Turning back the clock for the contractor vs employee space, the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 introduced new rules for determining whether or not someone is a genuine Contractor and these changes will largely come into effect on the 26th of August 2024.
What’s changed?
A quick history lesson is needed here first …
Going back to 2022, the majority of the High Court of Australia in CFMEU v Personnel Contracting Pty Ltd and ZG Operations v Jamsek held that when determining if a person is an employee or independent contractor, the assessment should be focused exclusively on the terms of the contract between the parties (you may have heard of the saying “contract is king”).
It changed the long-standing position that the totality of the relationship should be examined (e.g. how the parties interact with one another, the supply of tools and uniforms, the ability to subcontract work etc), and it confined that assessment to instead, only consider matters that arose directly from the terms of the contract.
Fast forward to today …
The new laws have flipped the principle back to what it was prior to the Personnel Contracting and Jamsek decisions in that, under the new section 15AA of the Act, the terms ‘employee’ and ‘employer’ will carry their ordinary meaning which will subsequently be determined by reference to the ‘real substance, practical reality and true nature’ of the relationship.
The new laws state that:
whether an individual is an employee of a person within the ordinary meaning of that expression, or whether a person is an employer of an individual within the ordinary meaning of that expression, is to be determined by ascertaining the real substance, practical reality and true nature of the relationship between the individual and the person.
It goes on to state that, for the purposes of ascertaining the real substance, practical reality and true nature of the relationship between the individual and the person:
- the totality of the relationship between the individual and the person must be considered; and
- in considering the totality of the relationship between the individual and the person, regard must be had not only to the terms of the contract governing the relationship, but also to other factors relating to the totality of the relationship including, but not limited to, how the contract is performed in practice.
These changes essentially take us back to pre-2022 with claims that a relationship should be characterised as employment now being subject to a broader set of considerations than the written contract between the parties and it will be more difficult for employers to rely solely, or in the main, on the terms of a written contract. The other factors that will come in to play include (but are not limited to):
- the degree of control;
- remuneration, including any loading, invoices, registration for GST, and whether tax is withheld; and
- who decides the hours worked by the individuals.
Opting Out
But wait, there is a little more ‘grey’ in the new legislation …
There is a mechanism for individuals, who would otherwise be considered an employee, to ‘opt out’ of being classified as an employee by notifying the other party in writing. To be eligible to opt out, the individual’s earnings must exceed the ‘contractor high income threshold’ (which will be prescribed by the Fair Work Regulations 2009 (Cth) at a later date). This opt-out notice can be revoked, however they can’t opt-out again at a later date as each individual may only give one opt out notice.
Practical tips
Employers will need to dust off those old contractor vs employee checklists and ensure that their relationships with their independent contractors have not unintentionally morphed into an employment relationship over time.
They should also consider having conversations with their highly paid independent contractors regarding whether or not they intend to opt-out of the new rules once the independent contractor high income threshold has been set.
For more information or if you would like assistance with navigating these changes and assessing your independent contractor arrangements, get in touch with us to see how we can assist. If you would like access to our ‘Contractor vs Employee Assessment’, please send us an email and we will share it with you.