Federal Court rules workers deemed ‘integral’ to a company are not contractors

The Full Bench of the Federal Court of Australia (Court) this month ordered a company to pay two contractor truck drivers significant unpaid leave and superannuation entitlements, despite the drivers being engaged under independent contractor agreements for nearly 40 years.

In the recent decision of Jamsek v ZG Operations Australia Pty Ltd [2020] FCAFC 119, the Court reinforced the view that a long-standing relationship between parties where workers are an integral part of the company, can demonstrate an employment relationship.

Background

Mr Martin Jamsek and Mr Robert Whitby (Applicants) worked for the respective companies that owned the business from time to time (for simplicity, together, Company) as truck drivers most of the time. The Applicants initially commenced working with the Company in 1977 as employees.

In late 1985, the drivers of the Company requested a pay rise. However, the Company rejected the request but offered the opportunity for the drivers to become contractors. The drivers, including the Applicants, were informed that the Company cannot guarantee their job going forward if they do not agree to become contractors. The proposal was for the drivers to buy the trucks they were using. The drivers took up the offer to become contractors.

The Applicants set up a partnership each with their spouse (Partnerships) and entered into a contract with the Company as contractors on behalf of their respective Partnerships in early 1986 (1986 Contract).

The Applicants purchased new trucks on behalf of their respective Partnerships and were responsible for the registration, maintenance and other costs associated with the upkeep of the trucks. From time to time, the Applicants were asked to, and did, install a tarpaulin on their trucks bearing the Company’s logo. The applicants were also provided with the Company uniforms.

In 1993, the drivers of the Company, including the Applicants, entered into a new arrangement with a minimum work hour of nine hours a day, an allowance for annual leave, public holidays and sick days (1993 Contract). The 1993 Contract guaranteed nine hours of pay each day although it was expected that the drivers might not necessarily have to work nine hours per day.

The Applicants executed further arrangements with the Company as “contractors” in 1998 and 2001. There were some periods where the Applicants did not have a written contract with the entity owning the business at the time, as the business changed hands on various occasions.

On some occasions, the Applicants were required to do some clerical work such as completing a “manifest run sheet” and scanning delivery dockets.

Decision

The Court found that the Applicants were employees rather than independent contractors, despite some observations that supported a contrary view.

In making an assessment as to the status of the employment relationship, the Court applied the multifactorial test and considered the following:

• partnerships and capacity to generate goodwill – the Court found that the existence of a partnership itself does not preclude the employment relationship. The Court held that there was no actual goodwill generated by the Partnerships for the following reasons:
  • although vehicles were owned by the respective Partnerships, which could have been sold, there was no guarantee of continuity of work from the Company if the vehicles were sold
  • the Applicants never undertook any delivery work for any other person, therefore a sale of the vehicles or their businesses would not have included an amount of goodwill
  • the fact that the Applicants never worked for any other entity or business leads to the conclusion that the Applicants cannot be characterised as engaging in entrepreneurial or profit motivated activity – which is a significant aspect of an independent business.
• written contracts – although the 1986 Contract indicates that the parties had common intention of entering into those terms (i.e. becoming “independent contractors”), the Court found that, in reality, there was really no room for negotiation with respect to the contract terms. The evidence showed that the Applicants were faced with the likely prospect of redundancy had they not entered into the contract. The Court thus underlined the importance of considering the actual bargaining powers of each party when considering the parties’ intention of entering into a contract
• absence of written contracts – the Court held that the lengthy period without written contracts, considering other circumstances of the present case, highlights the “immutability of the working relationship and the centrality of the Applicants to the Company’s organisation”
• contribution of vehicles – the Court acknowledged that it is the conventional view that the owners of expensive equipment, such as trucks, are independent contractors. However, the Court observed the following:
  • the conventional view is tied to the consideration that a person who invested in capital equipment has a special skill or training to use or operate the equipment. However, the level of additional skill required in this case was not so significant
  • the independent provision of substantial capital equipment may weigh against an employment relationship, but it will not always be a determinative factor
  • the Applicants were compelled to purchase the vehicles when entering into the 1986 Contract and the Company required its logo to be affixed to the trucks from time to time.
• day-to-day control by the Company – the Court acknowledged that the Applicants had a certain degree of freedom over the operation of their day-to-day activities. However, the Court considered the following aspects significant:
  • the Applicants were required to work from 6:00am to 3:00pm Monday to Friday, and were not permitted to take more than four weeks' annual leave
  • the Company required its logo to be affixed on the Applicants’ trucks and the Applicants, although not all the time, wore the Company uniforms during work. The Court found that the effect of this requirement was to encourage others to identify the Applicants as part of the Company’s staff and therefore the Applicants were representatives of the Company
  • on occasions, the Applicants were directed to undertake clerical, warehouse and non-delivery moving work in addition to their main responsibilities with any overtime work unpaid.
• exclusivity of work and right to subcontract – the Applicants had a contractual right allowing them to work for third parties. However, in practice, this right was of little utility as the Applicants devoted their working life and the vehicles to the Company. The Applicants were only left with minimal time for them to serve others after nine hours of work for five days a week, despite some flexibility they had.

The Court ultimately found that the Applicants were employees of the Company although it appeared on the face that the Applicants were operating independent businesses.

The Court reiterated that when a court is required to characterise a relationship as that of employment or not, the court will need to consider the substance and reality of the relationship.

In this case, the Court also highlighted that, in addition to the parties’ working relationship in practice, the long and uninterrupted period during which the Applicants worked for the Company was “a striking feature” – which indicated that the Applicants were an integral part of the Company’s business rather than conducting their own independent business.

Lessons for employers

This decision is another example where a court has confirmed that an employment relationship cannot be characterised solely by reference to the terms of a written contract. It highlights the importance of looking at the reality and totality of the relationship. When engaging contractors, employers must ensure that they are acting in a manner consistent with a contractor relationship practically, not just relying on contractual labels and theoretical possibilities.

Authors: Michael Selinger & Jamie Kim

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The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Michael Selinger

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