Managing the hiring of contractors in 2024

Changes introduced under the second of the Federal Government's Closing Loopholes Bills will affect Australian businesses which engage contractors and other service providers.

Those changes involve:

• a new definition of ‘employee’ and ‘employer’ for the purposes of the Fair Work Act (FW Act) which changes the way that the law distinguishes between an employee and a contractor; and
• the ability of independent contractors to pursue claims alleging unfair or harsh terms in the Fair Work Commission.

Businesses should:

• review any existing contractor arrangements to identify risks that those arrangements may fall foul of the new definitions and make any necessary changes to eliminate or minimise those risks;

• if they have not already done so for the purposes of compliance with the standard form small business unfair contract regime, review and potentially amend their contractor agreements to avoid the use of unfair or harsh terms.

Under the new definitions, which will take effect 26 August 2024 (or a date earlier if proclaimed), the meaning of ‘employee’ and ‘employer’, will be determined by the “real substance, practical reality and true nature” of the relationship between the individual and the business. The effect of this amendment is to reverse (for the purposes of the FW Act) the current law on the distinction between a contractor and an employee, which is based on two recent decisions of the High Court of Australia. Currently, whether a person is a contractor or an employee must be decided by reference to the terms of any written contract between the parties without going behind the contract.

The changes re-introduce a level of uncertainty and complexity for businesses. A business may engage an individual on a mutual understanding that the individual is an independent contractor, reflected by the contractual terms. However, despite this, the person could later be found to be an employee, based on notoriously difficult notions of what the “true” nature of the relationship is. This could leave businesses at risk of claims for employee related entitlements such as back pay, award entitlements and leave.

Independent contractors who earn above a yet to be defined threshold amount will have the option to "opt out" of the new ‘employee’ and ‘employer’ definition by providing an ‘opt-out notice’ to the principal business. Relevantly, an ‘opt-out notice’ provided can nevertheless be revoked at any time by the contractor.

The amendments to the FW Act also provide a new ability for independent contractors earning below the threshold amount to challenge perceived unfair provisions in their contracts in the Fair Work Commission (FWC).

This new jurisdiction adds to the existing, but rarely used, ability for independent contractors to apply to the Commonwealth Courts to review a services contract on the grounds set out in the Independent Contractors Act 2006 (Cth).

If the FWC considers a term of a service contract to be ‘unfair’ or ‘harsh’, the FWC will have powers to set aside, amend or vary all or part of a services contract.

It is likely that this will involve considerations similar to the existing regime which applies to unfair contract terms in standard form small business contracts.

For example, one sided indemnities, one sided termination clauses or rights to withhold or delay payments without a proper commercial justification.

This article provides general comments only. It does not purport to be legal advice. Before acting on the basis of any material contained in this article, we recommend that you seek professional advice.

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