Closing Loopholes No. 2: independent contractor arrangements

From 26 August 2024, the Fair Work Act 2009 (Cth) (FW Act) definition of “employee” has changed. The changes were made to address issues related to the classification and treatment of independent contractors, ensuring fairer work conditions and protections for such workers.

These changes are part of the Federal Government’s “Closing Loopholes” reforms to workplace laws. We explored the changes to Closing Loopholes No. 1 in our earlier blog, “Closing Loopholes sees significant changes to the Fair Work Act from December 2023”. No. 2 covers a number of reforms, but this blog is directed at the changes related to independent contractors.

Background to determining if a worker is an independent contractor or employee

Independent contractors have traditionally been seen as a separate and distinct category from employees. A true independent contractor will genuinely be operating their own enterprise, sometimes have greater flexibility but lack the basic protections afforded to employees under the FW Act. This means that independent contractors have often been subject to misuse, with some employers classifying workers as independent contractors for the purpose of avoiding various obligations such as superannuation, minimum wage requirements, worker’s compensation protections, leave entitlements and unfair dismissal protections.

The Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 (Closing Loopholes No. 2) seeks to address these issues by tightening the criteria for independent contractor status and extending certain employee protections to these workers. 

In 2022, the High Court of Australia handed down the decisions of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Personnel Contracting and Jamsek).

In Personnel Contracting and Jamsek, the High Court found that in deciding whether a worker is to be considered an employee or an independent contractor, this is to be primarily determined by the written contractual terms and not the other practical factors of the working relationship. These decisions give primacy to the written terms of the contract and largely disregard post-contractual conduct (except in limited circumstances).

The High Court’s decisions marked a significant departure from the established multi-factorial test, asserting that when a written contract exists, the legal rights, duties and terms of the contract should take precedence over the real substance of the relationship and the parties’ conduct in performing the contract.

The Changing Loopholes No. 2 changes in relation to independent contractors effectively overrule these High Court decisions, which is a positive change for those workers.

Closing Loopholes key changes for independent contractors

Definitions of employee and employer added to the FW Act

The insertion of section 15AA into the FW Act responds to Personnel Contracting and Jamsek and returns the law to the position it was in prior to those decisions – that is, to look at other factors of the employment relationship in addition to the written contractual terms.

Generally speaking, section 15AA provides that in determining whether a person is an employee, the focus is to be on the ‘real substance, practical reality and true nature of the relationship’ between the worker and the purported employer. Regard must be had not only to the employment contract, but also how the contract was performed in practice.

In deciding the ‘real substance, practical reality and true nature of the relationship’, section 15AA of the FW Act provides that the following must be considered:

1. the totality of the relationship between the individual and the person; and
2. in considering the totality of the relationship, regard must be had to not only the terms of the contract governing the relationship but also to other factors relating to the totality of the relationship, including (but not limited to) how the contract is performed in practice.

Opt-out notice options

Closing Loopholes No. 2 introduces a new section, 15AB into the FW Act (which commenced on 27 February 2024).

This section allows an individual worker to provide a written ‘opt out notice’ to a potential employer to opt-out of being classified as an employee under the new definition. This has to be at the worker or the potential employer’s initiative and can only be done if the individual worker’s earnings exceed the ‘contractor high income threshold’. The contractor high income threshold had recently been set at $175,000.00, and will increase each year. An independent contractor is able to revoke the opt out notice at any time, should they wish to do so.

Regulated workers – gig economy and road transport industry contractors will have increased protections

Closing Loopholes No. 2 introduces greater workplace protections (Chapter 3A) for certain independent contractors who are either employee-like workers performing digital platform work (the gig economy) or engaging in the road transport industry, collectively ‘regulated workers’.

A new Part 3A-2 is inserted into the FW Act, enables the Fair Work Commission (FWC) to set minimum standards orders and guidelines in relation to regulated workers, including but not limited to:

• payment terms;
• deductions;
• record-keeping in relation to matters covered by the FW Act;
• insurance;
• consultation
• representation;
• delegates’ rights; and
• cost recovery.

Closing Loopholes No. 2 also inserts the following into the FW Act.

Section 40D – changes for road transport industry

This new section brings in changes for workers in the road transport industry. The Explanatory Memorandum details that this addition considers the need for an appropriate safety net of minimum standards for road transport workers and employees in the road transport industry, having regard to the need to avoid adverse impacts on sustainability, performance and competitiveness of supply chains and the national economy.

Part 3A-3: protections against unfair deactivation and unfair termination for regulated workers

Part 3A-3 adds new protections for regulated workers against unfair deactivation and unfair termination. Deactivation is where the worker’s access to the platform has been modified, suspended or altered in such a way that prevents them from working.

This new addition will allow digital platform workers to apply to the FWC within 21 days of their deactivation to challenge that decision to deactivate them from the platform.

These changes also bring in restrictions that will stop a person from ‘double-dipping’ by pursuing multiple unfair deactivation or unfair termination remedies under different laws.  

Part 3A-4: collective agreements

This addition allows the FWC to register consent collective agreements between a digital labour platform operator and an organisation entitled to represent the regulated workers (for example, a union).

The Explanatory Memorandum provides that this amendment inserts a requirement that the FWC be satisfied that the operation of a proposed collective agreement would not be contrary to the public interest. It also provides that it would require the FWC to consider and make a discretionary judgment about the proposed operation of the agreement, having regard to whether it has been fairly made by consent for employee-like workers and regulated road transport contractors.

Part 3A-5 enables the FWC to address any unfair contract terms of service, which are required to balance the needs of principals and independent contractors with relevant procedures and remedies.

Get help from an employment lawyer

Closing Loopholes No. 2 represents a crucial step towards ensuring fair treatment and protection for independent contractors in Australia. By tightening the definition of independent contractors, extending the minimum standards and entitlements, and enhancing enforcement mechanisms, the legislation addresses long-standing issues in the labour market.

For employers, this means a need to review and potentially adjust their employment practices, while for workers, it offers greater security and protection.

If you require advice or assistance about your obligations and/or your entitlements as a result of the Closing Loopholes No. 2 changes, or any other workplace law issue, contact one of our award-winning employment lawyers.

Contacting Hall Payne Lawyers

You can contact us by phone or email to arrange your consultation; either face-to-face at one of our offices, by telephone or by videoconference consultation.

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Email: general@hallpayne.com.au