Closing Loopholes and the new definition of employment

In Closing Loopholes No. 2 the government introduced a new definition of employment that will change the way we determine whether someone is an independent contractor or employee. The new provisions will make it harder to engage people as independent contractors and increase the risk that they may later be deemed to be an employee.

The new laws will probably start on 26 August 2024. In this edition of The In-House Employment Lawyer we outline how the new laws work.

Why does the definition of employment matter?

The difficulty with engaging independent contractors is that they can later claim that they are actually an employee. If they do this successfully, they can claim entitlements that employees get like superannuation, award entitlements and leave entitlements. They may also be able to bring an unfair dismissal or general protections claim.

If an employee makes a claim like this, the Courts will apply a multi-factoral test to determine whether they are an independent contractor an employee. They will ask questions like: is the person working under the direction and control of the principal? Do they perform the work personally or can they delegate it to others? Do they use the principal's tools and equipment or supply it themselves?

Historically, when the Courts made this determination they would not just consider what was in the contract between the parties but would also look at the reality of how the relationship worked in practice. This made it difficult to know for sure whether someone would be treated as an independent contractor or an employee.

The Personnel Contracting and Jamsek decisions

This changed in 2022 when the High Court handed down the Personnel Contracting and Jamsek decisions. The High Court determined that, where the terms of the relationship have been comprehensively recorded in a written contract, the terms of that contract will be determinative as to whether a person is an independent contractor or an employee. How the relationship worked in practice was not relevant.

The Personnel Contracting and Jamsek decisions brought a lot of certainty - and less risk - when it came to engaging independent contractors.

The new definition of employment

In Closing Loopholes No. 2 the government expressly unwound the High Court's findings in the Personnel Contracting and Jamsek decisions.

The new legislation provides that, when determining whether a relationship is an employment relationship, you need to ascertain the real substance, practical reality and true nature of the relationship.

In order to do this:

• the totality of the relationship must be considered; and
• 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, such as how the contract is performed in practice.

This brings us back to the way things were before Personnel Contracting and Jamsek. It's likely to increase the number of claims by independent contractors for employment-related entitlements.

The new definition only applies to the Fair Work Act 2009

The new definition of employment will only apply for the purpose of the Fair Work Act 2009. It will not apply to other legislation.

For instance, a person qualifies for superannuation contributions under the Superannuation Guarantee (Administration) Act 1992 if they come within the definition of "employee" in section 12 of that Act. This section applies the ordinary meaning of "employee" and also has an expanded meaning. The ordinary meaning will still be determined by common law principles and therefore the Personnel Consulting and Jamsek decisions will apply, rather than the new meaning in the Fair Work Act 2009.

Could the new definition affect Pty Ltd contractors?

One of the ways people avoid the uncertainty associated with engaging independent contractors is to have them contract through a Pty Ltd company. This is generally thought to be a safe way of operating because the individual will have a contractual relationship with their company, rather than the principal.

It is conceivable that the new provisions could be used by a Court to work around these arrangements. This is because the Courts will need to look at the real substance, practical reality and true nature of the relationship. It is conceivable that a Court could use this to find that an individual who contracts through a company is actually employed by the principal.

There are practical difficulties that would be associated with a finding like this and the courts may simply apply the law as it stood before the Personnel Contracting and Jamsek decisions. We would need to see some case law before we know whether the provisions could be applied this way.

Opt out notices

The provisions introduce a new process where independent contractors who earn above the contractor high income threshold can opt-out of the new provisions. They would do this to ensure they are treated as an independent contractor after the new provisions start.

The contractor high income threshold for 2024-25 is $175,000 per annum.

Giving an opt out notice

An independent contractor can opt out by giving the principal a written notice stating that they elect for the new definition of employment not to apply to their relationship.

The notice must state that the independent contractor considers that their earnings from work performed for the principal exceed the contractor high income threshold at the time the opt out notice is given.

An opt out notice can be given before or after commencement of the new provisions. If it is given before commencement, the new definition of employment will not apply to that independent contractor. If it is given after commencement, the new provisions will cease to apply from the date the notice is given.

An independent contractor can only give one opt out notice in respect of a relationship with a principal.

An opt out notice can be revoked at any time

An independent contractor can revoke an opt out notice at any time.

They can do this by giving written notice to the principal that they elect for the new definition of employment to apply to their relationship.

The new definition of employment will apply to the relationship from the date the notice is given (or when the new provisions commence, if the notice is given before commencement).

An independent contractor can only give one revocation notice in respect of a relationship with a principal.

The fact that an independent contractor can unilaterally revoke an opt out notice at any time means that principals need to be careful about how much reliance they place on an independent contractor opting out in the first place.

Notice by a principal

If an independent contractor qualifies to issue an opt out notice, the principal can give them a written notice stating that they may give the principal an opt out notice. If they do this, the independent contractor will have 21 days to issue an opt out notice. If they don't do so, they will lose the opportunity to issue an opt out notice in the future.

A principal's notice can be issued at any time before or after commencement of the new provisions.

Transitional arrangements

The new definition of employment will apply to relationships entered into before commencement that are in existence at commencement, as well as relationships entered into on or after commencement.

However, people will be prevented from bringing retrospective claims for amounts that they would have been entitled to prior to commencement if the new definition of employment applied.

Further, if someone becomes an employee as a result of the new definition of employment, a period of service prior to commencement will not count toward the calculation of service-based entitlements if it would not have counted before the new definition commenced.

From commencement, the new definition of employment will apply to references to employers and employees in any FWC order, workplace determination, modern award or enterprise agreement.

The In-House Employment Lawyer is brought to you by Source Workplace . Source Workplace is a team of experts who help leaders manage great workplaces. We provide expertise in workplace law, human resources, employee relations and safety. For support for your workplace contact Sean Melbourne .

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