New rights for independent contractors in unfair arrangements

Under the recent Closing Loopholes laws, new protections have commenced for independent contractors alleging unfair contract terms. This is one of the key reforms that came into effect on 26 August 2024.

Organisations that engage independent contractors should take steps to ensure the relevant contracts are compliant. In particular, the changes regarding the unfair contract regime in the Fair Work Commission (FWC) will likely bring an increase in contractor disputes. 

What’s changed?

For the first time, the FWC will be able to intervene regarding terms of engagement between principals and independent contractors. A new unfair contract regime has been introduced in Part 3A-5 of the Fair Work Act 2009 (Cth) (FW Act), targeting independent contractors who earn below the contractor high-income threshold (as at the date of this article, $175,000 per annum). The provisions allow eligible contractors to apply to the FWC to vary or set aside all or part of a contract if it is deemed unfair.

To be eligible to make an application, the sum of the contractor’s annual rate of earnings must be less than the contractor high-income threshold – currently $175,000 per annum. The FWC specifies that the contractor high-income threshold should not be confused with the “high income threshold” which only applies to employees. At this stage, there is limited guidance on how the contractor high-income threshold and the contractor’s annual rate of earnings will be worked out and/or whether it will be pro-rated across the year.

Terms relating to ‘workplace relations matters’

Notably, only terms that would relate to “workplace relations matters” in the context of an employment relationship can be challenged due to unfairness. It is yet to be seen how the FWC will interpret this limitation, but according to section 536JQ of the FW Act, workplace relations matters include without limitation remuneration, hours of work and termination.

When determining whether a term in a contractor agreement is unfair, the FWC will consider:

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

For example, terms which provide a unilateral right to vary the terms of the contract or terminate the contract may be deemed to be unfair by the FWC.

Supplementary jurisdiction of the Independent Contractors Act 2006

The Independent Contractors Act 2006 (Cth) (IC Act) has contained similar protections for independent contractors against unfair contract terms for some time. However, given a claim must be initiated in the Federal courts, the IC Act has been criticised for being inaccessible.

With the introduction of the FW Act provisions, the IC Act jurisdiction has been narrowed whereby the unfair contract remedies will only apply to contractors earning above the contractor high-income threshold.

We anticipate the FWC will seek to rely on earlier decisions under the IC Act jurisdiction to inform its approach to assessing whether a term in a contractor agreement is unfair. If the FWC takes this approach, there may be limited grounds to establish unfair contract terms given a small number of substantive decisions made under the IC Act and of these, a number of the decisions in the IC Act jurisdiction have been overturned either in whole or in part, in favour of the respondent. Notwithstanding these earlier outcomes, considering the background to the FWC and the approach taken in unfair dismissal cases to factors demonstrating “harsh, unjust or unreasonable” conduct, the FWC is likely to take a broad view as to whether a contract term is unfair.

More accessible avenue to dispute agreements

Contracts that were previously considered enforceable may now be subject to scrutiny under the new regime if the contractor is earning below the contractor high-income threshold. The FWC also provides a more accessible avenue for contractors to dispute their agreements, which may lead to increased claims from contractors.

Further, there is no specific reference to costs orders in the new Part-3A-5 of the FW Act as it relates to the unfair contract provisions. The approach to costs in these matters is likely to be similar to the IC Act jurisdiction, which provides that costs do not follow the event and costs orders are unlikely to be made unless the application is vexatious or unreasonable. This approach to costs is consistent with the general rule in the FW Act that all parties must bear their own costs. As such, the lack of an adverse costs order will make it unlikely to dissuade a contractor from making a claim in the FWC.

The new provisions only apply to contracts entered into on or after 26 August 2024. Organisations should review their templates and all new contracts with independent contractors to ensure they meet the new fairness standards. Caution should be exercised when amending an existing agreement as it could be considered a new contract in some circumstances. Considerations of fairness may include the balance of power between the parties, the clarity and transparency of contract terms and whether the contract imposes undue disadvantage on the contractor.

Failure to adjust your terms for individual contractors could result in contracts being set aside or varied by the FWC, which could disrupt your business operations and lead to unforeseen costs.

Review template agreements for unfair terms

In line with these changes, organisations should review their current template agreements for independent contractors in the context of the unfair contract regime to ensure no terms could be perceived as unfair. This review can also take into account the changes to the definition of “employee” and “employer” covered in Fair Work Act updates.

Michael Selinger is a partner at Holding Redlich in Sydney, specialising in workplace relations and safety. Julia Wyatt is an associate at Holding Redlich in Sydney.