Australian businesses could face significant penalties for failing to comply with the new definition of ‘employment’ under section 15AA the Fair Work Act 2009 (Cth) (FW Act).
This new definition came into effect on 26 August 2024 and is one of the many changes under the Federal Government’s Closing Loopholes No.2 reforms.
Importantly, it introduces new rules on how to determine whether a worker is an independent contractor, or an employee.
Prior to 26 August 2024, there was a series of authoritative High Court decisions which gave primacy to the terms of a contract when determining whether there was an employment or independent contracting relationship.
The new definition under section 15AA overrides the ‘contract is king’ approach taken by the courts, reverting instead to an earlier common law framework that applies a ‘whole of relationship’ test (also known as the ‘multifactorial’ test).
What are the changes?
Prior to 26 August 2024, businesses could define the nature of the relationship by way of the terms set out in a contract (whether written, verbal or both).
In the event of a dispute about a worker’s characterisation, even if the relationship between the worker and the business had changed over time since the initial contract was formed, the courts would give precedence to the contractual terms when determining whether they were a contractor or employee.
The ‘whole of relationship’ test introduced by section 15AA of the FW Act displaces this.
Section 15AA provides that whether a person is an employee “is to be determined by ascertaining the real substance, practical reality and true nature of the relationship between the individual and the person.”
In applying section 15AA, courts will be required to consider the totality of the relationship by examining not only the contractual terms, but also how the parties actually carry out the contract in practice.
The ‘whole of relationship’ test
As the name suggests, the ‘whole of relationship’ test requires consideration of various factors to determine whether the relationship is one of employment or independent contracting.
The table below summarises the key factors which can help differentiate employees from contractors (noting that this is not an exhaustive list):
Factor | Employee: | Independent Contractor: |
Control | Operates under the direction of the business – the business controls how, where, and when an employee works. | Has a high level of autonomy over how, where, and when they work. |
Integration | Performs their work as part of the business, and as a representative. | Operates independently, and performs work to further their own business. |
Pay | Receives a set amount for the time they work such as an hourly or weekly rate, or annual salary. | Receives payment from the business upon submitting an invoice for a completed task or project. |
Ability to delegate | Performs the work themselves. | Can often delegate or subcontract their work to others. |
Tools and e | Uses tools and equipment that are generally provided by the business, or is paid a tool allowance. | Supplies their own tools and equipment without any expected allowances or reimbursement by the business. |
Risk | Bears no commercial risk for any injury or defects in their work (as this is the responsibility of the business). | Carries the risk for profit or loss on tasks, and is personally liable for injury or defects incurred in their work. |
Getting it wrong
If a business represents to a worker that they are a contractor but the relationship is actually one of employment, this may be considered as ‘sham contracting’ arrangement unless the business can prove that it reasonably believed the employee was a contractor.
Employees (except for state-based employees) are covered by the FW Act, while independent contractors are not. Sham contracting is the unlawful practice of representing an employee as a contractor in order to avoid various employee entitlements arising from the FW Act, and other legislation such as long service leave, superannuation, and work health and safety.
Courts can impose severe penalties against businesses or individuals for sham contracting. The maximum penalties for each contravention are:
- $18,780 for individuals;
- $93,900 for businesses with fewer than 15 employees; and
- $469,500 for businesses with more than 15 employees.
How DKL can help
It is important to make sure that your business is correctly characterising workers, as the potential costs for getting it wrong are steep. Even minor mistakes can snowball into significant expenses and legal headaches.
At Danny King Legal, we have the expertise to help your business get this right, and to avoid these potential penalties and liabilities. Our team is dedicated to supporting you every step of the way, whether you’re starting from the ground up or facing challenges that demand immediate attention.
Visit our website or contact us for more information.