Managing the hiring of contractors: Navigating employee vs contractor classifications

In 2024, the Federal Government’s “Closing Loopholes Bills” changed the definition of ‘employee’ and ‘employer’ under the Fair Work Act, impacting how Australian businesses can engage contractors and other service providers.

Under the updated definitions (effective from 26 August 2024) 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.

Previously, the distinction between a contractor and an employee was decided solely by reference to the terms of the written contract between the parties.

Recent decisions of the Fair Work Commission serve as a reminder that a worker’s legal status relationship will be determined by substance over form. Businesses need to be vigilant to ensure that their contractual arrangements accurately reflect the practical reality of the working relationship, as courts and tribunals will look beyond self-described labels and payment terms of convenience.

Some key reminders include:

• It is important that businesses refrain from exercising unnecessary control over how, when and where the worker performs their work. Too much control is likely to point to an employment relationship.
• Integrating the worker into the business (including by requiring the worker to wear a uniform and having the worker as the primary point of contact for third parties) increases the risk that the relationship will be characterised as one of employment.
• A finding of independent contracting is highly unlikely if the worker does not have a right to subcontract the performance of their duties to others.
• Contractual terms relating to payment methods will often be treated as mere convenience factors, and given little weight.
• A requirement to submit timesheets and to seek approval to take leave increases the risk of a finding of employment.

Businesses should review their existing contractor arrangements to ensure that there is consistency between the terms of any written agreements and the day-to-day reality of the working relationship.

In South Australia, this is particularly important for industries such as construction, hospitality, healthcare, and professional services, where contractors are commonly engaged.

Businesses should seek legal advice if they are unsure whether an existing contractor arrangement may be considered an employment relationship.

Misclassifying workers can lead to financial penalties, orders to back pay wages and entitlements, and reputational damage. Where businesses engage multiple contractors on similar terms and conditions, the consequences of getting it wrong can be tremendous.

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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