The case of Quarman v Burnett is considered the starting point of a foundational principle in Australian (and English) law: the distinction between an independent contractor and an employee. This principle emerged in the law of negligence, with the rule that an employer is vicariously liable for the acts of their employee, but a principal is not liable for the acts of an independent contractor. In time it became a central feature of our employment regime: the distinction between an employee and a contractor remains to this day one of the most important, and most vexed, areas of industrial law. Many legal rights and protections hinge on whether someone is or is not an employee.

The defendants in Quarman were elderly English ladies who owned a carriage. They frequently hired horses from Ms Mortlock, who also supplied a coachman, Mr Kemp. This was a longstanding arrangement - the carriage owners even arranged for Kemp to have a special uniform, a coat and hat, tailored for him. Mortlock paid Kemp a weekly salary, which was supplemented by a tip from the carriage owners after each journey. One day on a street in central London, just before Christmas in 1838, Kemp left the horses unattended to hang up his hat in the owners' house. The horses bolted and seriously injured a bystander, who then sued the carriage owners.

At trial, a jury found that Kemp was a servant (employee) of the carriage owners, and hence the ladies were liable for the bystander's injury. But on appeal, the Court of Exchequer overturned the decision, finding that as Kemp was an employee of Mortlock, who in turn was engaged by the owners, there was no legal relationship between the owners and the coachmen. "The liability, by virtue of the principle of relation of master and servant, must cease where the relation itself ceases to exist," held one judge. The alternative, he continued, would "'shock the common sense of all men'".

The legal structure in Quarman is an early example of what is today called a triangular labour hire relationship. As a parliamentary committee report once observed, "the essential quality of a labour hire arrangement is the splitting of contractual and control relationships". One party (the carriage owners) contract with another (Mortlock) for the services of a third party (Kemp). Thus, while the carriage owners had day to day control over Kemp, they had no legal relationship with him (nor any liability for his negligence).

These triangular structures have proliferated in the Australian Public Service (and other areas of the economy). Driven in part by the government's staffing caps, the APS has come to rely more and more on outsourced labour. While exact numbers are hard to come by, analysis by the ABC in 2020 found that the Department of Defence, for example, employed 17,400 public servants and engaged 28,600 other staff. Some would be arms-length consultants. But many have the same job titles and sit in the same offices as their public sector counterparts (when not working from home, of course).

Except rather than being public servants employed under the Public Service Act 1999, these individuals are provided by labour hire companies. There are different legal forms: some staff are employed by the labour hire company (on a permanent or casual basis), others are independent contractors (in what is known as an Odco model, named after a seminal Federal Court case that upheld the validity of such arrangements). But the material feature is the same: there is no contractual relationship between the individual and the public sector agency.

That feature is not in doubt in CFMMEU v Personnel Contracting, a case soon to come before the High Court. But the validity of Odco structures is at risk. Daniel McCourt was a 22-year-old British backpacker, in Perth on a working holiday, when he approached a labour hire company for work as building site labourer. Personnel Contracting engaged Mr McCourt as an independent contractor and he was given work at the site of a third party, which had a relationship with Personnel Contracting for the supply of labour. His union subsequently brought a claim against the labour hire company and the building company (as an accessory), alleging that Mr McCourt was actually an employee of the labour hire company and was being underpaid.

While the union lost in the Federal Court, and on appeal, the appeal bench expressed hesitation at the outcome and only rejected the appeal because they felt compelled by existing authority. Justice Michael Lee made clear what he thought of the idea that Mr McCourt was undertaking his own business (which is what an independent contractor is supposed to be doing): "For a period of months, he engages in basic labouring tasks; he takes out the bins, cleans workspaces and moves materials. He is not an entrepreneur nor a skilled artisan; he is paid by the hour, and when at work, is told what to do and how to do it." Although his Honour and the other two judges in the appeal ultimately remained faithful to the case law, Justice Lee ended his judgment with a warning: "the days of the Odco system may be numbered".

In February, the High Court agreed to consider the union's appeal; at the time of writing, the case was scheduled to be heard at the beginning of this month. Personnel Contracting provides an opportunity for the High Court to rewrite the law surrounding the distinction between employees and independent contractors. If the Court accepts that Mr McCourt was an employee, not an independent contractor, Odco models everywhere - including in the APS - will be in jeopardy.

The wider significance for the public sector remains to be seen. On one hand, labour hire companies might just have to focus on the employee-based model - already fairly common in the APS labour hire market. While that may drive up costs for the APS, it is unlikely to be material. It is possible that agencies could be sued by disgruntled independent contractors, alleging accessorial liability for sham contracting - although that issue was not decided in Personnel Contracting, and is not on appeal.

But the case also points to a broader tectonic shift in employment regulation and the labour market. The traditional principles that date back to Quarman are straining under the weight of contemporary developments. The gig economy is hard to reconcile with orthodox employment law. While Uber drivers are characterised as independent contractors, that characterisation may not withstand scrutiny. The Fair Work Commission recently held that a Deliveroo rider was, in fact, an employee (the case is currently under appeal).

These concerns go far beyond the gig economy. Indeed, the High Court is hearing Personnel Contracting alongside the case of Jamsek v ZG Operations, where the Full Federal Court found that two truck drivers classified as independent contractors for almost four decades were actually employees. The future of Australian employment law could be determined in these and other cases that will follow (such as Deliveroo).

Or it might not. In early August, in WorkPac v Rossato, another labour hire case, the High Court overturned a ruling that had previously found a long-term casual employee of Workpac was in fact, as a matter of law, a permanent employee. (There are considerable public sector parallels - many APS-focused labour hire companies engage employees on a casual basis, despite them working full-time equivalent hours for agencies for months or even years). With a black-letter reliance on the words of the contract, the High Court insisted that the employee was a casual.

All of which means employment lawyers, labour hire companies and their employees and contractors wait with apprehension. Personnel Contracting could mark a major shift in how Australian law approaches labour hire arrangements, with implications for the APS. Or the High Court can stick with the status quo, established all those years ago - in the days of horses and carriages - in Quarman.