Changes to Independent Contractors from 26th August 2024
Dispute Resolution and Contract Disputes
The Fair Work Commission (FWC) will be able to handle disputes between independent contractors and their clients over unfair contract terms. If a term is unfair, the FWC can change or remove it.
If the FWC decides a contract term is unfair, it will have the power to change the terms and make parts of the contract or the whole contract ineffective.
Ensuring Genuine Independent Contractor Relationships
New rules will help determine if someone is an employee or an independent contractor by looking at the actual work relationship, not just the contract. This means you need to regularly review your Independent Contractors to ensure that they are not actually employees.
It is very important to correctly classify workers as either employees or contractors.
Just because you define a relationship as a contractor through an agreement or contract, that doesn’t make it so. The work practices occurring in the relationship need to be considered and go to establishing the totality of the relationship.
If you determine that your staff member is a contractor, but they are operating for all intents and purposes like an employee, you could be liable under the Fair Work Act (2009).
How to correctly classify the relationship?
What is an employee?
An employee is an individual engaged on a permanent or part-time basis that performs a specific role on an ongoing basis. The practicalities of employment are covered by the employer including payment of superannuation, payroll tax, personal leave and annual leave.
What is a contractor?
Independent contractors provide services to another person or business. They aren’t employed by that person or business. Independent contractors usually negotiate their own fees and working arrangements, and can work for more than one client at a time. Generally, they undertake a contract with a business to provide services or labour at an agreed price and pre-determined time frame. Most contractors are engaged on a project basis or to complete a specific task.
Fundamentally different from employees, genuine independent contractors are typically regulated by commercial rather than employment laws. Independent contractors can also be called contractors or subcontractors.
Indicators to determine the nature of the relationship
The following indicators must all be considered to determine whether the relationship appears overall to be one of employment or contracting.
| Facts to Consider | Contractor | Employee |
| Degree of control over how work is performed | Has a high level of control over the work they perform, including their hours, work location and how they do the work. | Low – Work is controlled by the employer including hours, work location and how work is done. |
| Financial Responsibility and Risk | Carries the risk for making a profit or loss on each task or job. Is usually personally responsible and liable for poor work or any injury sustained while performing the task. Contractors generally have their own insurance policy. | Has no financial risk (as this is the responsibility of their employer). |
| Ability to delegate or subcontract work | May be able to subcontract work in some circumstances. | Is required to do the work themselves. For example, they can’t ask someone else to go to their workplace and do their work for them. |
| Tools / equipment | Uses their own tools and equipment (note: alternative arrangements may be made within a contract for services) | Tools and equipment are provided by the employer, or a tool allowance is provided |
| Payment / Remuneration | Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project | Time based – Paid regularly (for example, weekly/fortnightly/ monthly) |
| Expectation of Work | Usually engaged for a specific task | Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period) |
| Hours of Work | By agreement between both parties, decides what hours to work to complete the specific task. | Generally, works standard or set hours (note: a casual employee’s hours may vary from week to week) |
| Tax | Pays their own tax and GST to the Australian Taxation Office | Has income tax deducted by their employer |
| Leave | Does not receive paid leave | Entitled to receive paid leave (e.g., annual leave, personal / careers leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees |
| Superannuation | Generally, pays their own superannuation (note: in some circumstances, independent contractors may be entitled to be paid superannuation contributions) | Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer |
| Note: Increased Risk for Certain Jobs – Unskilled Labour The risk of workers being considered employees increases when those workers perform tasks that involve the application of relatively unskilled labour and that persist for a period of time. For example, a cleaner performing simple work for a single principal contractor, who wears their uniform, operates their equipment and accepts little or no commercial risk, cannot be defined as anything other than an employee. | ||
We would also encourage you to use the ATO website as a further resource to correctly classify your employee – https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/employees-treated-as–independent-contractor/how-to-work-it-out-employee-or-independent-contractor
What are the risks of getting it wrong?
There are significant risks of incorrectly classifying an employee as a contractor. Not only does misclassification deny the worker employment benefits, but the employer is also exposed to risk arising from workplace law, taxation law, superannuation law and worker’s compensation law.
Misclassification can lead to a contravention of Industrial Relations legislation including the National Employment Standards, minimum wage orders, and terms of a modern award or enterprise agreement among other employer obligations (e.g. providing employee records and payslips). Because of a contravention, employers may be exposed to back payments and superannuation payments with consequent tax implications.
If a misclassification is seen to be deliberate, whereby an employer attempts to disguise an employment relationship as an independent contractor agreement, this is known as sham contracting.
What is sham contracting?
A sham contacting arrangement occurs where an employer attempts to disguise an employment relationship as an independent contractor agreement. This is usually done to avoid responsibility for employee entitlements.
Under sham contracting provisions of the Fair Work Act (2009), an employer cannot:
- Misrepresent an employment relationship or a proposed employment arrangement as an independent contracting agreement;
- Dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor;
- Make a knowingly false statement to persuade or influence an employee to become and independent contractor.
Penalties & Fines
It’s illegal to represent to a worker that they’re an independent contractor when the employer doesn’t reasonably believe this.
It’s also illegal to knowingly say something false to convince an employee to become an independent contractor to do the same work (or mostly the same work) and/or dismiss or threaten to dismiss an employee to engage them as an independent contractor to do the same work (or mostly the same work).
Courts can impose penalties against businesses or individuals for sham contracting. The maximum penalties for each contravention are:
- $18,780 for individuals
- $93,900 for businesses with fewer than 15 employees
- $469,500 for businesses with more than 15 employees.
We welcome you to contact our team if you have any questions regarding this matter or any other HR concerns.