Closing Loopholes Bill sees return to multi-factorial test in determining contractor vs employee distinction

Cleaner cleaning a tiled floor in a building foyer.

By and large, the Fair Work Act 2009 (Cth) governs employment relationships, conferring rights and imposing obligations on an "employer" and an "employee". Under the Fair Work Act, "employee" and "employer" are defined to have their ordinary meanings i.e. their common law meanings as developed by the courts.

However, proposed amendments to the Fair Work Act under the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023 seek to introduce a definition of employment with implications for employers and employees alike.

If passed, under new section 15AA, the ordinary meanings of "employee" and "employer" will be determined by reference to the "real substance, practical reality and true nature of the relationship between the parties".

Under the new section 15AA(2), ascertaining this will require:

(a) consideration of the totality of the relationship between the worker and the principal - according to the Explanatory Memorandum, this phrase, drawn from the High Court decisions in Stevens v Brodribb Sawmillling Co Pty Ltd [1986] HCA 1 and the majority in Hollis v Vabu [2001] FCA 44, is intended to indicate that all relevant indicia to the relationship are to be considered, and not one indicia will be determinative;

(b) reference not only to the terms of the contract governing the relationship, but also other factors, including how the contract is performed in practice - according to the Explanatory Memorandum, this is intended to facilitate the use of a multi-factorial approach when characterising a relationship, and directly counteract the principles in the High Court decisions of CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 (Personnel) and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 (Jamsek). A proposed legislative note to section 15AA also expressly confirms that the section was enacted as a response to the decisions in Personnel and Jamsek.

Contract no longer king - return of the multi-factorial test

Prior to the High Court's decisions in Personnel and Jamsek, courts had long applied a "multi-factorial test" to determine whether a worker was engaged as an employee or an independent contractor.

The High Court's decisions in Personnel and Jamsek turned all of this on its head and marked a significant departure from the multi-factorial test, holding that, where a written contract exists, primacy must be accorded to legal rights, duties and terms of the written contract, rather than the substance of the relationship and subsequent conduct of the parties when performing the contract.

Personnel and Jamsek established that, except in limited circumstances, where a written contract exists evidence of post-contractual conduct of the parties is not relevant in establishing the existence of an employment or principal/contractor relationship. The Personnel and Jamsek decisions increased certainty for business by enabling them to engage workers as contractors without risk of a claim for misclassification and entitlement to employment benefits (so long as the contract of engagement was appropriately drafted). However, the decisions were the subject of criticism for making it easier for businesses to achieve cost savings by sourcing labour from contractors, outside of the FW Act and minimum terms and conditions, despite the social reality of the working relationship and inequality of bargaining power for workers entering contracts.

Back to the future - all relevant incidents to be considered, with no one incident necessarily determinative

Under the multi-factorial approach, the correct characterisation of the relationship between the parties was determined by assessment of various indicia, including:

  • the extent of control of, or the right to control, the worker;
  • whether the worker is provided with tools and equipment;
  • whether uniforms were provided and / or required by the principal;
  • whether the worker is permitted to delegate or subcontract work;
  • the remuneration structure - specifically, whether the worker receives payment of a periodic wage or salary or compensation by reference to the completion of a task or project;
  • whether the worker is entitled to paid annual leave or sick leave; and
  • the express terms of the contract between the parties.

However, courts regularly observed that there was no exhaustive list of relevant factors and that they will vary from case to case, as will the weight to be afforded to particular indicia.

To that end, the amendments do not prescribe an exhaustive list of factors that will be relevant to the multi-factorial assessment under section 15AA(2)(b). According to the Explanatory Memorandum, this is intended to ensure a flexible approach that will enable the ordinary meanings of "employee" and "employer" to continue to adapt to changing social conditions, market structures and work arrangements.

The amendments will apply to most businesses covered by the FW Act, but will not apply to businesses that are only "national system employers" due to a state's referral of industrial relations powers to the Commonwealth. The common law test for employment established by the Personnel and Jamsek decisions will continue to apply to such businesses. Similarly, the amendments will not affect the meaning of "employee" and "employer" under other workplace legislation to the extent that those laws adopt the ordinary meaning of "employee" and "employer" (e.g. superannuation, income tax, workers’ compensation).

For more information about the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023 and how the changes might apply to your organisation, please contact Lander & Rogers' workplace relations and safety legal experts.

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