Engaging Independent Contractors – A Practical Guide for Employers

On 26 August 2024, the definition of employment changed and new protections for contractors were introduced. We’ve put together our latest Employer Quick Guide to help you navigate these changes and be clear on what you need to do to ensure your contractor arrangements comply under the Fair Work Act 2009.

This is a must read for all businesses that engage Independent Contractors (or intend to).

1. Who does this apply to?

All constitutionally covered businesses (eg. limited companies) who engage or intend to engage Independent Contractors.

There are other rules that apply differently to state referred businesses such as sole traders, partnerships, other unincorporated entities and non-trading corporations. For more information, visit?State referred national system businesses.

2. How to confirm is someone is a contractor or an employee

A new definition of employment has been added to the Fair Work Act 2009, the definition is now much broader and looks at the practical reality of how the contract is performed, rather than just looking at the terms of the contract as it did previously.?

When using the definition to work out if someone is a contractor or an employee, the following must be considered:

• the real substance, practical reality and true nature of the working relationship. When considering this, the following factors should be considered:

??the amount of control over how work is performed;

??financial responsibility and risk;

??who supplies the tools and equipment;

??ability to delegate or subcontract work;

??hours of work;

??expectation of work continuing.

• all parts of the working relationship between the parties. This includes the terms of the contract and how the contract is performed in practice.

The new method of checking if a worker is a contractor or employee is known as ‘the whole of relationship test’.

The whole of relationship test should be used for all new contractors engaged from the 26th August 2024 onwards and as set out above looks at all parts of the relationship (that is, both the contract terms and the practical reality). ?

The start of relationship test should be used to work out if someone was a contractor or an employee before 26th August 2024. This test is based on what was agreed between the parties at the start of the relationship (normally this would be set out in a written contract, but it may also be what was agreed verbally). If the parties agree to vary the contract, the agreed changes should be considered when determining if the worker is a contractor or an employee.

Please note:

• Contractors that earn more than the high income threshold ($175K) can choose to opt out of the whole relationship test and choose to instead use the start of the relationship test – The Fair Work Ombudsman has more information on this here – Opting-out-of-the-whole-of-relationship-test.
• The new definition and test doesn’t apply to other existing laws that define employment, for example, tax, superannuation, and workers compensation. Different tests/definitions apply for these jurisdictions, making this a complicated area – employers should always seek advice.
• Some independent contractors may be entitled to superannuation contributions even if the business reasonable believes they do not meet the definition of an employee. You should seek advice from your Accountant about this.

3. Why do i need to know about this?

The definition for an ‘employee’ has changed and it is important that employers are aware of this and aren’t misrepresenting employment as a contractor arrangement (also known as Sham Contracting). The consequences of this can include:

• Legal penalties – The maximum penalties for Sham Contracting are:

??$18,780 for individuals

??$93,900 for businesses with fewer than 15 employees

??$469,500 for businesses with more than 15 employees

• Tax liabilities and penalties – misclassified workers may not have had the appropriate taxes with held from their pay leading to tax liabilities for both the employer and employee. The ATO also issue penalties and charges if they believe a business has incorrectly treated an employee as an independent contractor. You can read more from here from the ATO – employees treated as contractors.

• Legal claims for unpaid entitlements – a misclassified worker could make a legal claim for unpaid employment benefits such as superannuation, leave, overtime and more.

• Reputational damage – both internally and externally, if a business is thought to be or found to be using sham contracting arrangements.

4. SHAM Contracting

If a worker is told they are an independent contractor, when they should in fact be an employee of the business, unless the employer can prove that they reasonable believed the employee was a contractor, it could be found to be a sham contracting arrangement.

It’s illegal to represent to a worker that they’re a contractor when the business doesn’t reasonably believe this.

It’s also illegal to:

• knowingly say something false to convince an employee to become a contractor to do the same work (or mostly the same work), or
• dismiss or threaten to dismiss an employee to engage them as a contractor to do the same work (or mostly the same work).

The Fair Work Ombudsman says it will consider the following factors when determining if an employer had a reasonable belief:

• the size and nature of the employer’s business; and
• any other relevant matters.

5. Contractor Entitlements & Unfair Contract Terms

Independent contractors don’t get the same entitlements as employees (for example paid leave and minimum pay rates) but they do have some protections under the Fair Work Act 2009, including:

• adverse action – for example, a business can’t terminate a contractor because they made a complaint about a workplace right.
• Coercion – an employer can’t threaten to take action against a contractor with an intent to influence them to act in a particular way.
• abuses of freedom of association – contractors are free to join, or not join, a trade union or employer group.

Unfair Contract Terms – Effective 26th August 2024 Contractors can now apply to the Fair Work Commission if they believe a term in their contractor services agreement is unfair and it relates to workplace relations matters.

To decide whether a contract term is unfair, the Fair Work Commission can consider:

• the parties’ relative bargaining power;
• whether there is a significant imbalance in the parties’ rights and obligations under the services contract;
• 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;
• whether the services contract provides for total remuneration that is less than:

??what regulated workers performing the same or similar work would receive under a minimum standards order or minimum standards guidelines, or

??what employees performing the same or similar work would receive.

• Any other relevant matters.

An application can only be made by a contractor if their earnings are less than the contractor high income threshold of $175,000.

More information can be found here: Independent contractor disputes about unfair contract terms | Fair Work Commission

Minimum standards for some contractors:

Some Independent contractors have special laws that apply to them, including minimum standards for pay and conditions. These contractors are called regulated workers.

A contractor is a regulated worker if they are:

• an employee-like worker doing digital platform work (for example, work in the gig economy)
• a regulated road transport contractor who works in the road transport industry.

If you engage these types of contractors, ensure you seek advice. Information can also be found on the Fair Work Ombudsman website – Independent-contractors/regulated-workers

6. Action Employers Should Take

There are several actions employers should take to ensure their contractor agreements, both existing and new, are compliant with the changes to the Fair Work Act 2009. ??

• Document ALL arrangements. A professionally drafted Contracted Services Agreement that is compliant with the changes and provides adequate commercial protection for your business is a must for every business that engages contractors. Contact the team at Edwards HR for assistance.
• Familarise yourself (and anyone else in your business that is involved in engaging contractors) with the new definition of an ‘employee’ and ‘the whole of relationship test’. Make sure you refer to them when engaging new independent contractors. Will the new worker really meet the definition of a contractor both in terms of their contract for services agreement and the practical reality of how the contract is performed?
• Review existing Contractor Arrangements:

??Is there an up-to-date contracted services agreement in place?

??Has anything changed with the relationship since it was written that needs updating in the agreement?

??Are all the terms of the contract fair

• Seek advice from Edwards HR if you are unsure of how any of the points covered in this guide, affect your existing or new contractor arrangements.

7. Consider Training for Your Team

There are many obligations and laws that employers need to be aware of – it’s a headache – we know!!

Our training workshops have been developed by heavy industry professionals for heavy industry professionals (HR, payroll, supervisors, leaders, owners etc) to educate and improve skills and knowledge in the areas most businesses have trouble with.

We cover topics such as IR reforms, payroll foundations, salaries and flat rates, culture and retention, respectful workplaces, and more! Check out our Workshops calendar here, and take your skills and your business to the next level!

Edwards HR is here to assist you in complying with your obligations and creating a safe, respectful workplace. If you need help with policy updates or team training, please do not hesitate to reach out.

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