Identifying who is an employee and who is an independent contractor has long been a challenge for Australian businesses of all shapes and sizes. Getting it wrong can be disastrous for a business, potentially affecting tax, superannuation, and workers' compensation obligations.
By now you may have heard the buzz around the Closing Loopholes Act and changes coming to the Fair Work Act. Hot on the heels of the 2022 High Court decisions in Personnel Contracting and Jamsek, the Federal Government has had another go at clarifying this issue.
Change of Approach to Independent Contractors
From 26 August 2024, The Closing Loopholes No. 2 Act 2024 introduces a new section 15AA employee definition in the Fair Work Act. The new employee definition will impact how businesses determine if a worker is an employee or an independent contractor, known as worker classification.
With their decisions in Personnel Contracting and Jamsek, the High Court has emphasised the importance of the terms of the written contract when determining whether an individual is a contractor or an employee, provided that the relationship is fully documented in writing.
This guidance from the High Court was welcomed by businesses and advisors, as it gave an opportunity for greater certainty about the relationship, provided the business had proper documentation in place.
However, from 26 August 2024, it appears Parliament intends to shift back to a qualitative assessment of the relationship, as the new section 15AA will require the parties to consider the ‘real substance, practical reality and true nature’ of their relationship.
The totality of the relationship beyond the written terms of the contract must be assessed not limited to assessing ‘how the contract is performed in practice’. This approach reverts us to the multi-factorial assessment that was in place before the recent High Court decisions.
Understanding the ‘Multi-Factorial Assessment’
Prior to the High Court decisions, the common law had developed a list of practical considerations to allow the totality of the relationship to be considered. This list is non-definitive and each case of employment versus independent contractor turns on its own particular facts. The usual suspects are degree of control over how work is performed, working hours, expectation of work, risk, superannuation, tools and equipment, tax, payment method, and leave.
No one factor is determinative. The main examination is the totality of the relationship based on an overall view of the facts.
Closing Loopholes Act & Superannuation Entitlements
The new section 15AA definition of an employee is limited to the purposes of the Fair Work Act and is not to be confused with employment entitlements contained in separate legislation.
Under the Superannuation Guarantee (Administration Act) 1992 (Cth) (the SG Act), some contractors will remain entitled to payment of Superannuation where they fall within the definition of an employee as provided for in section 12(1) of the SG Act.
The SG Act provides that an independent contractor may be a ‘deemed employee’ for the purposes of superannuation where ‘a person who works under a contract that is wholly or principally for the labour of the person.’
This means that for the purpose of superannuation entitlement, businesses will need to focus on the written contract to determine if the worker is an employee for the SG Act.
Opting Out of the Closing Loopholes Legislation
For individuals who earn above the ‘contractor high income threshold’ there is the ability to ‘opt out’ of the new interpretive approach by way of an opt out notice and process. The contractor high income threshold is to be set by future regulation.
The effect would be that the new interpretive approach would not apply, and the nature of the relationship would be determined primarily with reference to the terms of the written contract following the High Court decisions in Jamsek and Personnel Contracting.
Talk to an Employment Lawyer for Expert Help
For advice on what the new changes may mean for your business, speak to BlueRock’s Melbourne-based employment lawyers. We’ve acted for thousands of Australian SMEs, delivering great outcomes in matters ranging from employment contracts to unfair dismissal, redundancy, workplace rights and obligations under the Fair Work Act, and much more. Submit the form below to get in touch with an employment lawyer now.
