What you need to know

From 26 August 2024 changes to the definition of “employee” significantly affect engaging individuals as independent contractors.

These changes do not affect the definition of ‘contractor’ or directly apply to employer obligations in relation to taxation, superannuation and workers compensation legislation. For information about taxation obligations, the Australian Taxation Office has issued a Practical Compliance Guideline PCG 2023/2 – Classifying workers as employees or independent contractors, which can be found at this link pcg2023-002.pdf (ato.gov.au)

Determining whether an individual is an independent contractor or employee – before the changes

Before these changes, decisions of the High Court in CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2, (High Court Decisions) established that the written terms of the contract determined whether an independent contractor relationship, rather than an employment relationship with an individual existed.

Determining whether an individual is an independent contractor or employee – after the changes

Contractual terms are no longer the determinative factor (although they are still important).

The changes, which introduced section 15AA to the Fair Work Act 2009 (Cth) to determine the ordinary meanings of employee and employer, actually go “back to the future” and reinstates the multi-factorial test for independent contractors that applied before the High Court decisions from 2022. To determine whether an individual is an employee, and not an independent contractor, employers will be required to look at “the real substance, practical reality and true nature of the relationship” between the individual and the business.

This means that employers must consider:

• the totality of the relationship between the parties;

• the terms of the contract - how the relationship is governed but also how the contract is performed in practice.

The changes will apply to all relationships existing before and after the provision commences.

However, if a person becomes an employee because of these changes, any service-related entitlements, such as minimum employment period and leave entitlements, would run from 26 August 2024, and not from the earlier engagement date.

New rights of an independent contractor

An independent contractor, who enters into a contract after 26 August 2024 and who earns less than the contractor high-income threshold of $175,000 (as at 1 July 2024), is entitled to seek a remedy in the Fair Work Commission (FWC) in relation to an unfair contract term.

Factors the FWC may consider when determining if a term is unfair include:

• the bargaining power of parties to the contract;

• whether the contract term is reasonably necessary to protect the legitimate interests of a party to the contract;

• whether the term imposes a harsh, unjust, or unreasonable requirement; and

• whether the services contract as a whole, provides for remuneration less than that applicable to an award employee doing comparable work;

• any other matter the FWC considers relevant.

The remedies available for an unfair contract term include being able to set it aside; void, amend or vary the unfair term within the service agreement. There is no specific reference to costs orders as an available form of remedy.

Remedies under the Independent Contractors Act 2006 will only apply to contractors earning above the contractor high-income threshold.

Opt out where contractor high income threshold exceeded

There are “opt out” provisions for individuals whose earnings for work performed under the relationship exceed the contractor high income threshold (threshold is subject to annual indexation from 1 July each year).

Any opt out notice must state the individual considers their earnings will exceed the contractor high income threshold on the date the notice is given.

The opt-out notice can be revoked at any time, with the new definition of employee taking effect.

If you believe an individual contractor will be an employee, you will need to notify the individual and provide them with an opportunity to provide to the employer an opt-out notice.

If an employer misclassifies an employee, they may face penalties for sham contracting.

Sham contracting

Sham contracting is when an employer misrepresents an employment relationship as an independent contractor arrangement.  

Under the new changes, the defence to sham contracting has been changed to one of reasonableness. The Court will assess the employers behaviour according to what the employer reasonably believed rather than only assessing an employer’s behaviour as to their reasons for acting.

Next steps for employers/businesses

Employers need to review records of their independent contractors who are currently engaged to identify whether their contractual duties are indicative of an employment relationship.

Employers should review any policies, procedures and contractor agreement templates to ensure they are consistent with the changes and describe the intended contractor relationship.

The contents of this article are for informational purposes only and are current as at the date of publishing. They do not constitute legal advice and should not be relied upon as such. You may need to seek legal advice about your organisation’s specific circumstances.