Drawing the line between Employees and Independent Contractors

The recent introduction of the Fair Work Legislation Amendment (Closing Loopholes No.2) Act 2024 has seen the implementation of various changes aimed at providing greater clarity with regard to Employees and Independent Contractors.

These changes are designed to address the misperception relating to the characterization of workers as independent contractors, a practice that has the ability to deny workers essential benefits and protections while offering businesses reduced labor costs and increased flexibility.

Whether a person is an independent contractor or an employee, largely depends on the assessment of a number of indicators including:

• the amount of control over how work is performed
• the financial responsibility and risk
• who supplies the tools and equipment
• the ability to delegate or subcontract work
• the hours of work
• the expectation of work continuing.

Provided below are further insights into a number of changes that have already taken effect and others soon to be implemented.

Effective from 24 February 2024, sham contracting amendments were introduced. Sham contracting refers to misrepresenting an employment arrangement as an independent contractor arrangement, which can result in penalties for employers. Employers could previously defend against sham contracting claims by proving they did not know and were not reckless regarding the nature of the employment relationship (known as the ‘recklessness’ test).

This has been replaced with a ‘reasonableness’ test meaning that at the time the representation was made, the Employer must now demonstrate that they “reasonably believed” the arrangement was that of an independent contractor.

New definitions will be included in the Act, which is set to take effect on the 26 August 2024, and will introduce greater criteria for determining whether a worker is genuinely an independent contractor or should be classified as an employee.

The Act redefines “employee” and “employer” based on the “ordinary meaning” test, taking into consideration the real substance, practical reality, and true nature of the relationship between the parties. This will require assessing the totality of the relationship, including how the contract is performed in practice, rather than solely relying on the written terms of the contract.

The introduction of a comprehensive test that examines various factors include:

• The genuine substance, practical reality, and true nature of the working relationship. This also applies when determining if a person is an employer or a principal for outworkers.
• Every aspect of the working relationship between the parties is considered, including both the terms of the contract and how it is carried out in practice. This marks a shift from the old test, which mainly focused on the contract terms alone.

Workers who earn more than the contractor’s high-income threshold (yet to be determined) will also have a right to ‘opt-out’ of applying the new definition test via an opt out notice being provided to the Employer. If a worker provides an opt out notice to the employer or principal, the new definition won’t apply to their relationship and the previous test that focuses solely on the written contract terms will be maintained.

A worker can revoke an opt out notice at any time by giving written notice.

For employees, these legislative amendments create a significant shift towards increased job security and access to employee benefits. Proper classification under the new criteria will ensure workers receive the appropriate wages and conditions including superannuation contributions, paid leave, and other additional benefits in accordance with the National Employment Standards and applicable Award or Enterprise Agreement.

Employers must take heed of these changes and review their workforce classifications and contractual relationships to ensure compliance with the new definitions and protections to avoid legal risks and penalties.

The enforcement of more rigorous criteria for the classification of employees means that many businesses may need to reassess their current workforce arrangements.

Employers will need to conduct a thorough review of their contracting arrangements to ensure compliance with the new regulations. This includes evaluating the nature of the employment relationship and ensuring that contracts align with the practical realities of the work performed​.

Employers should carefully review their independent contractor agreements to ensure they meet the new legal standards and be mindful that reclassifying independent contractors as employees can lead to increased costs, including higher wages, superannuation contributions, and compliance with leave entitlements and other employee benefits.

These legislative updates require employers stay informed and possibly seek further advice to navigate the complexities of the new employment landscape effectively.

If you would like to know more, please contact us and a Mapien Workplace Strategist will be in touch within 24 hours.