The Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 (Cth) (Act) received royal assent on 26 February 2024. Among other things, the Act changes the definition of an employee to specifically address the High Court’s decisions in CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 (CFMMEU) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek).

Broadly, these High Court decisions were considered by the Government to have created a ‘loophole’ as the judges largely focused on a contractual analysis of the rights and obligations established between the parties when determining whether an employee or independent contractor relationship existed. The High Court essentially confined the expansive multi-factorial approach to an analysis of the contract where the terms of the working relationship had been committed to a comprehensive written agreement. Outside of limited exceptions, such as oral agreements or sham contracts, the actual terms of the contract were the primary focus of determining the proper characterisation of a working relationship.

The Act, however, seeks to change this framework by reinstating the expansive multi-factorial approach that does not give primacy to the employment contract. It seeks to achieve this by amending the definition of an employee within the context of the FWA by inserting a new section, s 15AA, in the FWA.

The multi-factorial approach is far more complex and less certain for those engaging as contractors as there are many factors that must be considered in determining whether a person is engaged and working as an employee or contractor.

Employee/employer definition

Section 15AA provides three criteria for determining whether an individual is an employee and whether a person is an employer within the ordinary meaning of those words. These factors are:

• the real substance;
• the practical reality; and
• the true nature of the relationship between the individual and the person.

Importantly, these factors are ascertained through examining the totality of the relationship between the individual and the person, ie, all parts of the working relationship between the parties over the duration of the working relationship rather than at the time the contract is entered into. This includes the terms of the contract and how the contract is performed in practice. This is a major shift to the existing test, which focuses primarily on the terms of the written contract.

Note that s 15AA states that this legislative change was enacted in response to the High Court decisions in Jamsek and CFMMEU. As noted, the Government is legislating as it does not agree with the High Court’s decisions.

These provisions are due to commence on 26 August 2024.

The High Court view rejected by the FWA

By way of background, we have extracted some paragraphs below from our article ‘Employee or contractor –– High Court focus on contract v. multi-factors –– Part 2’:

The majority High Court decision in Jamsek was consistent with the views of the majority decisions of the High Court in Workpac v Rossato and CFMMEU. There are now three recent High Court decisions where the rights and obligations of the parties under the contract take primacy over the multi-factorial test where a comprehensive written agreement exists. The High Court has also clarified that the multi-factorial test has a considerably limited application than previously considered.

The multi-factorial test has been regarded as a key test in determining whether a person is engaged as an employee or contractor over many years as reflected in the following cases: Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1, Hollis v Vabu [2001] HCA 44, On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366 and Dental Corporation Pty Ltd v Moffet [2020] FCAFC 118. The ‘master-servant’ control test was the key test relied on before the shift towards the multi-factorial test.

However, the three High Court decisions discussed above (ie, Workpac v Rossato — covered in our Part 1 article, CFMMEU v Personnel Contracting and ZG Operations & Anor v Jamsek) reflect a significant shift towards placing the primary focus on the contract in question and a decreased reliance on the multi-factorial test to determine whether a person is an employee or a contractor. ...

The High Court confirmed that the factors that are applied in a multi-factorial test of the relationship can be considered to determine whether an employment or contractor relationship exists. However, the multi-factorial analysis must have regard to the rights and duties established by any contract.

Limited to FWA

As you can see from the extracts from our Part 2 article above, the rejection of the High Court’s views by recent Government legislative changes will have a substantial impact on those engaging as ‘contractors’ given the multiple factors that can change the outcome. In particular, the courts have generally examined each factor by giving a weighting and then deciding whether the factors weigh in favour of a worker being an employee or an independent contractor.

Note, however, that the new definition of employee and employer pursuant to s 15AA is limited to the FWA. Therefore, the methodology set out by the High Court in Jamsek and CFMMEU is still relevant in analysing the employee/contractor distinction within the context of other legislative frameworks such as:

• the Taxation Administration Act 1953 (Cth) in relation to Pay as you go withholding; and
• the Superannuation Guarantee (Administration) Act 1992 (Cth) (SGAA) for superannuation purposes (noting that s 12(3) of the SGAA provides for an expanded definition of employee); and
• for payroll tax and other purposes.

We understand that there are up to 16 different definitions of employee versus contractor that each need to be examined in relation to the specific legislation being considered (eg, income and PAYG withholding tax, superannuation guarantee, payroll tax, WorkCover insurance, long-service leave, vicarious liability, etc). Thus, it is not surprising that Australia has a reputation for being one of the most complex countries in the world to engage labour given the complexities involved with seeking to determine who is an employee versus who is a contractor.

Opt out provisions

If a worker’s earnings exceed the contractor high income threshold (this threshold is yet to be determined), a principal or employer may give the worker a written notice stating that the worker can give them an ‘opt out notice’. This can be done when the principal or employer thinks that the worker may be in an employment relationship because of the new definition of ‘employee’ and ‘employer’.

If a worker provides an opt out notice to the employer or principal, the new definition will not apply to their relationship. Thus, where the payment to the contractor exceeds the high income threshold, the principal or employer should consider the opt out system to minimise risk. However, an opt out notice can be revoked; albeit only once in respect of a particular relationship.

Other notable changes

Beyond the changes to the definition of an employee, the Act impacts a wide variety of employment areas and related issues. Below we briefly set out a summary of some of those changes.

Meaning of casual employee

Part 1 of the Act changes the definition of a casual employee. A casual employee will continue to be defined by an employment relationship characterised by an absence of a ‘firm advance commitment to continuing and indefinite work’. However, similarly to the new employee definition in s 15AA, the characterisation of a relationship for casual employees will also be assessed with regard to similar factors (ie, the real substance, practical reality and the true nature of the relationship).

This change in the FWA reflects the rejection of the High Court’s decision in Workpac v Rossato & Ors [2021] HCA 23, discussed in our Part 1 article. Broadly, the Workpac decision reflected the first significant shift towards placing the primary focus on the contract in question in determining whether an employee was a casual employee. The Act has changed this to focus on the real substance, practical reality and the true nature of the relationship and given more rights to casuals to convert to permanent employee status.

Sham arrangement amendments

Part 9 of the Act provides a new exception to s 357 of the FWA concerning misrepresenting an employment contract as an independent contractor arrangement. Formerly, an employer was required to show that they did not know and were not reckless as to whether a contract was one for employment rather than services. However, s 357(2) now only requires that the belief of the employer was reasonable, which is determined with regard to, among other things, the size and nature of the employer’s enterprise.

Conclusions

The above changes add to an already complex framework, with varying methodologies required to determine whether an employee or independent contractor relationship exists under the relevant legislation. Individuals and persons engaged in a working relationship should be mindful of a potential change to the classification of the relationship at the commencement date of s 15AA on 26 August 2024, as well as the impact of being subject to the provisions of the FWA.

Despite the shift to a multi-factorial test (rather than relying on the primacy of a contract), we recommend that a comprehensive written contract be documented for each employee and contractor.

As noted in our Part 6 article expert advice and written documentation that reflects the position should assist with minimising risk and penalties.