Employee or independent contractor?

Distinguishing between an employee and an independent contractor is often a complex and nuanced exercise. However, the distinction is crucial given employees and independent contractors have different legal rights, obligations and entitlements.

Prior to 2022

Historically, the test used in determining whether a worker was an employee or independent contractor was a "multi-factorial test", which focused on the totality of the relationship between the parties.

In applying the multi-factorial test, post-contractual conduct was relevant, and a range of factors were considered and assessed to determine whether a worker was an employee or independent contractor. The written contract between the parties was one of those factors, but it was not determinative alone. Other relevant factors included:

• the extent of control of, or the right to control, the worker
• whether the worker was provided with tools and equipment
• whether uniforms were provided and/or required by the company
• whether the worker was permitted to delegate or subcontract work
• the remuneration structure - specifically, whether the individual received payment of a periodic wage or salary or compensation by reference to the completion of a task or project
• whether the worker was entitled to paid annual leave or sick leave.

Current position

In 2022, two High Court decisions confined the use of the multi-factorial test used to determine whether a person is an employee or an independent contractor. These decisions were Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.

The decisions held that where the relationship of the parties has been committed to a written contract, and the contract is not challenged as being a sham and has not otherwise been varied or displaced by the parties, then the relationship ought to be characterised by reference to the rights and obligations detailed in the contract, with primacy given to the terms of the contract.

What this has meant is that the while the "multi-factorial" test is still relevant, primacy must be accorded to legal rights, duties, and terms of the written contract over the subsequent conduct of the parties.

Changes this year

There have been, and continue to be, a range of amendments to the Fair Work Act 2009 (Cth) (FW Act).

The Fair Work Legislation Amendment (Closing Loopholes No 2) Act 2023 (Cth) was passed on 12 February 2024.

One of the changes that it will introduce (from 26 August 2024 or an earlier date by proclamation) is an expanded statutory test for determining whether a worker is an employee or independent contractor.

Under the new test, the relationship is to be determined by ascertaining the real substance, practical reality, and true nature of the relationship, having regard to the totality of it. This includes the terms of the contract, and how it is performed.

The amendments made are a direct response to the "primacy of contract" approach that was adopted by the High Court, which is made explicit by a note inserted into the FW Act. Whilst the terms of the contract will still play a significant role in determining the relationship, effectively, we are going to revert to a multi-factorial test.

There is no exhaustive list of relevant factors, as the relevant factors will vary from case to case, as will the weight to be afforded to each indicator. 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.

Below are some of the factors that may be relevant to conducting an assessment about whether a worker is an independent contractor or employee.

Note: A worker may have some indicators of them being an independent contractor, but they can still be an employee on overall consideration and weighing of the factors. This also works vice versa.

It is not necessary that each indicator point to the worker being either an employee or independent contractor; it is whether the totality of the relationship indicates that the real substance, true nature, and overall practical reality is that the worker is either an employee or independent contractor.

Support

Employers should familiarise themselves with the new FW Act provisions. For tailored advice on how these changes may impact your organisation, please contact a member of Lander & Rogers' Workplace Relations and Safety team.