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Accountants warned on impact of High Court decisions on clients


A number of recent High Court decisions concerning the definition of independent contractors and employees could have significant impact on small-business clients and issues such as SG and payroll tax, says an industry law firm.

By Miranda Brownlee7 minute read

Speaking in a recent webinar, DBA Lawyers director Daniel Butler said there had been two recent High Court decisions that have seen a shift in how the courts determine whether an individual is an independent contractor or an employee. The outcomes of the two cases are consistent with another High Court decision handed down in August last year, Workpac v Rossato.


Mr Butler reminded accountants and advisers that the definition of an independent contractor is critically important as it has implications for pay as you go (PAYG), superannuation guarantee (SG), payroll tax and employee entitlements under the Fair Work Act 2009.

“If you do not withhold PAYG at the time of payment, there are huge penalties. [Similarly] with SG, if you don’t pay SG, the penalties are crushing. You can easily put a business out of business by not having SG up to scratch,” he warned.

Mr Butler also noted that in a number of jurisdictions, state payroll tax offices are closely scrutinising a lot of relevant contracts, with a whole range of professional structures at risk.

The clearest definition of an independent contractor, Mr Butler explained, is a person who typically runs their own business, with the person engaging their services having little direction or control in respect of how that service is supplied.

“However, there are many that fall into the grey zone,” he said.

He also noted that the ATO hasn’t really touched their guidance material in this area since it’s released TR 2005/16 on “Income tax: Pay As You Go – withholding from payments to employees”.

“The ATO is likely to revisit these materials after these High Court decisions. It’s a moving feast, so you need to watch this space,” he cautioned.

CFMMEU v Personnel Contracting

The decision, Construction, Forestry, Maritime, Mining And Energy Union & Anor V Personnel Contracting Pty Ltd [2022] HCA 1 involved an appeal by a labourer engaged by a labour-hire company called Personal Contracting. The court looked at whether the labourer, Mr McCourt, was engaged by Personal Contracting as an employee or an independent contractor.

There was no contract between Mr McCourt and the builder he performed work for, Hanssen.

The primary judge held that Mr McCourt was an independent contractor, and an appeal to the Full Court was dismissed.

“Both courts applied a multifactorial approach, by reference to the terms of the contract between Personnel Contracting (trading as Construct) and McCourt and the work practices imposed by each of Construct and Hanssen,” said Mr Butler.

“[However], the High Court, by majority, held that Mr McCourt was Construct’s employee.”

In its decision, the High Court noted that the only kinds of rights with which courts are concerned are legal rights and that the “employment relationship is a legal relationship”.

“Where the parties have comprehensively committed the terms of their relationship to a written contract, the validity of which is not in dispute, the characterisation of their relationship … proceeds by reference to the rights and obligations of the parties under that contract,” the court stated.

“Where no party seeks to challenge the efficacy of the contract … on the basis that it is either a sham or is otherwise ineffective …, there is no occasion to seek to determine the character of the parties’ relationship by a wide-ranging review of the entire history of the parties’ dealings. Such a review is neither necessary nor appropriate because the task of the court is to enforce the parties’ rights and obligations, not to form a view as to what a fair adjustment of the parties’ rights might require.”

Mr Butler said this decision means that while the factors applied in the totality of the relationship can be considered to determine whether an employment or contractor relationship exists, this analysis must have regard to the rights and duties established by the contract between the parties. 

“Under the Construct’s contract, it could dictate who the labourer worked for, while he promised to provide his labour to Hanssen. The employer’s ability to supply a compliant workforce was the key to its business, the court found, producing an employer/employee relationship despite the use of the ‘contractor’ label,” he explained.

“The High Court’s analysis is consistent to Workpac v Rossato clarifying the totality test has limited application if a comprehensive written agreement exists.”

ZG v Jamsek

The decision, ZG Operations & Anor V Jamsek & Ors [2022] HCA 2 involved two truck drivers who were employees from 1977 to 2017. In 1985-56, the company negotiated a new arrangement with each truck driver and their wife as separate partnerships.

Each partnership maintained its own truck and was paid for the delivery of goods via invoice. A claim was made for employee entitlements, including leave and SG.

When the case was heard at the Federal Court of Australia (FCA), the primary judge concluded that they were independent contractors. The Full Court overturned that decision and held that having regard to the “substance and reality” of the relationship, the respondents were employees.

The High Court unanimously held that they were not employees.

Mr Butler said it was put to the court by Jamsek that they had no option but to accept the new arrangement and set up partnerships if they wanted to continue working.

Despite the fact the company held a lot of bargaining power, this did not impact the outcome of the case, said Mr Butler.

The court dismissed the totality approach, stating that it was “erroneous in point of principle for the reasons given in CFMMEU v Personnel Contracting”.

“It is necessary to note in these observations of the Full Court the expansive approach taken to determining the ‘substance and reality’ of the relationship between the parties, and especially the significance attached to the disparity in bargaining power as itself affecting the meaning or effect of what the parties had agreed,” the court stated.

“This expansive approach accords with that which has been taken in the United Kingdom. For the reasons stated in WorkPac Pty Ltd v Rossato and in CFMMEU v Personnel Contracting, this expansive approach involves an unjustified departure from orthodox contractual analysis.

“What the courts are saying here is that you can’t just look at substance and reality, this totality approach is not applicable here, and contract law is very important.”

Mr Butler noted that the SG issue is still up in the air and has been referred back to the Full Court of the FCA for a hearing with the ATO to be joined as a party.

Implications for accountants and advisers

Mr Butler said there are now three High Court judgments, including Workpac v Rossato, which stated that if comprehensively written, the rights and obligations of the parties under the contract take primacy.

While the multifactorial totality approach now has a more limited application in light of these cases, he said, it will still have relevance where there is no comprehensive written agreement, the agreement is partly oral and partly written, or the agreement is found to be invalid.

“A multifactorial totality approach can [also] still assist with deciding whether an employment or contractor relationship exists having regard to the rights and obligations in the contract,” he added.

“Contractual analysis and factual evidence is key to establishing the terms of the contract. Subsequent factors may be ignored unless, for example, there is a variation to the contract as in ZG v Jamsek when the employees purchased trucks in 1985/6 and set up in partnership with their spouses to deliver goods.”

Mr Butler explained these are major changes and mean that the ATO’s tax rulings are now out of date.

“The totality principle is no longer the primary test according to the High Court, the rights and obligations under the contract is the primary test that we should be looking at,” he stated.

“We all need to be up to date. This is serious territory because it can cost your client its business and therefore it could cost you your business because if you’re the adviser, you will be liable unless you’re up to date.

“We are seeing a lot of litigation cases involving advisers at the moment who are completely missing changes in the law.”

Accountants warned on impact of High Court decisions on clients
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Miranda Brownlee

Miranda Brownlee


Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on:miranda.brownlee@momentummedia.com.au

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