Redefining the employment relationship (again)

On 26 February 2024, the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 received Royal Assent and introduced further significant reform to the Fair Work Act 2009 (Cth), including new provisions to determine when a person is an “employee” or “employer” and an amended definition of “casual employee”.

The devil is in the detail when it comes to interpreting and applying these new definitions. David Perrozzi, Associate, explains how these changes are likely to impact employers.

Who is an “employee” and “employer”?

The Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 (Closing Loopholes No. 2 Act) amends the FW Act to insert an interpretive principle that will apply when determining the meaning of “employee” and “employer”.

The interpretive principle provides that whether a person is an “employee” or “employer” of an individual is to be determined by ascertaining the real substance, practical reality and true nature of the relationship.

The real substance of the relationship will be determined by considering various factors, including:

  • the totality of the relationship between the individual and the person;
  • the terms of the contract between the parties; and
  • how the contract is performed in practice.

These provisions are intended to unwind the settled position established by the High Court in CFMMEU & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel Contracting) and ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 (Jamsek) – in which the Court ruled that the terms of a contract (where such terms have been genuinely and comprehensively documented) take primacy over the subsequent conduct of the parties when distinguishing whether a worker is an employee or an independent contractor.

Accordingly, these reforms mark the return to the multi-factorial test, where the reality of post-contractual conduct (how the contract is performed in practice) and the totality of the relationship must be considered when assessing whether an individual is truly an independent contractor or an employee.

When applying the new provisions, Courts and tribunals will likely have regard to the factors they routinely considered prior to the Personnel Contracting and Jamsek decisions, such as:

  • the degree of control exerted by the principal over the manner in which the work is performed by the individual;
  • how the individual is remunerated;
  • the autonomy of the individual in determining their hours of work; and
  • the allocation of risks and liabilities between the parties.

It is also worth noting briefly that the new definitions for ‘employer’ and ‘employee’ in the FW Act will stand in contrast to the Australian Tax Office’s Taxation Ruling 2023/4, which was updated in late 2023 to reflect the position taken by the High Court in the Personnel Contracting and Jamsek decisions in relation to the ‘ordinary’ meaning of an ‘employee’ for the purposes of pay-as-you-go tax withholding under the Taxation Administration Act 1953 (Cth) and for superannuation contributions under the Superannuation Guarantee (Administration) Act 1992 (Cth).

Individuals earning above the ‘contractor high income threshold’

An individual earning above a (yet to be determined) independent contractor high income threshold can ‘opt out’ of the new interpretive principle. The effect of ‘opting out’ is that the new interpretive principle would not apply to the relationship between the individual and the person who engages them. Instead, the nature of the relationship would predominantly hinge upon the terms of the contract (as set out by the previous High Court decisions).

The choice to opt out can be made before, on or after commencement of the provision. An individual who chooses to ‘opt out’ can later revoke that decision, in which case the new interpretative principle will apply to the relationship.

Definition of casual employment

The Closing Loopholes No.2 Act also amends the current definition of a “casual employee” in section 15A of the FW Act.

Under the new definition, an employee will only be a casual employee where:

  • the employment relationship is characterised by an absence of a firm advance commitment to continuing and indefinite work; and
  • the employee is entitled to receive a casual loading or a specific rate of pay for a casual employee as outlined in a fair work instrument or their contract of employment.

This differs from the current definition of “casual employee” in the FW Act which gives primacy to the terms upon which employment was offered and accepted. Under the new definition, determining whether a firm advance commitment exists will also require a multi-factorial assessment of several factors, including:

  • the real substance, practical reality, and true nature of the employment relationship, which may extend beyond contractual terms;
  • whether there is an inability of the employer to offer or not offer work or an inability of the employee to elect to accept or reject work;
  • having regard to the nature of the employer’s enterprise, it is reasonably likely there will be future availability of continuing work of the kind usually performed by the employee;
  • comparison with permanent employees performing the same kind of work within the employer’s enterprise; and
  • the presence of a regular work pattern for the employee (noting that a regular pattern of work does not of itself indicate a firm advance commitment to continuing and indefinite work).

Like the new definitions for employee and employer, this multifactorial assessment aims to capture the essence of the casual employment relationship beyond mere contractual arrangements.

Key takeaways

The Closing Loopholes No. 2 Act marks a significant change in the way employee relationships are defined and regulated and has the potential to increase the potential of ‘sham contracting’ and/or underpayment claims.

The new provisions will come into effect on 26 August 2024.

In preparation for the introduction of these provisions, we recommend employers:

  • review their contractor agreement and casual employment contract templates to ensure they are drafted in a manner that clearly articulates the nature of the intended relationship between the parties, consistent with the new provisions;
  • revisit (and re-introduce, if need be) their independent contractor versus employee (‘multifactorial’) checklist which can be used internally to assist contract managers and people leaders examine at any point in time during the contractual term whether an individual engaged to perform work is a genuine independent contractor or whether there is a risk that the arrangements in practice could meet the new employee definition;
  • implement training on the new definitions in the FW Act for people leaders, to ensure awareness of these new definitions and how they will be interpreted;
  • implement processes which require routine reviews of the relationship with individuals engaged as contractors to ensure the true nature and practical reality of the relationship has not changed over time; and
  • prepare template contractor “opt out” notification documents which can be used to allow individuals earning over the “contractor high income threshold” to opt out of the new interpretive principle.

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The views expressed in this article are general in nature only and do not constitute legal advice.

Please do not hesitate to contact us if you require specific advice tailored to the needs of your organisation in relation to the implications of these changes for your organisation.

Shelley Williams
+61 7 3071 3110
[email protected]
David Perrozzi
+61 8 6381 7057
[email protected]