Changes to 'employment' and 'independent contractor' definitions

Changes to the Fair Work Act 2009, which take effect from 26 August 2024, could have an impact on how members engage workers and contractors.

A new definition will be inserted into a new section15AA of the Act, and define the ordinary meaning of employee and employer as follows:

• For the purposes of this Act, whether an individual is an employee of a person within the ordinary meaning of that expression or whether the person is an employer of a person within the ordinary meaning of that expression is to be determined by ascertaining the real substance, practical reality and true nature of the relationship between the individual and the person;
• For the purposes of ascertaining the real substance, practical reality and true nature of the relationship between the individual and the person:
  • The totality of the relationship between the individual and the person must be considered; and
  • In considering the totality of the relationship between the individual and the person regard must be had not only to the terms of the contract but also to other factors relating to the totality of the relationship including but not limited to how the contract is performed in practice. This new definition goes to the ‘real substance, practical reality and true nature’ of the employment relationship rather than simply looking to the terms of a written contract, meaning that to determine whether a person is an employee or a contractor, it will no longer be sufficient to simply look to the terms of the written contract. What will be required is an assessment of other factors including how the contract is actually performed.

Opt out provisions

The new provisions however permit a business and independent contractor to opt out from being covered by the new definition of employment. This option creates two pathways for a business and independent contractor to voluntarily agree that the new definition will not apply to them.

This option will only be available for contractors who earn above the ‘contractor high-income threshold’. This threshold is $175,000 for the year starting on 1 July 2024.

There are two ways to ‘opt out’.

For businesses, the pathway is as follows:

• They can give an independent contractor notification stating that:
  • Due to the commencement of the new definition under section 15AA, that the relationship may become one in which the independent contractor may be considered an employee of the business instead of an independent contractor; and
  • That the independent contractor may give the business a notification that they wish to ‘opt out’ of being covered by the new definition at section 15AA; and
  • That the independent contractor has 21 days to provide the ‘opt out’ notice.

For independent contractors, the pathway is as follows:

• They can give a business an 'opt out' notification stating that:
  • Due to the commencement of the new definition under section 15AA, the relationship may become one in which the independent contractor may be considered an employee of the business instead of an independent contractor; and
  • That the independent contractor does not want to be considered an employee and therefore wants to ‘opt out’ of being covered by the new definition at section 15AA; and
  • That the independent contractor’s individual earnings for work performed under the relationship exceed the contractor high income threshold earnings for work performed under the relationship when the opt out notice is given.

A business or an independent contractor can provide the ‘opt out’ notifications to each other at any time – however the independent contractor can only provide an ‘opt out’ notification once throughout the relationship.

An independent contractor may revoke any ‘opt out’ notice they give to a business. However, as stated above, the independent contractor cannot later decide to ‘opt out’ again.

The effect of the ‘opt out’ notice is to opt out from coverage of section 15AA – being the revised definition of employment. If an independent contractor does not provide an ‘opt-out’ notice, it does not necessarily mean that they are considered to be an employee. It simply means that revised definition may apply to them – but until this is determined by a Court or tribunal, the relationship remains one of independent contractor.

For assistance with opt out notices, please contact the Workplace Relations team.

Sham contracting

Sham contracting involves employers (or businesses) deliberately misrepresenting a relationship to be one of ‘independent contractor’ when they know it should be an employment relationship, as a means to avoid taking on someone as an employee and being obliged to pay employment entitlements.

Employers can be prosecuted for breaches of sham contracting provisions and must be able to show that they reasonably believed that they were correct in classifying a worker as an independent contractor. An employer’s ignorance or unreasonable mistake will not allow them to avoid liability for sham contracting.