Closing Loopholes No 2: What you need to know about the next raft of changes commencing 26 August

Changes to the definition of “employee”

Commencing 26 August 2024, a new ordinary meaning definition for "employee" will be introduced which assesses the real substance, practical reality and true nature of the relationship between the worker and the employer. This essentially reverts back to the common law multi-factorial assessment which considers the written terms of the contract and how the services are performed in practice.

While there is no exhaustive list, key factors for the multi-factorial assessment include:

• the degree of control over, or the right to control, the worker;
• whether the worker exclusively performs work for the principal;
• whether the worker permitted to delegate or subcontract work;
• who bears financial risk and insurance in the arrangement;
• whether the worker is provided with tools and equipment;
• whether there is an expectation of continuing work;
• how the worker is remunerated (for example, if they are paid based on time worked rather than work performed and how taxes are managed);
• whether the worker is required to wear a uniform or display material which associates them with the principal business; and
• whether the worker can decide their working hours.

Under the new ordinary meaning, some relationships may be characterised differently which may result in different rights and obligations for the affected workers. For example, workers whose services were previously engaged as independent contractors may have their engagement status reclassified as an employee which carries its own separate rights and obligations.

Employers should regularly monitor the full scope of the relationship in order to accurately record any changes in the nature of the services being performed.

Sham contracting (commenced on 27 February 2024)

To avoid being in breach of sham contracting, employers must not misrepresent an employment contract as a contract for service (in other words, an independent contractor arrangement) when a worker performs work consistent with an employment relationship.

Under the new regime, an employer will not contravene the sham contracting provision if, at the time of the representation, the employer reasonably believed that the contract of employment was a contract for services. Factors to support this defence include the size and nature of the employer's business, and whether the employer acted on or sought legal advice prior to entering the contract.

This replaces the current defence where employers need to prove that they did not know and were not reckless as to whether the contract was an employment contract or a contract for services, and introduces a more objective analysis.

Opt-out notices

Certain workers (including independent contractors) who earn over $175,000 (the current Contractor High Income Threshold) have the option to opt out of the amended reclassifications and maintain their existing engagement status through a notification process. This is even if, in practice, many factors are consistent with them being an employee.

Opt-out notices can be provided by the worker before, on or after the commencement of the provision, and may be revoked at any time.

Principals who have reasonable belief that a worker earning above $175,000 and may be in an employment relationship because of the new definitions may notify the worker of their option to provide an opt-out notice if they consider the relationship may become an employment relationship under the new regime. If the worker does not opt out of the new classification, the principal will need to consider whether the worker should be reclassified as an employee.

Steps to consider

Given the new definition for employee, it might be timely for employers to ensure they have robust processes that:

• properly characterise and treat workers as employees or independent contractors, including in the context of contracting, induction, payroll and day-to-day management;
• have regular checkpoints during the engagement to accurately monitor changes in nature of the relationship; and
• consider whether the opt-out process will be of any practical utility and, if so, develop an internal guideline around this.

Changes to “casual employee”

Commencing 26 August 2024, the definition of casual employee will change to take into account the real substance, practical reality and true nature of the employment and rather than just the terms of the written employment contract.

An employee will now only be defined as a casual employee if:

• there is an absence of a firm advance commitment to continuing and indefinite work; and
• the employee is entitled to casual loading, or a specific casual rate of pay.

Factors which may be relevant when assessing the presence of a firm advance commitment to work may include:

• whether the employer can choose to offer work or not, and whether an employee can choose to accept to work or not;
• whether it is reasonably likely for there to be similar continuing work available at the business;
• whether there are full or part-time employees performing the same kind of work in the business that the casual employee is performing; and
• whether there is a regular pattern of work for the employee.

Employees who start work as a casual employee remain as such until a specified event occurs to change the nature of their employment (for example, where they become a permanent employee in line with the ‘employee choice’ pathway outlined below, their status is changed by an order of the Fair Work Commission or in accordance with the terms of an industrial instrument, or they accept an offer of employment that is not casual employment and commence that employment). This provides some comfort that the relationship between the parties will not somehow unintentionally morph into permanent employment at some stage during the employment relationship.

Converting employment classifications

The existing framework for casual employees to convert their employment classification will be replaced with a new “employee choice” pathway. Previously, the responsibility was on the employers to offer the option to convert employment classifications to eligible casual employees. Instead, under the amended regime, casual employees can provide written notice of an intention to convert their employment classification if:

• they believe their employment no longer meets the new requirements to be classified as a casual employee; and
• they have been employed for a period of at least 6 months (or at least 12 months for a small business).

If a notice to reclassify has been issued by a casual employee, the employer needs to consult with the notifying employee and respond in writing within 21 days. If the notice is being denied, the employer must provide a reason for refusing the change. A notice can only be refused on fair and reasonable operational grounds (for example, substantial changes would be required to the way in which the employer’s enterprise is organised, there would be significant impacts on the operation of the employer’s enterprise, or substantial changes to the terms and conditions of the employment would be necessary to ensure the employer does not contravene a Fair Work instrument that would apply to the employee as a permanent employee).

The new reform will also now include an additional requirement for employers to provide a Casual Employment Information Statement (CEIS) as soon as practicable after a casual employee commences employment. It must also be provided to casual employees after they have completed 6 months and 12 months of employment, and then at the end of each 12 month period thereafter. This requirement is slightly different for small businesses, who are only required to provide a CEIS on commencement of employment and 12 months after commencement.

Sham arrangements

Similar to the sham contracting amendments that commenced on 27 February 2024, protections will now be available to employees engaged on a casual basis under sham arrangements. The amendments will make it illegal for employers to knowingly say something false to convince a current or former full-time or part-time employee to enter into a contract for casual employment to do the same, or mostly the same, work. Furthermore, it will be illegal to dismiss or threaten to dismiss an employee to engage them as casual employees to do the same, or mostly the same, work.

Steps to consider

• Have a process to properly characterise employees as casual or permanent, as assessed at the commencement of the employment relationship and at any relevant conversion points.
• Engage in ongoing consultation to understand how casual employees are working in the business in practice.
• Issue an alert to managers regarding what to do if employees believe they are no longer casual and ensure there is a process and guideline in place to support managers and HR in responding to notifications from employees who believe they are no longer casual.
• Ensure the Casual Employment Information Statement is provided to casual employees at the start of the employment and other required junctures.

New jurisdiction for resolving unfair contract terms for independent contractors

From 26 August 2024, there is a new jurisdiction for the Fair Work Commission to deal with unfair contract terms for independent contractors earning below the Contractor High Income Threshold (currently $175,000), provided those terms relate to "workplace relation matters" like remuneration, leave entitlements and hours of work.

When determining whether a term in a services contract is unfair, the Commission will consider:

• the relative bargaining power of the parties;
• whether the contract as a whole displays a significant imbalance between the rights and obligations of the parties;
• whether the term is reasonably necessary to protect the legitimate interests of a party;
• whether the term imposes a harsh, unjust, or unreasonable requirement on a party; and
• whether the contract as a whole provides for a total remuneration that is less than what employees performing the same or similar work would receive (among other things); and
• any other matters the Commission considers relevant.

If the Commission is satisfied that one or more unfair contract term exists in a services contract, the Commission is empowered to make an order to either:

• set aside all or part of the services contract; or
• amend or vary all or part of the services contract.

Independent contractors classified as consumers or small businesses and who are party to a standard form contract will maintain access to the unfair contract terms regime under the Australian Consumer Law, including the right to raise complaints to the ACCC and commence legal proceedings.

Independent contractors earning above $175,000 will continue to maintain access to the existing unfair contracts protections under the Independent Contractors Act 2006 (Cth).

Steps to consider

• Review current services contracts to identify potential unfair terms, and revise any potential unfair terms to align with the new framework.
• Obtain legal advice if necessary, in particular with possible unfair terms related to pay and termination in order to reduce the risk of being subject to unfair contract disputes.
• Provide adequate training to management and relevant teams on the new framework.