All businesses who engage contractors should review and reconsider their current arrangements as a matter of priority following recent changes to the Fair Work Act 2009 (Cth) (Fair Work Act) and the Australian Taxation Office’s (ATO) Practical Compliance Guideline PCG 2023/2 – Classifying workers as employees or independent contractors – ATO Compliance Approach (PCG), which was issued on 6 December 2023.
What is changing?
The definition of employee contained in the Fair Work Act is changing on 26 August 2024, and it is important that employers and principal contractors are aware of these changes and what it means for their business.
The PCG outlines the ATO’s approach for reviewing the relationships of businesses that engage workers who may either be independent contractors or employees. The ATO’s risk framework in the PCG is made up of 4 zones (very low, low, medium and high). The PCG sets out seven criterion the ATO will consider when determining which zone a business’s arrangement with a worker is likely to fall within.
The Current Approach to Independent Contractors
On 9 February 2022, the High Court of Australia (HCA) handed down the decisions of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek), which were summarised in our previous alert.
These decisions made it clear that whether a worker is considered an employee or an independent contractor is to be determined by the written contractual terms, if the relationship is wholly committed to in writing. However, the impact of those decisions will change once the new legislation commences.
New Statutory Definition of Employee
From 26 August 2024, the Fair Work Legislation Amendment (Closing Loopholes No.2) Act 2023 (Cth) (Closing Loopholes No. 2) will introduce a new section 15AA ‘employee definition test’ into the Fair Work Act. This new section was discussed in our previous alert.
To determine whether a worker is an employee or independent contractor, this new section will require the parties to consider the “real substance, practical reality and true nature” of their relationship. In considering the ‘totality of the relationship’, the parties will need to engage in a ‘multifactorial assessment’ that not only looks at the written terms of the contract between them, but also how it is performed in practice.
Opting Out of the New Statutory Definition
Closing Loopholes No. 2 also introduces a new section 15AB into the Fair Work Act. This section commenced on 27 February 2024 and allows the parties to reach an agreement by way of an opt out arrangement (Opt Out Notice) so that the new definition of employee will not to apply to their relationship.
For an individual to be eligible to provide an Opt Out Notice, their earnings for the work performed under their relationship with the engaging entity must exceed the ‘contractor high income threshold’. To date, there are no details on what the contractor high income threshold is or how it is to be calculated. We expect this information will be provided closer to 26 August 2024.
Superannuation Entitlements
While this new definition will alter the assessment of workers for the purposes of the Fair Work Act, the common law approach in Personnel and Jamsek will continue to apply for other employment entitlements contained in separate legislation.
This means that when determining if a worker is entitled to superannuation payments for the purposes of the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGA Act), the parties will need to focus on the written contract to determine if the worker is an employee.
However, businesses must be very careful, as a worker may not be considered an employee within the common law meaning of the SGA Act, but they still may be deemed an employee within the expanded meaning of employee set out in this legislation. This is because the SGA Act expands the meaning of employee to include a person who works under a contract with another party that is “wholly or principally” for their ‘labour’.
Importantly, the ATO’s PCG makes it clear that if a business obtains specific advice from a lawyer on a worker’s classification within the ordinary and extended meaning of employee under the SGA Act, they will satisfy two of the PCG’s seven criterion, making it more likely the relationship will fall within the no or low risk zone.
How we can help
The importance of ensuring employment or independent contractor agreements are well-drafted is now more important than ever. All businesses who engage contractors must consider their current and future relationships very carefully and obtain advice in writing from a lawyer.
Russell Kennedy can:
- Provide a checklist to assist in engaging new contractors.
- Review or provide updated contractor agreements.
- Assist businesses in determining if Opting Out is appropriate.
- Advise businesses on superannuation entitlements for contractors and the likely risk regarding classification of the relationship under the ATO’s PCG (if required).
We will also be delivering a webinar on these changes on Wednesday, 17 July, to see more details and register, click here
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