'You need to carefully examine how your arrangements are set up in terms of the contracts,' lawyer says
From August 26 this year, new regulations will come into effect that further determine whether someone is a contractor compared to an employee.
“The legislation will expressly say that, in determining whether a person is an employee, it's necessary to look at the practical reality and the true nature of the relationship,” Paul Dugan, principal at DMAW Lawyers told HRD Australia.
“Including not only looking at the contract but other factors such as how, in practice, the contract is performed.”
The change comes as part of the second tranche of the Fair Work Legislation Amendment (Closing Loopholes No. 2) Bill 2023.
But what will it mean for employers?
New regulations in Australia
Dugan explained that the new regulations will bring a “significantly higher degree of uncertainty” for employers about whether they are genuinely engaging people as contractors or not.
“Instead of just needing to ensure that you have a proper fit-for-purpose service contract which accurately reflects the nature of the relationship, someone who was engaged as a contractor…might decide in five years’ time, ‘I think that maybe I could argue I was really an employee’,” he said. “‘Even though the contract said one thing, I say the relationship was different to that’.”
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And this could lead to those individuals claiming that they should have been paid annual leave, award rates, penalty rates and so on.
Contractor or employee?
When it comes to determining whether someone is genuinely employed as a contractor, one of the key considerations is what’s being referred to as a right of delegation, Dugan said.
“What that means is if a person who's engaged to provide the services doesn't have to do so personally – it could employ someone to provide the services or subcontract it to someone else – if your contract enables that to happen then almost certainly in those circumstances, that person is going to genuinely be a contractor rather than an employee,” he said.
“Because it's a key consideration of employment that you personally have to do the work and you can't go off and get someone else to do it for you.”
And Dugan emphasised that employers should make sure their contract reflects that.
Opting out notice from contractors
However, under the new changes, contractors who earn above a threshold – which is yet to be determined – can provide an ‘opt-out’ notice to the business that has engaged them. And so long as that opt-out notice is in place, the new rules won’t apply to them, Dugan said.
“It will mean that in deciding if they go to court, in looking at the relationship, you will not be able to go behind the terms of the contract. So you'll effectively be avoiding all that complexity about ‘How is the contract actually being administered in practice?’ And you only need to have your fit for purpose contracts in place, which is the position at the moment.
“But the contractor can, at any time, give a notice revoking that opt out. So they can effectively bring that to an end. And in which case, the relationship from that point in time will fall under the new definition which would then bring into play ‘Well then, how does the relationship really operate in practice?’.”
Minimising the risks
Dugan highlighted the financial risks for employers if a person makes a claim in court and was found to have been an employee. For example, they could be entitled to backpay or overtime pay.
“And often, it's not just one contractor in play,” he said. “You might have engaged tens or hundreds of people on the same type of arrangement. In which case, you might find that that $30,000 that you might have to end up paying to contractor A who's found to be an employee, then turns into a claim by hundreds of contractors. And therefore a claim for millions of dollars for those backpay entitlements.”
“And therefore, you need to carefully examine how your arrangements are set up in terms of the contracts, how its administered and ideally with the benefit of competent legal advice so that you hopefully get it right.”
Legal defence
Dugan suggested that HR teams and employers seek legal advice when it comes to the new regulations. He added that as part of the changes, there will be a defence for sham contracting and seeking legal advice can support the argument that you genuinely believed you engaged with someone as a contractor.
“That defence is if the person reasonably believed that they were engaging someone as a contractor, then they can't be prosecuted,” Dugan said. “Even if the person ultimately is found to be an employee or they can't be found liable. And one of the factors determining whether or not they thought reasonably to have believed that the person was a contractor is whether they have received legal advice to that effect.
“So if you get your lawyers in and they run the ruler over the relationship, and they give you advice that in their view it is a genuine contractor relationship, that would be a very strong factor in favour of you being able to defend the claim alleging sham contracting.”