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Independent Contractor vs Employee: Understanding the New Fair Work Legislation

June 18, 2024  

Understanding Independent Contractors vs. Employees

Employers like to recruit independent contractors instead of employees, when possible, as independent contractors have fewer rights and obligations than employees and employers owe more obligations to employees than to an independent contractor.

Recruiting independent contractors allows employers to avoid expenses associated with employees like taxes, overtime benefits, workers’ compensation insurance, unemployment insurance, etc.

Sometimes an individual is not provided with the rights and benefits of an employee, as they are hired as ‘independent contractors. The label of the relationship on a contract is defined to be of a ‘Principal’ and a ‘Contractor.’ However, they are treated as employees by the employers exercising control over how and when work is done, among other things. This is problematic as the person in actual fact works as an employee but does not receive any of the associated benefits.

The new Fair Work Legislation Amendment (Closing Loopholes No. 2) Bill 2023 which comes into force on 26 August 2024, has introduced an interpretive principle for determining whether an individual is an ‘employee’ or ‘independent contractor’.

What is the new definition of employment?

Under the new act, ‘employment’ is determined by whether a person is an ‘employer’ or ‘employee’, by ascertaining the practical reality, and true nature of the relationship between the parties. To make this ascertainment, the totality of the relationship between the parties must be considered, alongside the terms and execution of the contract.

Why consider Mergers and Acquisitions? 

The purpose of this definition is to find whether an individual is an ‘employee’ or an ‘independent contractor,’ or an ‘employer’ a ‘principal,’ by applying a ‘multi factorial’ assessment that has been used by courts and tribunals for almost 30 years.

The new definition has been starkly influenced by key cases, CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1, and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2. These cases have differentiated employees from independent contractors by looking at:

  • The key terms of the written contract characterize the relationship as an ‘employee’ or an ‘independent contractor’.
  • The “totality of the relationship” which is assessed by a “multifactorial” test by considering various key indicators. This may include the level of control over how, where and when work is performed, financial responsibility and risk, ability to delegate or subcontract work, expectation of work continuing, and the rights and duties established by the contract.

Importance of Assessing the Relationship

Assessing the totality of the relationship with the key terms of the contract is important to avoid placing a ‘label’ on the relationship that is inconsistent with the rights and duties set out in the contract. This fairer test helps to properly identify the unclear relevant working relationship to provide certainty and clarity in employment arrangements and ensure proper adherence to legal obligations.

Does this apply to every working relationship?

The new definition applies to most workers and businesses covered by the Act. However, national system employees, who are employees except on a vocational system employed by national system employers such as a constitutional corporation; the commonwealth; commonwealth authority; a body corporate in a Territory; a person who carries work on an activity (whether governmental, commercial or any other); or a person in connection with the constitutional trade or commerce who usually employees flight crew officer, maritime employee, or waterside worker, won’t be affected by this change.

An individual who earns more than the contractor’s high-income threshold will be able to ‘opt out’ of being subject to the new definition by providing notice to the employer. Or where the principal or employer thinks that the worker may be in an employment relationship and subject to the new definition, the employer will be able to give the worker a written notice stating that the worker can give them an ‘opt out notice’.

The high-income threshold is yet to be set by regulation. Nonetheless, an individual who chooses to ‘opt out’ can later revoke that decision and be subject to the new definition.


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