New definitions of ‘employee’ and ‘employment’ to have significant effects on contractor relationships

From 26 August 2024, new section 15AA of the Fair Work Act 2009 (Cth) (FW Act) will contain a new definition of ‘employment’ and ‘employee’.

This means workers who are currently independent contractors could be employees, for certain purposes under the FW Act, after the new definition takes effect. They could then enforce employee rights and entitlements against their employer.

The new definition will:

• Overturn the High Court’s decision that the terms of the employment contract define whether a person is engaged as an employee or an independent contractor in CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.
• Enshrine the test to determine who is an employee and who is an independent contractor to an assessment of the ‘real substance’, ‘practical reality’ and ‘true nature’ of the relationship as it operates in reality, not on paper (or as outlined in a contract). This is very close to enshrining the former ‘multi-factorial’ test which sought to assess how the relationship operated in practice.

A failure of a business to properly characterise a worker as an employee may expose the business to liability for prohibited ‘sham contracting’, employee dismissal claims and failure to pay employee entitlements (such as paid leave, notice of termination of employment or entitlements under awards). If found liable, individuals and corporations may be subject to pecuniary penalties in addition to orders for damages and compensation for economic loss.

Employees also have other rights including the right to request flexible working arrangements under the FW Act, the right to access unpaid parental leave, the right to disconnect and the right to make an unfair dismissal claim if they meet relevant criteria.

To whom does the definition apply?

The new definition of ‘employment’ and ‘employee’ as set out in section 15AA of the FW Act will apply to most employees and employers in Australia.

However, it will not apply to all employees. The new definition won’t apply to employees who are only ‘national system employees’ because of a State referral of power to the Commonwealth to make workplace laws. This includes State public servants and law enforcement officers.

The new definition won’t affect the meaning of ‘employee’ or ‘employment’ under any contracts (e.g. policies of insurance) or other legislation, such as workers’ compensation, taxation or superannuation legislation.

Key take away points

Before 26 August 2024, employers can issue notification to workers to invite them to prepare an ‘opt out’ notice (which, if accepted, means the new definition won’t apply to them)

• Before 26 August 2024, if there is any doubt about whether an independent contractor in your business might be captured by the new definition, you can give the worker a written opt out notice - as long as they are earning above the ‘contractor high income threshold’.
• If a worker gives an opt out notice before 26 August 2024, the new definition of employment won’t apply to them. A worker can revoke an opt out notice in writing at any time, including on or after 26 August 2024.
• The ‘contractor high income threshold’ has just been announced this week as $175,000 for 2024/25. This means that independent contractors who earn more than $175,000 from a contracting relationship can now issue an ‘opt out notice’ to confirm they wish to remain a contractor after 26 August 2024. As above, this must be done before 26 August 2026 which is only a very small window.

Prepare and offer contracts of employment where necessary

• If your independent contractors are likely to fall within the new definition of employment, you should seek legal advice. You may need to offer these workers contracts of employment to ensure you do not contravene the law.

If you need assistance with determining who the new definition of employment applies to, classifying your workforce, the ‘opt out’ notification process or offering new contracts of employment, please let one of the team members of the Workplace team know.