Increased contractor protections - new definition of employment and unfair contract terms jurisdiction

Changes to workplace laws from 26 August 2024 will alter who is an employee or contractor and give independent contractors rights to challenge unfair contract terms.

The changes are another part of the amendments arising from the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 (Cth), discussed in our previous Insight.

Employee or contractor

From 26 August 2024, the 'ordinary meaning' of 'employee' and 'employer' will be defined by section 15AA of the Fair Work Act 2009 (Cth). The test for determining whether a relationship is one of employee or contractor will be based on assessing 'the real substance, practical reality and true nature of the relationship', having reference to the 'totality of the relationship'.

In practice, this means considering all parts of the working relationship between the parties including:

• the terms of the contract governing the relationship; and
• how the contract is performed, such as the hours worked and what the individual does day to day when carrying out their work and/or duties.

A brief history of the test of 'employee' vs 'contractor'

Before 2022, courts applied a 'multi-factorial' test in deciding whether an employment or contractor relationship existed. A court would take into account not only the terms of the contract but also how it was performed in practice over the life of the relationship including such things as whether the worker bore the practical risk of success or failure of the engagement, or could or could not work for others when carrying out work for the principal.

In 2022, the High Court found (in Personnel Contracting Pty Ltd¹ and Jamsek²) that the traditional multi-factorial test was to be applied only to the terms of the contract in question, and the making of the contract at the time, without taking into account any post-contractual conduct. Further details of these decisions can be found in our previous Insight.

Changes from 26 August 2024

The new method for determining the 'ordinary meaning' of 'employee' and 'employer' is intended to reinstate the pre-2022 multi-factorial test by including consideration of how the contract is performed in practice over the life of the working relationship in question, taking all of the circumstances into account.

This means that an independent contractor could challenge the nature of their engagement and seek employment-related entitlements (such as paid annual leave, sick leave and applicable Award entitlements), even if the terms of any written agreement are clear that the relationship is one of principal and independent contractor. Businesses may be particularly at risk if (for example) they engage contractors who:

• have little or no control over how they perform work;
• are integrated into the business (for example, through wearing company branding, having a company email address);
• bear no risk of loss in the engagement;
• use the business's tools or equipment, rather than providing their own; and/or
• are paid based on time worked.

A way out

For businesses that are concerned that these provisions may redefine their contractor relationships, there may be a way out.

A further new provision will apply that allows an individual engaged as a contractor, in certain circumstances, to give an opt out notice (before or after 26 August 2024) electing not to be covered by the new definition.

Persons engaging a contractor may also send a notice to an individual inviting them to submit an opt out notice. To be eligible to opt out, the worker's earnings must exceed the contractor high income threshold (currently $175,000 p.a.). The opt out notice must be in writing and may be given only once (although it may also be revoked once).

New powers for the Fair Work Commission in relation to unfair contract terms

The amendments create further protections for contractors.

From 26 August 2024 the Fair Work Commission (FWC) will have a new jurisdiction regulating unfair contract terms for individual contractors.

A party to a 'services contract' will be able to apply to the FWC to have (all or part of) the contract set aside or varied if it contains 'unfair terms'. A services contract includes any contract for services relating to the performance of work by an individual. However, the applicant must earn less than the contractor high income threshold (discussed above) in order to make an application.

The relevant term of the contract must relate to a 'workplace relations matter', which includes (amongst other things) remuneration and other amounts payable, hours of work, leave entitlements and termination, but excludes terms about discrimination, superannuation, workers' compensation and a variety of other matters already regulated by other legislation.

In determining whether to grant an application and declare a term unfair, the FWC may consider matters including:

• the relative bargaining power of the parties to the contract;
• whether there is an imbalance or rights and obligations between the parties;
• whether:
  • the contract term is reasonably necessary to protect the legitimate interests of a party;
  • the term is harsh, unjust and unreasonable; and
  • the remuneration provided under the contract is less than minimum standards provided for regulated workers or minimum entitlements for employees performing similar work; and
• any other matter the FWC considers relevant.

What you should do

All businesses that engage workers they view as 'contractors' should review those relationships urgently to determine whether they could be subject to challenge based on the new method for determining an employment relationship.

Businesses concerned that this may be the case could consider inviting contractors to submit an opt out notice (where applicable); or otherwise take steps to change the practical aspects of the engagement that may be indicative of an employment relationship.

Businesses should also review their contractor agreements to determine whether they contain any clauses which may give rise to an unfair contract terms claim.

For more information or assistance, please contact our Employment, Workplace Relations and Safety team.

¹ Construction, Forestry, Maritime, and Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1.

² ZG Operations Australia Pty Ltd v Jamsek [2022]HCA 2.

Authors

Bridget Nunn | Partner | +61 8 8236 1129 | bnunn@tglaw.com.au

Jess Berghofer | Senior Associate | +61 7 3338 7928 | jberghofer@tglaw.com.au

‍