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Contractor or Employee? Understand the Latest Updates

If you engage any independent contractors in your business, it’s important you understand recent updates from the Closing Loopholes legislation including new definitions and criteria for classifying workers as employees or independent contractors under the Fair Work Act. These changes, which will take effect from 26 August 2024, redefine how we determine employment relationships by emphasising the practical reality and true nature of these relationships over mere contractual terms. Rebecca Spiliopolous and Luis Izzo from Australian Business Lawyers & Advisors (ABLA) tell us what’s changing – and what you need to know.

Understanding the New Definitions

From 26 August 2024, the Fair Work Act will require a holistic assessment to be undertaken when determining if a worker is an employee or an independent contractor. This involves evaluating the entire relationship between the parties, not just the written contract terms. Consideration must be given to:

  • the real substance, practical reality and true nature of the relationship – the actual performance and day-to-day operations must reflect the true nature of the relationship; and
  • the whole relationship between the parties, including the terms of the contract and how the contract is performed in – both the contract and its practical execution are crucial.

Unsurprisingly, due to the above legislative changes, the exercise of characterising a worker as an ’employee’ or an independent contractor under the new definition will be a complex process that goes beyond a simple tick box exercise. The evaluation now involves a comprehensive analysis, taking into account both the contract and the overall relationship, as well as how the contract is actually executed in practice. This approach aims to uncover the real substance, practical reality, and true nature of the working relationship. Consequently, each assessment will differ based on a business’ specific arrangements and the daily operational realities of each business and worker.

ABLA Resource – Independent Contractor Assessment

To make the above information easier to digest, we have created a comprehensive document titled the ‘Independent Contractor Assessment’, which goes through the new assessment criteria for determining whether a worker is classified as an employee or an independent contractor under the Fair Work Act. It emphasises that businesses now must evaluate the entire working relationship beyond just contractual terms, focusing on factors such as control, remuneration, and equipment provision. The guide provides businesses with practical steps on how to reassess current arrangements, highlights potential risks of misclassification, and includes a summary of key indicators and questions to consider in making these determinations. The document is intended as a resource to help businesses ensure compliance with the new legislative requirements.

To assist businesses in navigating these changes, our Independent Contractor Assessment outlines essential factors that indicate whether a worker is more likely to be classified as an employee or an independent contractor, some of which include:

  • Remuneration and Tax: Employees are typically paid based on time worked, with taxes deducted by the company. Contractors invoice for services and handle their own taxes.
  • Obligations and Delegations: Employees usually cannot work for others or delegate their work without company consent. Contractors often have these freedoms.
  • Control and Direction: Companies have significant control over employees’ work. Contractors usually retain autonomy in their work methods and schedules.
  • Provision and Maintenance of Equipment: Employees often use company-provided equipment, while contractors provide their own tools and equipment.
  • Leave Entitlements: Employees are entitled to paid leave, such as annual and sick leave, whereas contractors are not.
  • Commercial Risk: Typically the company remains liable for remedying any faulty work of employees’, whereas contractors bear the commercial risk of their services.

We encourage you to download our comprehensive guide on Independent Contractor Assessment, available here.

So where to from here?

Businesses should now assess their current independent contractor arrangements against factors such as the above to mitigate risks of misclassification. This includes:

  • Reviewing contractual terms and actual work practices.
  • Identifying any contractors who may now be deemed employees.
  • Considering the contractor’s rights under the new legislation, such as the ability to opt-out if they earn above the contractor high income threshold (yet to be set).

Potential Risks

Misclassification can result in significant liabilities, including claims for back pay and penalties for sham contracting. Therefore, businesses must take proactive steps to ensure compliance with the new definitions. Specifically:

  • Back Pay Claims: Misclassified employees may seek back pay for employment-based entitlements that have been arising since 27 February 2024.
  • Penalties: Reckless or knowing misclassification can lead to pecuniary penalties under the Fair Work Act for engaging in sham contracting.

One final word of advice for employers

Whenever undertaking an assessment to determine if a worker is an employee or an independent contractor, consider the following questions to determine the true nature of the relationship (whilst also keeping factors such as the above front of mind!):

  • Is the person performing the work an entrepreneur who owns and operates their own business?
  • In performing the work, is that person working in and for their own business rather than as a representative of your business?

Need Help?

If these changes raise concerns or you need a second opinion, our team at Australian Business Lawyers & Advisors is ready to assist. For further guidance or to discuss your specific circumstances, please contact us by emailing ABLA or calling the ASGA Workplace Advice Line.

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