Closing the Independent Contractors Loophole and Addressing Unfairness

The Return of the Multi-factorial Test

Recent amendments to the Fair Work Act 2009 (Cth) (FW Act) introduce a new definition of employment, which legislates to overturn the effect of the 2022 High Court decisions in Jamsek1 and Personnel Contracting2.

The 2022 High Court decisions essentially held that, where contracting parties had reduced their relationship to writing, the legal rights set out in the contract were to take primacy in determining the nature of the relationship between the parties. This represented a significant departure from the “multi-factorial” test which had previously applied, whereby the nature of the relationship between the parties was largely determined by analysing the conduct of the parties rather than the terms of the contract.

The new definition of employment, which will take effect from 26 August 2024 and will appear in section 15AA of the FW Act, provides that:

1. Whether an individual is an employee will be determined by ascertaining the “real substance, practical reality and true nature of the relationship” between the parties; and

2. The “real substance, practical reality and true nature of the relationship” between the parties will be ascertained by considering:

(a) The totality of the relationship between the parties;

(b) Not only the terms of the contract, but also how the contract is performed in practice.

In order to ascertain the nature of the relationship between contracting parties, the Courts will therefore once again utilise the multi-factorial test, which considers the following factors:

Factor Indicator of employer/employee relationship Indicator of principal/contractor relationship
The extent of control of, or the extent of the right to control, the worker including when and how the work is performed Employers have the legal right to control the work an employee performs, the hours of work, the work location and how the work should be undertaken Principals exercise limited control over contractors, particularly in relation to how the work is to be undertaken
Whether the worker can refuse work With the exception of casuals, employees have limited power to refuse work Contractors are at liberty to refuse work
Whether the worker supplies tools or equipment Employers generally provide employees with all tools and equipment required for the work, or provide an allowance or reimbursement if employees are required to supply their own Contractors generally supply their own tools and equipment at their own expense
Whether the worker is required to wear the company uniform The wearing of a company uniform presents the worker as an integral part of the business and therefore an employee Contractors are not an integral part of the business and therefore ordinarily do not wear the principal’s uniform
Whether the worker is permitted to delegate or subcontract the work Employees cannot subcontract their work and may have only limited power to delegate their work Contractors ordinarily have power to delegate or subcontract their work (although it is not unusual for a principal to require a contractor to first seek approval of any delegation or subcontracting)
Whether the worker is paid by reference to completion of the task or project Employees are ordinarily paid a set amount per hour, per week or per annum Contractors are ordinarily paid based on results, such as completing a task or project, and are often paid a fixed fee
Whether the worker bears the risk and liability for any defects Employees bear no liability for poor work. The employer is responsible for the quality of the work and bears the cost of rectifying any defects Contractors are ordinarily liable for fixing their own defects
Whether the worker is building goodwill for his or her own business Any goodwill generated by the employee stays with the employer’s business Any goodwill generated by the contractor stays with the individual or his/her business
Whether the worker receives employment entitlements (such as allowances, paid leave, etc.) Employees are entitled to paid leave, and may have additional entitlements to penalty rates, overtime, allowances, etc. Contractors are not entitled to paid leave, penalty rates, overtime, allowances, etc.

The Introduction of an Opt-out Regime

Also introduced as part of the recent amendments to the FW Act is an independent contractor opt-out regime, which allows contracting parties to agree that the new definition of employment will not apply to their contracting relationship. Pursuant to the opt-out regime:

1. Prior to 26 August 2024, a principal may issue a written notice to an individual, which states:

(a) The principal considers that, on the commencement of section 15AA of the FW Act, the relationship between the parties may become a relationship in which the principal is the employer of the individual because of the operation of section 15AA; and

(b) The individual may provide an opt out notice to the principal if the independent contractor wishes to elect that section 15AA will not apply to the relationship.

2. After 26 August 2024, a principal may issue a written notice to an individual, which states:

(a) The principal considers that the relationship between the parties may be a relationship in which the principal is the employer of the individual because of the operation of section 15AA; and

(b) The individual may provide an opt out notice to the principal if the independent contractor wishes to elect that section 15AA will not apply to the relationship.

3. A principal may only issue an opt out notice to an individual if, at the time of issuing the notice, the principal believes that the individual’s earnings for work performed under the relationship exceed the contractor high income threshold3.

4. An individual may give an opt out notice to the principal:

(a) Within 21 days of receiving an opt out notice from the principal; or

(b) If the principal has not provided an opt out notice, at any time after 27 February 2024.

5. An opt out notice provided by an individual to a principal must be in writing and must state that:

(a) The individual elects that section 15AA is not to apply to the relationship between the principal and the individual; and

(b) At the time of issuing the notice, the individual considers that his or her earnings for work performed under the relationship exceed the contractor high income threshold4.

6. An individual may at any time revoke an opt out notice by written notice to the principal. Unless the revocation notice specifies a particular date it will take effect, section 15AA will commence applying to the relationship on the day the revocation notice is issued to the principal.

The Unfair Contracts Jurisdiction

Another change resulting from the recent amendments to the FW Act is the introduction of a new unfair contracts jurisdiction for the Fair Work Commission (FWC). From 26 August 2024, any independent contractor may apply to the FWC for orders in relation to unfair contract terms provided their annual rate of earnings in the year the application is made is less than the contractor high income threshold.

Upon receipt of an application to deal with unfair contract terms, the FWC may make an order only if the FWC is satisfied that the contract includes one or more unfair contract terms which, in an employment relationship, would relate to workplace relations matters5.

If the FWC is satisfied that an order is appropriate, the remedies the FWC may order include setting aside or varying any part or all of the services contract which, in an employment relationship, would relate to a workplace relations matter.

In determining whether a contract term is unfair, the FWC may have regard to:

1. the relative bargaining power of the parties;

2. whether the contract as a whole displays a significant imbalance between the rights and obligations of the parties;

3. whether the particular contract term(s) complained about are reasonably necessary to protect the legitimate interests of a party to the contract;

4. whether the particular contract term(s) complained about impose a harsh, unjust or unreasonable requirement on a party to the contract;

5. whether the services contract as a whole provides for total remuneration for performing work that is less than an employee would receive for performing the same work;

6. any other matters the FWC considers relevant.

Practical steps to consider

All businesses which engage individuals as contractors should review their contract terms for unfairness and take proactive steps to ensure that, by 26 August 2024, any unfair terms have been deleted or amended.

In addition, for any businesses which engage contractors who are likely to be found to be employees pursuant to the multi-factorial test, it would be prudent to do the following prior to August 2024:

1. Issue the contractor with an opt-out notice (noting that this cannot occur until the contractor high income threshold is set, and noting that an opt-out notice may only be issued to contractors whose earnings for work performed under the relationship will exceed the contractor high income threshold);

2. For any contractors who do not respond with an opt-out notice, and for any contractors who will not meet the contractor high income threshold, consider transitioning those workers to an employment contract;

3. Consider what processes can be implemented in order to respond quickly if a contractor ever revokes his or her opt-out notice.

1 ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.
2 Construction, Forestry, Maritime, and Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1.
3 The contractor high income threshold has not yet been set. Until that occurs, it will not be possible to issue an opt out notice to an independent contractor.
4 The contractor high income threshold has not yet been set. Until that occurs, it will not be possible for individuals to issue an opt out notice to a principal.
5 Workplace relations matters are defined in section 536JQ of the FW Act to include remuneration, allowances, leave entitlements, hours of work, termination of employment, resolution of disputes, and industrial action.

This article may provide CPD/CLE/CIP points through your relevant industry organisation.

The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.

Lara Radik
Partner

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