In the past few years, the legal position surrounding independent contractors has fluctuated as a result of various case law judgments culminating with the landmark High Court decisions in 2022. Recently, the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 (Cth) (Closing Loopholes No.2) introduced a number of key reforms that came into effect on 26 August 2024 which implement protections for independent contractors into the Fair Work Act 2009 (Cth) (FW Act). It is important that organisations that engage independent contractors are aware of these changes to ensure the arrangements they enter into are compliant.
“Employee” and “employer” definition
What’s changed?
Images: Holding Redlich
A significant change is the introduction of section 15AA in the FW Act, which establishes a new statutory definition of “employee” and “employer” which impacts the distinction between employees and independent contractors.
Until recently, courts in Australia considered the totality of the relationship between the worker and the principal, by reference to various indicators of the day-to-day relationship to determine the nature of the relationship. This is sometimes referred to as the “multi-factor test”. That changed in 2022 following the High Court’s decisions in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd and ZG Operations Australia Pty Ltd v Jamsek, which set aside the totality of the relationship approach in favour of one that focused primarily on the terms of the contract between the parties.
The introduction of section 15AA largely “reverses” the High Court’s decisions, and once again puts the focus primarily on the real substance, practical reality, and true nature of the relationship between the parties. Section 15AA provides a statutory guideline that courts and the Fair Work Commission (FWC) must consider when interpreting whether a worker is an employee or a contractor.
Multi-factor test
Section 15AA brings the “multi-factor test” to the forefront. Although the terms of the contract remain relevant, the test will apply to the whole relationship including how the contract is performed in practice rather than relying solely on the terms of the contract.
The multi-factor test considers all relevant factors to determine whether a person is an employee or an independent contractor. Each case is determined on a case-by-case basis. The factors considered often include, but are not limited to:
• the degree of control an employer/principal has over the employee/independent contractor. Previous case law has placed significant weight on this factor, although courts have previously found that no single feature determines the totality of the relationship;
• the existence of a written employment contract or independent contracting agreement;
• whether the worker can refuse work;
• whether the worker maintains a high level of flexibility or control as to how work is performed;
• whether the worker is paid or entitled to paid leave entitlements;
• whether the worker operates under an ABN or interposed entity; and
• the extent of the integration of the worker into the business, for example, the requirement to wear a uniform.
How this impacts organisations
Misclassification can lead to significant legal and financial repercussions, including penalties, back payments of entitlements and potential litigation. It is crucial to review your contractor agreements and ensure that your categorisation of workers aligns with the new interpretative framework.
As the new definition applies to both pre-existing engagements and engagements entered into on or after 26 August 2024, it is important that organisations review both their existing engagements and new contracts entered into moving forward.
The new laws provide for high earning contractors, that is those currently earning in excess of $175,000 per annum, to opt out of the application of the section 15AA definition and retain their contractor status in circumstances where elements of the relationship may indicate they are an employee. Importantly, only one opt out notice can be provided per relationship and the opt out notice only applies to the relationship from the date on which it is given. In effect, depending on when the opt out notice is given, there may still be a period of exposure to misclassification risks. The opt out notice can also be revoked at any time.
Unfair contract regime for independent contractors
What’s changed?
For the first time, the FWC will be able to intervene with respect to the terms of engagement between principals and independent contractors. A new unfair contract regime has been introduced in Part 3A-5 of the Fair Work Act 2009 (Cth) (FW Act), targeting independent contractors who earn under the contractor high-income threshold (as at the date of this article, $175,000 per annum). The provisions allow eligible contractors to apply to the FWC to vary or set aside all or part of a contract if it is deemed unfair.
In order to be eligible to make an application, the sum of the contractor’s annual rate of earnings must be less than the contractor high income threshold – currently $175,000 per annum. The FWC specifies that the contractor high income threshold should not be confused with the ‘high income threshold’ which only applies to employees. With that said, at this stage, there is limited guidance on how the contractor high income threshold and the contractor’s annual rate of earnings will be worked out and/or whether it will be pro-rated across the year.
Notably, only terms that would relate to “workplace relations matters” in the context of an employment relationship, can be challenged due to unfairness. It is yet to be seen how the FWC will interpret this limitation however workplace relations matters are defined in section 536JQ to include without limitation remuneration, hours of work and termination.
When determining whether a term in a contractor agreement is unfair, the FWC will consider:
• the relative bargaining power of the parties to the contract;
• whether the contract as a whole displays a significant imbalance between the rights and obligations of the parties;
• whether the contract term is reasonably necessary to protect the legitimate interests of a party to the contract;
• whether the contract term imposes a harsh, unjust, or unreasonable requirement on a party to the contract; and
• whether the contract as a whole provides for a total remuneration for performing work that is less than what employees performing the same or similar work would receive; and
• any other matters the FWC considers relevant.
For example, terms which provide a unilateral right to vary the terms of the contract or terminate the contract may be deemed to be unfair by the FWC.
Supplementary jurisdiction of the Independent Contractors Act 2006 (Cth) (IC Act)
The IC Act has contained similar protections for independent contractors against unfair contract terms for some time. However, given a claim must be initiated in the Federal courts, the IC Act has been criticised for being inaccessible.
With the introduction of the FW Act provisions, the IC Act jurisdiction has been narrowed whereby the unfair contract remedies will only apply to contractors earning above the contractor high-income threshold.
We anticipate the FWC will seek to rely on earlier decisions under the IC Act jurisdiction to inform its approach to assessing whether a term in a contractor agreement is unfair. If the FWC does take this approach, there may be limited grounds to establish unfair contract terms given there a small number of substantive decisions made under the IC Act and of these, a number of the decisions in the IC Act jurisdiction have been overturned either in whole or in part in favour of the Respondent. Notwithstanding these earlier outcomes, considering the background to the FWC and the approach taken in unfair dismissal cases to factors demonstrating “harsh, unjust or unreasonable” conduct, the FWC is likely to take a broad view as to whether a contract term is unfair.
How this change impacts organisations
Contracts that were previously considered enforceable might now be subject to scrutiny under the new regime if the contractor is earning below the contractor high income threshold. The FWC also provides a more accessible avenue for contractors to dispute their agreements which may lead to increased claims from contractors.
Further, there is no specific reference to costs orders in the new Part-3A-5 of the FW Act as it relates to the unfair contract provisions. In effect, the approach to costs in these matters is likely to be similar to the IC Act jurisdiction, which provides that costs do not follow the event and costs orders are unlikely to be made unless the application is vexatious or unreasonable. This approach to costs would also be consistent with the general rule in the FW Act that all parties must bear their own costs. As such, the lack of an adverse costs order will make it unlikely to dissuade a contractor from making a claim in the FWC.
The new provisions only apply to contracts entered into on or after 26 August 2024. Organisations should review their templates and all new contracts entered into with independent contractors to ensure they meet the new fairness standards. Caution should be exercised if you are amending an existing agreement as it may be considered a new contract in some circumstances. Considerations of fairness might include the balance of power between the parties, the clarity and transparency of contract terms and whether the contract imposes undue disadvantage on the contractor. If you need advice on the terms of your contracts, you should seek legal advice.
Failure to adjust your terms for individual contractors could result in contracts being set aside or varied by the FWC, which could disrupt your business operations and lead to unforeseen costs.
Key takeaways
In line with these changes, we recommend organisations consider taking the following steps:
1. Review current engagements (new definition of employee)
Organisations should review current engagements and written agreements to ensure independent contractors have not been ‘labelled’ as independent contractors where the duties and obligations reflect an employment looking at the multi-factor test.
You should develop a process for reviewing arrangements at regular intervals to ensure the engagement accurately reflects one of an independent contractor. Organisations who pay contractors above the contractor high income threshold can also consider whether the opt-out notices should be utilised.
2. Ensure each engagement of an independent contractor is confirmed in a written agreement (new definition of employee and unfair contracts)
It is important that all independent contractors are engaged according to a written agreement, with terms that are fair and accurately reflect a principal/contractor relationship. In the absence of a written agreement, organisations are exposed to a finding of employment.
A written agreement for a contractor should clearly define the nature of the relationship and the terms and conditions of the relationship, including payment, termination and services to be provided. The terms of the written agreement should also aim to be fair and balanced.
3. Review template independent contractor agreements (new definition of employee and unfair contracts)
Organisations should review current written agreements with independent contractors to ensure that the terms of the agreement reflect the principal/contractor relationship. For example, a contractor agreement should not include any entitlements such as annual leave.
The templates should also be reviewed in the context of the unfair contract regime to ensure no terms could be perceived as unfair.
As above, it would be prudent for companies to ensure all precedents for on-boarding are up to date and accurately reflect the new changes.
If you need assistance in navigating these changes and preparing your business to ensure compliance, please get in touch with our team below.
Disclaimer: The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
Authors: Michael Selinger and Julia Wyatt