Navigate the new workplace laws with the Australian Industry Group.

A new definition of employment

Some of the most fundamental questions for our employment laws are who they apply to, and in what circumstances. This includes determining when someone performing paid work for a business is an employee, and when they can work as an independent contractor.

For the best part of a century, courts have been asked to determine if relationships entered into as independent contracting, are in fact a genuine contracting arrangement or are in reality, employment.

Although two High Court cases in 2022 provided significant clarity for business, the rules have recently been changed again. For the first time, a definition of employment appears in the Fair Work Act. All businesses using contracting, or considering doing so, need to be aware of the new arrangements, limitations, and business risks.

ABS data indicates 1m Australians, equivalent to 7.5% of employed Australians, worked as independent contractors in 2023. Independent contracting was highest in construction (21% of workers), administrative and support services (19%) and transport, postal and warehousing (14%). (ABS (2023) Working Arrangements)

There is a long and complicated history of competing, and changing, court precedents on when work is true independent contracting, and when its real character is employment.

In essence:

• The courts’ approaches have changed over time, with a series of different tests applied to delineate independent contracting from employment.
• At various times, the considerations separating contracting from employment have centred on combinations of factors or tests such as:
  • The relationship the employer and worker say they are entering into, and the designation they agree to; independent contractor or employee.
  • The level of control the business can exercise over how the work is undertaken.
  • The extent to which the worker and the work is integrated into the business.
  • The financial responsibilities and risks borne by the worker and business.
  • Who supplies the tools and equipment necessary to undertake the work.
  • Scope for the worker to delegate or subcontract the work.
  • Expectations of the work continuing, and histories of the work being undertaken through contracting.

Recent amendments

One of the stated workplace relations priorities of the Albanese Government is tackling ‘job insecurity,’ and making changes to forms of work the government characterises as insecure, and as undercutting and disadvantaging those in employment.

Independent contracting has been drawn into this following two recent decisions of the High Court which unions, lawyers, academics, and the now government opposed.

The two significant High Court decisions in 2022 emphasised the importance of the agreed terms of a contract in determining whether someone is a contractor or an employee. More weight was attached to how businesses and workers agreed to characterise their legal relationship, making independent contracting more reliable for both businesses (principals) and workers wanting to work as contractors.

This has now been deliberately overturned. As of 26 August 2024, there is a definition of employer and employee in the Fair Work Act for the first time, designed to (a) overturn the two High Court decisions, and (b) to deliberately favour work being found to be employment rather than independent contracting.

Less significance will be attached to the characterisation a worker and business agree attach to their working relationship. Courts will instead determine whether someone is a contractor or employee by examining the ‘real substance’, ‘practical reality’ and ‘true nature’ of the working relationship.  

Courts will again look not only to the agreed arrangement, but to how work is undertaken in practice and look again at multiple factors such as who can exercise control, integration into the business, responsibilities and risks, supply of tools and equipment, scope for delegation and subcontracting, and expectations of ongoing work.   

This means:

• Independent contracting arrangements will risk being characterised as employment relationships in more circumstances based on how they are implemented in practice.
• A disgruntled individual or union wanting to challenge an individual contracting arrangement will have expanded grounds upon which to seek to do so.

Key considerations for businesses

• What measures can you take to ensure that your independent contracting arrangements are not found to be employment arrangements?
• How can you manage contract work to ensure the ‘practical reality’ and ‘true nature’ of the relationship in practice does not change contracting into employment?
• Can you offer your independent contractors the option of ‘opting out’ of the new definition of employment (which is provided for under the recent amendments for some contractors) and how should you go about doing so?

Sham contracting and penalties for misrepresentation

In addition to legislating a definition of employment for the first time, there are changes to the existing rules against misrepresenting employment as independent contracting, known as sham contracting.

At issue is when an employer should be liable for misrepresenting what should have been employment as contracting, and defences available to businesses where sham contracting is alleged.

Prior to recent amendments, sham contracting required a business to have been reckless in regard to whether a particular working arrangement was contracting or employment (which attracts a substantial fine).

As of 27 February 2024, the defence is narrower, and the fines are higher. A business facing allegations of misrepresenting employment as contracting will need to show it reasonably believed it was correct in classifying a worker as a contractor.

A new right to challenge unfair contract terms

From 26 August 2024 eligible independent contractors will also be able to apply to the Fair Work Commission to have terms of their contracts they consider unfair changed or nullified/removed. In resolving such disputes, the Commission will consider factors such as:

• The relative bargaining power of the business and contractor.
• Whether the contract displays a ‘significant imbalance’ between the rights and obligations of the parties.
• Whether a contract term is reasonably necessary to protect the legitimate interests of a party to the contract (i.e. the business).
• Whether the contract term under consideration imposes a harsh, unjust, or unreasonable requirement on a party to the contract (i.e. the worker).
• Whether the contract provides for total remuneration for performing the work that is less than that of comparable employees or independent contractors.

If the Commission finds that a contract term is unfair, it will be able to change the terms of the contract, or ‘set aside’ all or part of the contract.

What businesses need to know

Given these significant changes, it is even more important businesses wanting to use independent contracting (a) take comprehensive, up to date advice, (b) get the written terms of their contracts right, and (c) implement independent contracting properly.

Ai Group has been at the forefront of helping businesses navigate changing law and practice in this area for decades. Our expert team can work with your business to ensure you can structure work appropriately for your operations and be as secure as possible in both your independent contracting and employment arrangements.     

Further assistance

There are many ways Ai Group can help you to prepare for and navigate the changes to laws impacting on independent contracting.

Ai Group members can:

• Contact the Ai Group Workplace Advice Line on 1300 55 66 77 for free telephone advice workplace relations issues, including all aspects of the new workplace laws as well as interpretation of awards and enterprise agreements.
• Access our HR Resource Centre, which includes
• A Factsheet on the independent contracting changes
• A series of written advices and reports regarding the development of the new laws.
• A Guide to the Fair Work Legislation Amendment (Closing Loopholes) Act 2023 and Guide to the Fair Work Legislation Amendment (Closing Loopholes No.2) Act 2024.
• Access a range of briefings, conferences and webinars covering changes to workplace relations laws & a raft of other resources
• Access Ai Group's ‘annotated awards’ services that have information on how key clauses in modern awards should be interpreted.
• Obtain personalised advice and assistance from Ai Group’s national team of workplace lawyers.

Not a member? Request a call or get in touch on 1300 55 66 77.

Ai Group & Ai Group Workplace Lawyers can also provide more detailed assistance on workplace issues, including potentially complex considerations for the ongoing use of independent contractors and drafting up to date contracts.