‘Closing Loopholes’ in the Fair Work Act: How to Determine if someone is an Employee vs Contractor

O*NO! Do you know if your team member is an employee or contractor? Running a real estate business can be a bit like walking a tightrope, especially when it comes to figuring out whether a team member is an employee or an independent contractor. This isn't just a minor detail—getting it wrong can lead to serious legal, financial, and reputational headaches. From hefty fines to back taxes and potential lawsuits, the risks are real.

At a basic level, an employee is an individual providing their personal services under a contract of service where the services are performed under the direction and control of the employer, whereas an independent contractor can be an individual providing their personal services under a contract for service, generally carrying on a business of their own.

Further changes to the Fair Work Act 2009 are set to be introduced this August when more of the Federal Governments ‘Closing Loopholes’ legislation comes into effect. Through the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 a new section 15AA will be inserted which will affect how you determine who an ‘employee’ is. New sections 15AB, 15AC, and 15AD will also be added to address the operation of section 15AA.

The anticipated commencement date for these changes is 26th August 2024. Let’s take a closer look at these amendments and what they mean for your agency.

Why is a new section 15AA being inserted?

The Fair Work Act generally relies on the ordinary meaning of employee and employer, which is the meaning at common law.  The common law meaning of employee and employer can be relied on to determine whether an individual is a contractor or an employee.  Over the years, the common law had evolved a multi-factor test to make that determination, looking at the true nature of the relationship, not just the contract between the parties.

However, two recent landmark High Court cases changed the common law and how we determine contractor vs employee status: CFMMEU v Personnel Contracting Pty Ltd [2022] HCA and ZG Operations Australia Pty Ltd v Jamsek  [2022] HCA 2. Both decisions focused on the terms and conditions contained in the contracts between parties, and the obligations these established, to determine the status of a worker. In essence, the cases linked the tests for determination to the contracts rather than the multi-factor approach that was taken before. Therefore, if there is a comprehensive written contract, then this will be the determining factor on whether an independent contractor arrangement exists.

As the Fair Work Act relies on the ordinary meaning (or common law meaning) of employer and employee which was changed by the Personal Contracting and Jamsek decisions, the government took the opportunity in the second tranche of the Closing Loopholes amendments to reinstate the multi-factor test by imposing a statutory rule of interpretation on the definition of employee and employer in the Fair Work Act.

How will the Fair Works Updates affect employee vs contractor determinations?

Section 15AA: Under the new section 15AA, whether an individual is an employee for the purposes of the Fair Work Act, is to be determined by ascertaining the ‘real substance, practical reality and true nature of the relationship.’ This means the totality of the relationship between the parties needs to be looked at. This includes the terms of any contract and also includes how the contract is carried out and how the obligations are performed in practice.

However, the amendments also allow for eligible individuals to opt out of the statutory rule of interpretation so that their relationship will be assessed only on the common law, that is, what is set out in the written contract between the parties.  This does not automatically mean that a contractor is not an employee.  If the written contract contains terms that are more applicable to an employment relationship, then the contractor is likely to be considered an employee.

Section 15AB: This clause allows for an employer/principal to elect for section 15AA to not apply. To opt out, an employer/principal may give written notice to a worker before section 15AA starts operating, saying the worker can opt out if they think the relationship might turn into an employer-employee one because of section 15AA. This notice may also be given on or after section 15AA commences. The worker can also give an opt out notice to the principal/employer.

However, the employer/principal or worker can only give an opt out notice if they believe the workers earnings are above the contractor high income threshold when notice is given.  We are still waiting on the contractor high income threshold to be determined so opt out notices cannot be issued until the threshold is set.

Section 15AC: If the opt-out notice is given before section 15AA comes into effect (ie. 26th August 2024), then the new section will not apply to the relationship, until and unless it is revoked. If the opt-out notice is given on or after section 15AA commences, then the provisions in section 15AA stop applying on the day the notice is given and will not apply until the notice is revoked.

Section 15AD: A worker who has given an opt-out notice can revoke it at any time. To do this, they must give a written revocation notice to the employer/principal the worker wants section 15AA to apply to. A revocation will apply on the day it is given. A worker can only give one revocation notice per relationship.

Practical Effect: Since the section 15AA amendment hasn't been enacted yet, we won't know the practical factors it considers until the courts start applying it. However, we expect that previous case law in lower courts where the multi-factor test was applied will guide the interpretation of Section 15AA.  So after a brief hiatus where the employee v contractor issue was simplified to just the contract, we are back to the courts being allowed to look behind the contract, and now to the ‘real substance, practical reality and true nature of the relationship’, which may prove to be even broader than the multi-factor test.

For risk management, principals and individual ABN contractors should review the ‘real substance, practical reality and true nature of the relationship’ compared to what is in the contract.  If there are concerns that the ‘real substance, practical reality and true nature of the relationship’ is closer to an employment relationship, then it would be prudent to consider using the opt-out provisions, especially if both parties want to maintain a contractor relationship.

Is this the only test we need to use for employee vs contractor determinations?

No, the test only applies to employees and employers covered by the Fair Work Act so there will be company to company contractor arrangements which are not affected by the Closing Loopholes amendments.

Additionally, the definition of ‘employee’ in other legislation or rulings has not changed to reflect the Fair Work Act changes. This most importantly includes the latest ATO rulings. Under the 2023/24 Taxation Ruling (TR) the word ‘employee’ has its ordinary common law meaning as it is not defined in the Taxation Administration Act 1953. This ruling also states that if a worker and an employer/principal have a valid written contract defining their relationship, then the contract's terms may determine if the worker is an employee or not. However, evidence of how the contract is performed can also be considered. Similarly, to determine an employee under the ATO’s 2024/1 Practical Compliance Guideline (PCG) or for the purposes of super under the Superannuation Guarantee (Administration) Act 1992 you must take the ordinary meaning of the word. These rulings and laws are important as they impact your tax, PAYG, payroll tax and superannuation obligations. Individuals who are contractors are also likely to be deemed employees under workers' compensation legislation.

Closing Loopholes or Creating Uncertainty: What does this mean for you?

For a short period of time, the High Court provided a level of certainty in the employee v contractor debate by limiting an assessment of the relationship to what was written in the contract.  From 26 August 2024, the uncertainty returns with the totality of the relationship once again being considered.

Engaging individual ABN contractors has always been a risky proposition and there is a high likelihood they will be deemed employees for super and workers compensation purposes anyway.  If there is any doubt that the individual contractor you are engaging will be considered an employee, it is better to just put them on as an employee.

So, what can you and your agency do to be prepared for these changes:

Review Contracts & Practices: Ensure your contracts reflect the practical realities of the working relationship. All individual contractors must hold the appropriate licence to run their own agency so that limits the contractor options for real estate agents and that ‘factor’ is likely to tend towards a contractor relationship.  Align your work practices with the new legal standards to avoid discrepancies and make sure your contracts include set off clauses in case a contractor is deemed to be an employee and owed employee entitlements.

Communicate With Workers: Inform your workers about the changes and how they might be affected. Provide training to ensure everyone understands their rights and obligations under the new legislation.

Consider the Opt-Out Provisions: Use the opt-out provisions if there is a risk the multi-factor approach will result in the contractor arrangements already in place being considered an employment relationship, particularly if you and your contractor would prefer for the common law to apply, i.e. a contractor relationship determined only by the contract between the parties.

Seek Legal Advice: Get advice on how the new legislation affects your specific situation. Keep up with updates to the FW Act, TAA, SGAA, and ATO rulings to ensure compliance.

Don’t forget about the sham contracting rules

To further complicate matters, we can’t forget about the sham contracting rules. A sham contract is when the contract says one thing, but in practice you do something totally different. 

Whilst we have mostly been focusing on individuals who contract under ABN’s in this article, there can still be issues when your contractor contracts through a company to you. In 2015 the High Court looked at sham contracting. Here the court did extend the operation of the sham contracting provisions to situations where the individual is engaged through a company (FWO v Quest South Perth Holdings Pty Ltd [2015] HCA 45).  The High Court applied section 357(1) of the FW Act very broadly, although in that case, the “contractors” were already employees and the employer set up a dodgy labour-hire arrangement to turn them into contractors.  However, given that in the real estate industry a contractor needs to be fully licensed at a level to show they are running their own business, that may make it more difficult for a court to determine contracting arrangements through a company are a ‘sham contract’ as the person engaged is not a vulnerable employee and will satisfy one of the major indicators of a contractor relationship.

However, if a real estate agent convinces an inexperienced person without the appropriate licence to be a contractor through a company instead of being an employee (with all the protections in the Real Estate Industry Award for employees, particularly sales employees) then that would be a problem, and likely to be considered sham contracting.

Key Takeaways

• Amendments to the definition of ‘employee’ and ‘employer’ in the Fair Work Act 2009 will commence on 26 August 2024.

• Under the new section 15AA, an employment relationship is to be determined by ascertaining the ‘real substance, practical reality and true nature of the relationship.’

• We have returned to a multi-factor approach to the employees vs contractor determination issue, as opposed to relying mainly on the terms of the contract between the parties.

• However, for tax, PAYG, payroll tax, workers compensation and superannuation purposes, to determine who is an ‘employee’ you must look at the ordinary common law meaning of ‘employee’, where the terms of the contract between the parties is paramount.

• By reviewing contracts, seeking legal advice, considering opt-out provisions, and maintaining open communication with workers, agency owners can navigate these changes and ensure compliance with the new standards.

NEXT STEPS

Navigating the legislative changes can be complex, but you don’t have to do it alone. As experts in real estate agency law, we specialise in helping agency owners and employers like you with employee-contractor determinations. Book your free call to see how we can help with your workplace law needs.

Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.