Work Commission so it seems[ii]) are displaying a preference to determine employer identity questions using the same approach that the High Court used in Personnel Contracting[iii] and Jamsek[iv] earlier this year to determine employment status questions.
But not everyone agrees with that approach. The NSW Supreme Court in Spitfire Corporation[v] held that, in corporate group cases – at least where the provisions and policy of Part 5.6, Div. 6 of the Corporations Act 2001 are engaged[vi] – there may still be scope to inquire into the totality of the relationship rather than to restrict the inquiry to the legal rights and obligations of the parties as set out in the contract.
Nevertheless, Spitfire Corporation could be limited to insolvency cases.[vii] It may take another appeal to the High Court to resolve that question.
Meanwhile, sham transactions are still susceptible to being unravelled by an examination of the circumstances beyond what is merely set out in the contract. That proposition is consistent with Personnel Contracting[viii].
But the courts may take a fairly narrow view of what amounts to a sham transaction – the essence of a sham being an attempt to disguise a transaction as something that it is not. That is to say, it involves “some kind of deception”.[ix]
That may be difficult to establish if the entities in the group share the same “controlling minds and officers”. In such a case, there may be considerable freedom to choose which of several corporate vehicles within the group should act as employer.[x]
Neither will the courts move too quickly to “pierce the corporate veil”. Unless “the corporate form is being abused for an improper purpose, such as to perpetrate fraud and avoid extant legal duties”,[xi] a court is unlikely to ignore the separate legal personality and limited liability of legal corporations.
However, liability may still be sheeted home to a principal within a corporate group as the result of agency if there is “a real [legal?] relationship of agency between parent and subsidiary not one said to arise [merely?] from the existence of control and identity of interest in two separate corporate forms”.[xii]
The intersection between employment law and consumer (fair trading) law is, at last, beginning to be explored in the context of employer identity issues.
In this case, misleading and deceptive conduct claims[xiii] and misrepresentation in connection with offers of employment claims[xiv] were pursued against the putative employer and its director. They failed because the employee brought them against a company that was not his employer[xv] and could not establish that they were made.xvi
Future exploration of the intersection between employment law and the Australian Consumer Law might eventually see the terms of the comprehensive written contract (or contracts), upon which the court would rely in determining the employer identity issue according to the approach in Personnel Contracting, thoroughly scrutinised for misleading conduct, unfairness (other than purely in respect of employment terms) and even estoppel[xvii] or mistake – all with a view to having the web of contractual rights and obligations “put in order” so that the court may have a reliable guide that will enable it to place all its eggs in the contractual basket.
Lastly, it seems fair to observe that the arguments for the employee were complex, sophisticated and elegantly assembled. But arguments do not make a case; and, in this instance, the arguments could fare no better than the facts on which they were based – the court finding that: “[the employee] has failed to prove any of his claims on the balance of probabilities.”xviii
This can all seem difficult enough – even in a relatively simple corporate grouping consisting of no more than an operating entity and an administrative entity. However, as the network of contractual relationships expands to include labour hire firms, outsourced payroll providers and incorporated worker entities, the difficulty of identifying the true employer of a worker as between the person who pays them and the person who controls the supply of their labour increases dramatically. Some of those dramas are already being played out in the Fair Work Commission. Hopefully we will get some more clarification before too long.
Andrew C. Wood
[i]Robinson v BMF Pty Ltd (in liq) (No 2)[2022] FCA 1191 7 October 2022.
[ii]Peter John Chambers Jennifer O’Brien v Broadway Homes Pty Ltd t/a Broadway Homes [2022] FWCFB 129 (13 July 2022).
[iii]Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd[2022] HCA 1.
[x] At para [174] distinguishing Fair Work Ombudsman v Ramsey Food Processing Pty Ltd [2011] FCA 1176; 198 FCR 174 – a labour hire case about whether the host or labour hire firm was the true employer.
[xii] At para [212], citing Alsop CJ speaking extra-judicially in “Piercing the Corporate Veil: Recent International Developments” (Paper presented to the 38th Annual Conference of the Banking & Financial Services Law Association, 26 August 2022). My inserts.
Six months on from the High Court’s decisions in Personnel Contracting[i] and Jamsek,[ii] the dust is beginning to settle and we’re getting a clearer look at how those decisions may be affecting the labour hire landscape. In that time, I’ve seen many things written about the High Court’s new approach to determining whether a work relationship is one of employment or independent contracting. But one of the clearest and most helpful explanations of the new approach that I’ve seen so far, comes from the recent Federal Court decision in JMC Pty Limited v Commissioner of Taxation.[iii]
Background
The case concerned JMC’s liability as an employer to pay superannuation to a worker whom it engaged to provide it with “teaching services”. Those teaching services comprised delivering lectures to JMC’s students at its Melbourne campus and marking student examinations or assignments.[iv] JMC contended that the worker was an independent contractor and that it was therefore not required to make superannuation contributions on his behalf. The Commissioner for Taxation disagreed.
Six Key Principles
In the course of holding that the worker was an employee, Wigney J outlined six key principles that can be extracted from Personnel Contracting; Jamsek and related cases. I’ve set them out in “digest” form below, without their references and additional elaboration.
The decision from paragraphs [16] to [27] is worth reading in full. It should only take you about five to ten minutes. But if you’re pressed for time, here are the six key principles in digest form:
Where the rights and duties of the parties are comprehensively committed to a written contract, the legal rights and obligations established by the contract are decisive of the character of the relationship provided that the validity of the contract has not been challenged as a sham, or that the terms of the contract have not been varied, waived or are subject to an estoppel.
In order to ascertain the relevant legal rights and obligations, the contract of employment must be construed in accordance with the established principles of contractual interpretation. …regard may be had to the circumstances surrounding the making of the contract, as well as to events and circumstances external to the contract which are objective, known to the parties at the time of contracting and which assist in identifying the purpose or object of the contract.
…the characterisation of the relationship between the parties is not affected by circumstances, facts or occurrences arising between the parties that have no bearing on their legal rights.
The contractual provisions that may be relevant in determining the nature of the relationship include, but are not limited to, those that deal with the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work, the provision for holidays, the deduction of income tax, the delegation of work and the right to exercise direction and control.
Characterisation of the relationship …, often hinges on two considerations. The first consideration is the extent to which the putative employer has the right to control how, where and when the putative employee performs the work. The second is the extent to which the putative employee can be seen to work in his or her own business, as distinct from the business of the putative employer. Neither of those considerations are determinative and both involve questions of degree
A “label” which the parties may have chosen to describe their relationship is not determinative of the nature of the relationship and will rarely assist the court in characterising the relationship by reference to the contractual rights and duties of the parties. The characterisation of a relationship…, is ultimately an evaluative judgment that takes into account the totality of the parties’ contractual rights and obligations.
My emphasis
A common mistake
One common mistake that I’ve observed, both in commentary about the High Court’s new approach and in attempts to apply it in drafting contracts, is that there is often a failure to distinguish between what the contract says, on the one hand; and the legal rights and obligations that it creates, on the other.
So, you get the situation where employers are still going to great lengths to include and rely on acknowledgements that the relationship is one of independent contract.
Then they say something like: “Well, the High Court decided that you can only look at what the contract says. And look, see, it says right here that our relationship is one of independent contract. So, it can’t be anything else.”
They’re entirely wrong, of course. What they’ve missed is that the High Court was really saying that you look to contract to find “the totality of the parties’ rights and obligations”, and proceed from there. Look, again, at points 1, 2, 4, 5 and 6 of the principles summarised so comprehensively by Wigney J in JMC.
Don’t confuse mere acknowledgments with legal rights or obligations. You can acknowledge, in your contract if you want to, that the world is flat, or that a duck is a rooster; but it doesn’t make it so. Neither does it give you the legal right to make it so; or to oblige someone else to make it so for you.
Some emerging issues
There are also several emerging issues that it may be important to note in labour hire arrangements that do not conform to the traditional tripartite model.
Loose and uncertain arrangements
Personnel Contracting and Jamsek apply in cases where the parties’ rights and obligations are “comprehensively committed to a written contract”. But in cases where there is some uncertainty or looseness in the arrangement, the courts may still undertake a more wide-ranging examination of the totality of the relationship.
At least, that was the view of the Fair Work Commission in Waring v Hage Retail,[v]where the specific terms under which the work was to be performed were found not to be the subject of any express agreement, oral or written arrangements between the parties;[vi]and their arrangements, whatever they were, were described as “vague, opaque and amorphous”.[vii]
The issue should not arise where carefully drafted contracts that are used in traditional labour hire tri-partite settings. However, it may crop up in non-standard arrangements involving additional parties as supply or payment intermediaries, including where payroll services providers are appointed as employer-of-record, or where “pyramid” or tiered supply arrangements are used – especially if the written contracts used to support those arrangements are misaligned.
Where arrangement not contractual; or alternatives not limited to employment and independent contracting
Personnel Contracting and Jamsek both “start from the position that there is a contract between the worker and the organisation”.[viii] However that may not be so in all cases.
For example, various unpaid work trial, work experience, internship and volunteer arrangements might not be underpinned by an identifiable “work contract”. In those cases, it may be difficult to identify what the terms of the arrangement were, and a court or commission might still embark on a wider inquiry.
That is what happened in the Victorian Supreme Court case of O’Connor v Comensoli, where a question arose concerning the vicarious liability of the Catholic Archdiocese of Melbourne for alleged conduct of one of its priests.
After observing that the relationship between the Archdiocese and its priests is not contractual and that the employee/ independent contractor dichotomy, which permits only two alternatives neither of which applied in the circumstances of the case, Keogh J held that High Court’s decision in Personnel Contracting did not authoritatively dispose of the vicarious liability issue.[ix]
The case highlights that there may still be situations that were not addressed by the High Court’s new approach and that parties will need to be on their guard to identify situations in which that approach will not apply.
In a labour hire setting, the issue could arise between a labour hire provider and its temps, noting that a person can still be a “worker” for a labour hire provider even in the absence of a contractual arrangement between them[x] – especially where non-standard arrangements that involve additional parties as supply or payment intermediaries are used.
Parties to such arrangements will need to exercise special care to identify where the legal rights and obligations fall, how they control the provision of the worker’s labour, and who is responsible for them.
Employer identity question
Whilst Rossato,[xi]Personnel Contracting, and Jamsek clarified the approach to determining employment status questions, they did not deal with the separate employer identity question – that is to say: who, amongst more than one contender, is the true employer.
In Spitfire Corporation[xii], the NSW Supreme Court carefully distinguished the High Court decisions, saying that they did not apply to a determination of the employer identity question, in the circumstances of that case.
Conclusion
Whilst the High Court’s decisions in Personnel Contracting and Jamsek have clarified the approach that the courts will adopt in classifying a work relationship as either employment or independent contracting, a number of issues regularly encountered in the labour hire setting were not addressed. Moreover, the approach can be difficult to apply for anyone who is not familiar with the categorisation of legal rights and obligations. Those difficulties can be exacerbated in cases where the parties’ arrangements are loose and uncertain, or where they are misaligned.
Labour hire providers and their intermediaries (as well as their advisors) will therefore need to exercise considerable care in applying the approach adopted by the High Court in Personnel Contracting and Jamsek and remain alert to identify those situations in which it might not apply at all.
[x] See for example, Labour Hire Licensing Act 2017 (Qld) s. 7(2)(b); Labour Hire Licensing Act 2018 (Vic) s. 9(3)(b), Labour Hire Licensing Act 2020 (ACT) s. 7(3)(b).
Photo by Pixabay on Pexels.comJames Wood interviews the author.
TRANSCRIPT:
ANDREW: Over the past few days, I’ve been invited to provide further commentary on my recent post about Employer of Record (EoR) arrangements and on-hire contracts with incorporated workers. Some of the questions raised by readers have been very insightful. So, I’ve asked James to compile them and pass them through to me in this podcast.
ANDREW: Sure. An Incorporated Worker Entity, or IWE, is typically a proprietary limited company through which a worker conducts a small business. So, for example, a person might incorporate a company to supply, say, ITC or project management services, with the person performing the actual ITC or project management work on behalf of the IWE – the Incorporated Worker Entity.
JAMES: So, are the individual workers the employees of the Incorporated Worker Entity?
ANDREW: Not always. They can be the employees of their IWEs. But they can work in other capacities as well. For example, they could be engaged as independent contractor consultants to their IWE. Or they might be a working director and be remunerated via directors’ fees. Or they could even be a shareholder in a family run business and be remunerated through dividends on their shareholdings. There are probably other methods as well, involving various types of trusts and partnerships.
JAMES: So, the Worker Entity supplies the services and the individual worker performs the work, right?
ANDREW: Yes.
JAMES: How does that work in an on-hire situation where the on-hire firm and its client might be a bit fussy about who is actually going to do the work?
ANDREW: It’s common in that setting for the contract between the Worker Entity and the on-hire firm to include a nominated worker clause. It’s a bit like the sort of nominated sub-contractor provision you might find in some commercial and works contracts.
JAMES: Could you include the nominated worker as a party to the contract between the Worker Entity and the on-hire firm?
ANDREW: You could do that. In fact, I used to draft on-hire IWE contracts that way back in the 1990s. The thinking back then was that it was a good way to tie up loose ends and keep control of the worker and of the IWE’s right of delegation.
But I stopped doing it around 2010, around the time of the commencement of the Fair Work Act, when I was asked to design an on-hire IWE template that framed the relationship as a genuine commercial relationship.
It seemed (well, it seemed to me at least) that it would be important to leave the engagement of the worker to the IWE – because the worker might have been remunerated by the Worker Enterprise as a working director, an independent contractor, employee, or a dividend receiving share holder.
Most on-hire IWE contracts of that period, which included the individual as a nominated party, ignored those distinctions and imposed obligations on the individual that could easily have been construed as the type of obligations typically owed by employees. I suspect that many still do.
JAMES: Would that be a problem?
ANDREW: Yes. I think so. The problem, of course, is that, where those obligations are owed to the on-hire firm, the arrangement is susceptible of being construed as one by which the on-hire provider, regardless of its arrangement with the Worker Entity, may have become the employer the nominated worker.
And since the High Court’s decision this year in Personnel Contracting, an on-hire IWE contract that includes the nominated worker might be even more susceptible to that construction if the obligations owed by the individual to the on-hire provider are treated as a “core asset” of the on-hire provider’s business that’s necessary to enable it to supply “compliant labour”to its clients.
So, my take on this is that it might be better, now, to leave the individual workers out of it.
It would still be possible to exercise proper control over the right to delegate. It’d simply be a matter of ensuring that the IWE could only delegate to approved workers, and establishing rigorous procedures for giving or withholding approval.
JAMES: OK. So, there could be some problems there. In your posts, you’ve spoken about “Employers of Record”. Could you clarify what you mean by an Employer of Record?
ANDREW: Of course. Well, an employer-of-record is simply someone who appears “on the record” as the employer of your workers, though they’re not the true employer. That’s to say, they don’t control the employment relationship in the same way that the true employer does; and the work which the employee performs is not dependent upon or subservient to them in the same way in which it is to the true employer. In this situation, the employee’s obligation to perform work will most likely be a core asset of the true employer rather than of the employer-of-record.
JAMES: So, what does an employer of record actually do?
ANDREW: Typically, it will handle payroll and will probably be the named employer in the employment contract. It will issue pay slips and pay summaries and remit tax and super. It might arrange for insurance and handle a range of administrative tasks for the true employer. It might, for example, perform those tasks as an agent for the true employer or employers in a group of related entities trading as a corporate group. That would be quite a common arrangement.
JAMES: But you say it’s not the true employer?
ANDREW: That’s right. In Australia, we don’t have a concept of joint employment or co-employment. There’s only one employer in any employment relationship. So, we can understand the employer-of-record as being just the nominee “on the record” for the true employer.
JAMES: How do you tell the difference between the employer of record and the true employer?
ANDREW: You look at the totality of the legal rights and obligations that exist between the parties. Whilst your contract (if you’ve got one) will usually be the primary focus of your inquiry, the New South Wales Supreme Court recently said, in March this year, that you don’t necessarily confine yourself to a consideration of the terms of the contract – even if it’s wholly in writing. The case was Spitfire Corporation v Aspirio. It seems to be a different approach from the way the High Court has said you go about determining whether a work relationship is one of employment or whether it’s one of independent contracting.
JAMES: You mentioned “payroll arrangements”. I wonder if we could now turn to the situation where a labour hire firm is appointing a payroll services provider…
What could go wrong when a labour hire provider engages a payroll services provider to pay its employee on the condition that the payroll services provider “must employ the individual,”
ANDREW: The first and obvious problem is that a contract that only says, “You must employ worker X” is not a contract that actually employs worker X. It’s only an agreement for you to do something. If you do employ worker X, then presumably there must be a contract somewhere that does that. And it would be that contract that’d be the chief guide in answering both the worker status question and the employer identity question.
JAMES: …and the labour hire provider’s worker is required to sign the agreement acknowledging that they are to be employee of the payroll provider?
ANDREW: If the worker is included merely to get signed up to various acknowledgements (such as of employment status or employer identity) then there’s the obvious problem that those acknowledgments might be nothing more than “labelling”. They may have little weight … except to the extent that they could evidence an attempt to avoid or to disguise aspects of the true work relationship.
And then because the worker’s obligations under such a contract (which we’ve already identified as not being the actual employment contract) are likely to be owed to the party that appoints the payroll services provider, rather than to the payroll provider itself, there’s a further risk that the obligations may be interpreted as signalling control by the appointing party (such as a labour-hire provider) that would be consistent with an employment relationship between the worker and the labour hire firm.
JAMES: Wow! Well, in the same situation what could go wrong if the worker was operating through their own Incorporated Worker Entity as a nominated person?
ANDREW: OK. So that type of contract contemplates that there would be four parties.
the on-hire firm that appoints the payroll provider;
the payroll provider itself;
the Worker Entity; and
the individual worker
Now what can go wrong … horribly wrong … is that a contract gets confused about who is doing what.
I’ve actually seen examples of contracts that confuse the payroll provider with the Worker Entity. The payroll provider supplies payroll and administration services, The Worker Entity provides the services that the on-hire firm’s client actually wants: like ITC services, project management services, engineering services, design services. That sort of thing.
The result can be an absurd arrangement by which the payroll provider apparently assumes the obligation to supply the services that the Worker Entity or the worker should provide.
Once you’ve got those sorts of problems, you can no longer rely on the contract as any sort of reliable guide to questions about who is the employer, or whether the work relationship is one of employment or independent contracting. And serious questions then arise about its enforceability.
JAMES: Well, that’s all the questions we have so far.
ANDREW: James, thank you for fielding those questions for us. I hope the answers have helped to clear up some of the confusion around this topic. If they have, be sure to drop us a line, and don’t forget to head across to the Australian & New Zealand Labour Hire Licensing & Regulation LinkedIn Group, where we can continue the conversation.
You might not want to place all your trust in the written contract and the “Golden Trio” of recent High Court cases[i] if you’re still using an employer-of-record payroll arrangement in the belief that it relieves you from your employer responsibilities. That’s because the NSW Supreme Court has recently held[ii] that the High Court’s guidance about characterizing employment relationships by reference solely to the terms of the contract does not apply to the challenge of identifying the “true employer” – at least, not where the provisions and policy of Part 5.6, Div. 6 of the Corporations Act 2001[iii]are engaged.
Whether the NSW Supreme Court’s decision withstands challenge on appeal and whether it stands for any broader principle are matters that remain to be seen. In the meantime, what many may have regarded as having been clarified by the Golden Trio cases may still be a “grey area”.
Background
Spitfire Corporation was the holding company of seven wholly-owned subsidiaries, including Aspirio. Aspirio was set up as employer-of-record for the group. Aspirio:
was party to the employment contracts, which provided for the payment of wages, superannuation and other entitlements to employees of the Spitfire Group;
took out workers’ compensation insurance and paid premiums for employees of the Spitfire Group;
reported PAYG for employees in BAS lodged through the ATO portal;
recorded leave entitlements of the employees; and
was identified as the payer on payslips issued to the employees.
Before going into liquidation, Spitfire Corporation gave security over its assets to Resilient Investment Group Pty Ltd (Resilient). In the course of the liquidation, a question arose as to whether assets of Spitfire should be used to pay the workers, who were apparently employees of Aspirio, in priority to Resilient as secured creditor.
Determination of the issue required the Court to decide whether Spitfire Corporation or Aspirio was the true employer. If Spitfire Corporation were the true employer, its assets would have been available for payment of the employees ahead of any payment to Resilient.
Argument
Resilient argued, relying on the Golden Trio of recent High Court cases, that determination of the true employer’s identity “does not permit inquiry beyond the employment contract (other than in cases of sham or contractual variation) and that, by reference to the written employment contracts and orthodox contractual principles, Aspirio was the relevant employer of the employees”. It contended that reference to the “totality of the relationship” or to a “multifactorial analysis” was no longer available after the High Court’s decisions.[iv]
In support of a less constrained approach, the liquidators and the Commonwealth (with an interest in payment in the employees’ superannuation) argued that the High Court’s decisions did not deal with a question of who, between competing entities within a corporate group, was the true employer, and that they did not address the question of how the identity of the employer, for the purposes of the insolvency provisions of the Corporations Act, was to be approached. On those grounds, they argued that the High Court decisions did not overrule existing case law that required the true employer’s identity to be determined by reference to the “totality of the relationship” or on the basis of a multifactorial analysis.[v]
Decision
The workers were held to be the employees of Spitfire Corporation.
Black J accepted that earlier “true employer” cases directed to Pt 5.6 Div 6 of the Corporations Actcomprised a discrete line of authority which the Court was bound to follow unless the line of authority was overruled by an appellate court.[vi]
His Honour did not consider the High Court, in Workpac, Personnel Contracting or ZG Operations expressly or impliedly overruled the earlier line of authority, where the Golden Trio cases “did not need to address and did not address the terms, functions or policy of Pt 5.6 Div 6 of the Corporations Act and the High Court did not there need to consider the implications of treating employment contracts with corporate shells, that have no assets or nominal assets and perform no real business functions, as a means of defeating employee entitlements in insolvency or shifting the liability for them to the Fair Entitlements Guarantee scheme”.[vii]
Although the employment contract named Aspirio as the employer, a number of provisions imposed on the employee obligations owed to members of the Spitfire Group. To that extent, they indicated that Aspirio was merely the agent of the true employer.[viii]
Moreover, the evidence did not establish any business reason for Aspirio, a company without assets, to be the employer of record for all but the managerial employees.[ix]
Significantly, Aspirio:
did not carry out any business activities, other than as a formal employer of record;
did not have any external clients or customers;
had no substantial assets or revenue stream to meet its employment liabilities
held only minimal amounts in its bank accounts, except when other entities in the Spitfire Group transferred money to Aspirio to enable it to make tax payments
did not make payments to employees from its bank accounts, and Spitfire Corporation made those payments, which were recorded as loans from Spitfire Corporation to Aspirio
did not repay the resulting debt that it owed to Spitfire Corporation, and could not do so where it had no assets of substance and did not charge management or other fees to Spitfire Corporation or any other entity in the Spitfire Group.[x]
Further:
employees nominally employed by Aspirio undertook work for other companies in the group, each of which conducted different and separate business activities;
each business unit had its own supervisors, who made their own decisions about bringing on more staff, dismissing staff, and employee entitlements;
each business unit entity was responsible for managing the day-to-day operations of each entity, including giving directions to employees;
Aspirio did not carry out any business activities and had no assets or revenue streams to meet its employment liabilities
Spitfire Corporation paid the employees and relinquished, without consideration, its formal entitlement to pursue Aspirio for the value of those payments; and
there was no evidence of a contractual arrangement between Aspirio and Spitfire Corporation (such as a management services agreement) which would have allowed Aspirio to receive payment for the services it undertook in making its employees available for the benefit of the Spitfire Group, or to fund the payment of their salaries.[xi]
When those factors were considered, and the totality of the relationship examined, the Court held that there was no “intelligible business objective” consistent with the “financial and administrative organisation of the business” in Aspirio’s being the employer of the relevant employees[xii] and that Spitfire Corporation rather than Aspirio was the true employer of the relevant employees, at least for the purposes of Pt 5.6 Div 6 of the Corporations Act.[xiii]
Observations
This seems to have been a fairly clear case in which the evidence overwhelmingly pointed to Aspirio being nothing more than an employer of record or agent for Spitfire Corporation. Its significance lies not so much in the outcome of the multifactorial approach, as in the fact that the multifactorial approach was applied at all following the High Court’s decisions in the Workpac, Personnel Contracting and ZG Operations.
The NSW Supreme Court felt able to distinguish those cases because of what the High Court had not dealt with – the question of identity; application in a corporate group situation, where questions of agency might arise; and the circumstance that the provisions and policy of the insolvency protections in the Corporations Act were engaged.
That should be enough at least to start alarm bells ringing for anyone who might have thought that the Golden Trio cases represented the last word on the topic, and that it was now safe to rely wholly on the terms of the written contract.
Andrew C. Wood
[i]WorkPac Pty Ltd v Rossato (2021) 95 ALJR 681; [2021] HCA 23 (“Workpac”); Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd[2022] HCA 1 (“Personnel Contracting”); ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (“ZG Operations”).
[ii]In the matter of Spitfire Corporation Limited (in liq.) and Aspirio Pty Ltd (in liq) [2022] NSWSC 340 (“Spitfire Corp”).
[iii] Proof and ranking of claims in insolvency. The division includes s. 561 Priority of employees’ claims over circulating security interests.
I opened a book today – one that I’ve not needed to look at since 1973. In fact, I don’t think I could have looked at it too much, even back then. The pages were in pretty good condition…
The book is Maher, Waller & Derham (1971) Cases and Materials on the Legal Process (2 ed). I opened it because I needed to refresh my memory (now fading) about the relationship between the binding rule of a case (its “ratio decidendi”) and its material facts. I wanted to do that because several aspects of the High Court’s recent decision in CFMMEU v Contracting Personnel were causing some panic in the labour hire industry, and I wanted to see if it was justified.
The aspects that were proving especially troublesome were those passages in the judgments that seemed to be suggesting that, as a matter of binding principle, the mere making of a promise to work through a labour hire firm might be enough to make a person that firm’s employee – if the promise were used by the labour hire firm in running its business, as of course it is.
Such a principle, if indeed it were the correct principle to extract from the case, seemed to conflate the “control test” with the “integration” or “organizational test”, applying selected elements of the “multi-factorial test” (though only to the terms of the written contract – mostly), whilst viewing all through the “prism” of the “own business test”, or something not entirely unlike it.
Heaven help us if we’re teaching employment law this semester!
But there, on pages 113-114 of my cherished copy of Maher, Waller & Derham, purchased at the exorbitant price of $8.50, was what I was looking for – a lucid but barely remembered account of the relationship between the binding rule of a case and its facts, showing how the material facts of Donoghue v Stevenson (the famed “snail-in-the-ginger-beer-case”) could be divided into fact families, the members of which could be “stated at various levels of generality”.
Applying the method recommended by those esteemed authors, I was able to discern four families of important facts that might go some way towards explaining what the High Court really said, and which might allay some of the alarm currently circulating through the labour hire industry.
I’ll set them out, and then see if I can combine them into a workable statement of principle.
Facts as to the worker’s identity & capacity: The worker was an individual, not in his own business.
Facts as to the contract: The contract with the labour hire firm was wholly in writing.
Facts as to preservation of independence: the worker’s promise to perform work for the labour hire firm’s clients as directed was not subject to a sufficient reservation of independence – eg. as to what work he would do or how he would do it.
Facts as to the labour hire firm’s control and use of the worker’s promise: The labour hire firm controlled and used the worker’s promise as an asset in its business.
It’s going to be difficult for labour hire firms to avoid #2 and #4. But #1 and #3 might suggest there is some scope to fashion a different outcome in some cases.
So, here’s a first attempt to extract the principle in CFMMEU v Personnel Contracting:
Where A, being an individual not in business for themselves, makes a promise to B, in a wholly written contract without sufficient reservation of independence, to perform work for C, which promise B controls and uses in its business, then A may be characterized as B’s employee.
Don’t hold me to that. I’ll need time to refine it. In fact, it might not be settled until later courts tell us what the High Court really meant. But might it work? Might it keep the doors of a few locum agencies and professional on-hire firms open a bit longer?
Here’s hoping a court that needs to consider the issue in a different occupational context might think so!
This is the first of The Recruiters’ Casebook’s micro-analyses of the recent Australian High Court’s decision in CFMMEU v Personnel Contracting.
The case is important to the recruitment and on-hire community because it challenges established workforce services business models, and because it may leave some suppliers of on-hire contractor services exposed to employment claims.
Context
The case concerned the status of a young UK backpacker, who was engaged and on-hired, as an independent contractor, to work as a labourer on a construction site. The Court, held that he was not an independent contractor, but was, instead, an employee.
Issue: The “Own Business Test”
The case is about how the court decides if a person is an employee, when the contract is wholly in writing. Different principles might possibly apply to a contract that is not wholly in writing.
At issue was a question about the extent to which a court should consider whether independent contractors must necessarily be in business on their own account.
Kiefel CJ, Keane & Edelman JJ said the own business requirement, though not essential, was still useful when checking whether the terms of the work contract preserved the worker’s legal right to perform the contracted work, independently in their own business.[39] They said that the legal relationship had to be determined from the terms of the contract, and that the absence of a contractual right to carry on business highlighted the subordinate or subservient nature of the relationship, [39] leading to a conclusion that the worker, in this case, was an employee. [73]
Gageler & Gleeson JJ thought that the “own business ” test really only posed the ultimate question of whether the worker was an employee in a different way.[114] They departed from current orthodoxy in holding that the court should go beyond the terms of the contract to consider the manner in which it was performed[143] and its interaction with performance of the labour hire agreement between the labour hire provider and its client. [144]
They said that it was legitimate for a court to consider the extent to which the worker can be seen to work in his or her own business as distinct from the business of the putative employer [113].
For that purpose, regard could be had to whether the work was performed under a labour hire arrangement involving back-to-back contracts between a labour hire provider and a host, [152] which they considered to be a strong indicator that the work was for the benefit of the labour hire business and that the worker, in this case, “was not in any meaningful sense in business for himself.”[158]
They used the “own business” test as a sort of intuitive cross-check against a conclusion, which they reached on an application of what was, in reality, a version of teh “control test” or “integration test”. [113]
Gordon J thought that the Court was “not assisted by seeing the question as involving a binary choice between employment and own business”. [162] She thought that it was “not necessary to ask whether the purported employee conducts their own business” [180] and that it “may not always be a suitable inquiry for modern working relationships, [181] because that inquiry will “ordinarily direct attention to matters which are not recorded in the contract”. [182]
The “better question to ask”, according to her Honour, is “whether, by construction of the terms of the contract, the person is contracted to work in the business or enterprise of the purported employer” [183]
Construing the terms of the work contract, Gordon J found that the worker had agreed to perform his work so as to enable the respondent to carry on its labour hire business, [198] in consequence of which he had agreed to work in its business or enterprise and was therefore its employee. [200]
Steward J agreed with Gordon J’s statement of the test to determine whether a person is an employee;[203] but was not prepared to overrule the long line of authorities on which the legitimacy of the on-hire contractor services (Odco) model was based.
Fall Out
The attention given by the judges to the interaction between the work contract and the labour hire contract seems problematic. In a later post, I’ll discuss whether it indicates that the control test and the integration test have merged, in a labour hire setting, into a new “subservience test”, the application of which will, in nearly every case, produce the result that the contracted worker is the employee of the labour hire firm.
In the meantime, it’s worth recalling the context in which the question of the worker’s status arose.
The union and the worker sought compensation from the on-hire firm for contraventions of the FW Act and modern award. The union also sought compensation from the on-hire firm’s client on the basis that it was accessorily liable for the on-hire firm’s alleged breaches.
The appeal has not resolved the claims for compensation. Those claims will now go back to the primary judge to be determined on the basis that the worker was an employee. The claim against the host is likely to raise fresh questions about the circumstances in which a host can be liable as an accessory to an on-hire firm’s contraventions of the FWA and award. Those questions were not considered at first instance, or on appeal.
The Conference reaffirms the fundamental principles on which the Organization is based and, in particular, that:
(a) labour is not a commodity;
ILO Declaration of Philadelphia 10th May, 1944
Whilst the outcome seems intuitively sound – a young UK backpacker, working as a casual labourer on someone’s building site, is surely an employee – on looking a bit more deeply into the High Court’s reasoning in CFMMEU v Personnel Contracting, I’m beginning to wonder whether the Court’s approach to the back-to-back contracts accords with the reality of the on-hire business model, and whether the decision shows signs of treating labour as a commodity.
It’s always risky to paraphrase what the High Court says, but basically, what it appears to have said in this case is that, if you’ve got a contract with a labour hire firm to perform work for its clients, then you’re its employee because, through that contract, it controls the provision of your labour. (Kiefel CJ and Keane & Edelman JJ at para [89]).
Abstracting their honours’ reasoning at para [90], you discover that if your work is “dependent upon, and subservient to” someone else’s business through back-to-back contracts, then you must be that person’s employee – you’re working under a contract of service.
Gaegler and Gleeson JJ appear to have adopted much the same approach saying, at para [158]:
…by supplying his labour to Hanssen [the host], Mr McCourt was at the same time supplying his labour to Construct [the labour hire firm] for the purposes of Construct’s business.
You could almost see how that is intuitively sound in the case of a young UK backpacker supplied to work as a construction labourer. But, to be sound in principle, it has to be capable of wider application. And it’s at that point that the approach adopted by the High Court warrants closer scrutiny.
To test it, take the key passage from the joint judgment of Kiefel CJ and Keane & Edelman JJ at para [89], and simply swap the names and context around to apply to a medical locum agency. Then ask yourselves whether the result is still intuitively sound.
Here it is in translation. The names of the agency and the client are, of course, fictitious:
89 Under the Locum Agreement, Dr McCourt promised LocumsNow to work as directed by LocumsNow and by LocumNow’s customer, Whiteacre Health Service District. Dr McCourt was entitled to be paid by LocumsNow in return for the work he performed pursuant to that promise. That promise to work for LocumsNow’s customer, and his entitlement to be paid for that work, were at the core of LocumsNow’s business of providing [medical] labour to its customers. The right to control the provision of Dr McCourt’s labour was an essential asset of that business. Dr McCourt’s performance of work for, and at the direction of, Whiteacre HSD was a direct result of the deployment by LocumsNow of this asset in the course of its ongoing relationship with its customer.
We can do the same thing with the corresponding passage from the judgment of Gaegler and Gleeson JJ at para [158]:
158 …by supplying his labour to Whiteacre HSD, Dr McCourt was at the same time supplying his labour to LocumsNow for the purposes of LocumsNow’s business.
This sounds dangerously like the heresy of treating labour as a commodity.
What patients were treated at the office of the labour hire firm? A locum agency doesn’t provide, supply, or perform medical labour or services. It arranges for its locums to attend hospitals and health practices to supply the medical services required by the hospital or health practice. That does not make the locum’s work “dependent upon, and subservient to” the agency’s business in any way that compromises the independence of the locum such as to make them the agency’s employee. It does not place them in service of the locum agency.
Neither does a locum agency’s business model involve the acquisition of medical labour or services; it merely involves the acquisition of contractual rights, freely bargained for, which it utilises to discharge its contractual agreement to provide workforce services to facilitate the marshalling of its client’s workforce.
Its workforce services comprise, not the supply of medical services, or the performance of medical services; but rather, the making of arrangements for their supply.
What, I suspect, will now become critical in distinguishing between on-hire employment and on-hire (independent) contracting will be the extent to which those arrangements compromise, or preserve, the capacity for the locum to work independently in the performance of his or her work – including in the absence of needing to demonstrate the exercise of entrepreneurial skill on his or her own account.
The same would be true for any professional locum agency and its locums.
And it is true, at a conceptual level, for on-hire providers in any sector – horticulture, engineering, logistics, teaching, cleaning, aged care etc.
What the decision seems to require is a reappraisal of the Court’s understanding of “control” as it was laid down in Zuijs (1955) and in Stevens v Brodribb (1986). And perhaps that’s the direction in which a legislative solution now needs to be found.
It’s sometimes said that, “hard cases make bad law”. This case may prove the saying true.
Recruiters' Casebook 