The changes in the ‘Closing Loopholes No. 2 Act’ have been passed into law and most of the changes will commence in 2024.
What does this mean for employers, employees, and contractors, and what do they need to do?
In a previous article we explained the key changes to casual employment. In this article we explain the changes that affect engaging independent contractors, and what workplaces and contractors should do.
What are the Changes?
New Definition of Employment
The definitions of ’employee’ and ’employer’ are amended so that their ordinary meaning will be determined by ascertaining the ‘real substance, practical reality, and true nature of the relationship’.
The ‘totality of the relationship’ must be considered, by regard to:
- the contract terms; and
- other factors, including how the contract is performed in practice.
This will probably return to a multi-factorial assessment for determining if an individual is an employee or independent contractor, and reverse the impact of recent High Court decisions that put prime emphasis on the contract terms.
Confusingly, the High Court decisions will continue to apply to other laws relating to employment, such as superannuation and long service leave laws, with the possibility that a person could be an employee under one set of laws but not another.
New Opting Out Mechanism
A high-income individual may ‘opt out’ of being classified as an employee under the new definition.
The individual’s earnings must exceed the ‘contractor high income threshold’. The amount of the contractor high income threshold will be prescribed by the Fair Work Regulations 2009 (Cth) at a later date.
An individual can revoke an opt out notice, although only once for the relationship.
This option will be suitable for situations where both parties are happy with the high income individual having the autonomy and self-direction of contracting.
When do the New Laws Take Effect?
The new laws outlined above will come into effect on 26 August 2024.
When are the Implications of Getting the Engagement Wrong?
An employer that incorrectly engages an employee as a contractor risks breaching sham-contracting laws, underpaying employment and other entitlements, and failing to comply with tax withholding obligations.
What Should Employers, Contractors, and Employees Do?
Employees and contractors should:
- Understand the new meanings of ‘employee’ and ‘employer and how they affect being engaged as a contractor.
- Take care to understand an offer of contracting that is made to them.
- If they are highly paid, consider if the opt out mechanism is suitable.
Employers should:
- Consider their current contracting engagements and their risk of a contractor being considered an employee under the new laws.
- Identify highly paid contractors and consider whether to agree with them to exercise the opt out mechanism.
- Review their contractor agreement templates.
Some more information is available here or you can book online for an initial no-obligation chat about reviewing an employment contract or contractor agreement.