Employee vs contractor under Closing Loopholes: the new whole-of-relationship test

What changed on 26 August 2024

The Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 introduces a significant change to how employment status is determined. A new statutory definition of 'employee' has been inserted into the Fair Work Act, and this definition comes into effect on 26 August 2024.

Previously, the determination of whether a worker was an employee or contractor largely relied on the terms of the written contract, as established in the cases of *Jamsek* and *Personnel Contracting* in 2022. This contract-only test is now superseded.

The new legislation mandates a whole-of-relationship test. This means that when assessing employment status, the focus shifts to the real substance, practical reality, and true nature of the working relationship. The written contract will be considered, but it is not the sole or necessarily decisive factor.

What the new test looks at

The new whole-of-relationship test examines all aspects of the working arrangement to determine whether a worker should be recognised as an employee or a contractor. This test moves away from focusing on a single factor and instead considers the totality of the relationship.

Several factors are relevant to this assessment. These include the degree of control exercised over how the work is performed, whether the worker is integrated into the business’s operations or operates as an independent entity, the typical hours worked, who provides the necessary tools and equipment, who assumes the commercial risk associated with the work, and the method of payment.

It is crucial to understand that no single factor is decisive. Courts will weigh all relevant factors to reach a conclusion about the true nature of the working relationship. Workers earning above a high-income threshold have the option to remain classified as a contractor under the existing contract-only test by providing written notice.

Why misclassification matters

Misclassifying an employee as a contractor has significant consequences for the worker. Individuals wrongly classified as contractors are legally entitled to receive unpaid leave, superannuation, award rates, and other employee entitlements. Failure to provide these entitlements creates a legal obligation to rectify the situation and compensate the worker for the shortfall.

Sham contracting, where a genuine employment relationship is disguised as a contract, is considered a civil-penalty contravention. Furthermore, from 1 January 2025, intentionally underpaying employee entitlements carries criminal penalties, with individuals facing potential imprisonment of up to 10 years. Businesses should use the penalty estimator to understand potential liabilities.

The Fair Work Ombudsman actively investigates instances of worker misclassification. This proactive enforcement demonstrates the seriousness with which the government views this issue, and businesses should be prepared for potential scrutiny and investigation.

What to do now

Businesses should now audit their contractor workforce to assess their classification against the new whole-of-relationship test. This assessment should consider all relevant factors to determine whether a worker should be reclassified as an employee. The aim is to ensure accurate classification and compliance with the new legislation. Use the compliance calendar tool to track relevant deadlines.

For workers correctly classified as genuine contractors, it is essential to maintain robust documentation. This documentation should clearly demonstrate the indicia of a genuine contractor arrangement, such as possession of an Australian Business Number (ABN), ownership of equipment, engagement of their own clients, and a degree of control over how the work is performed.

High-income contractors seeking clarity on their classification may consider utilising the opt-out notice. Where a contractor relationship is determined to resemble employment, businesses must reclassify the worker and provide back-entitlements.