Recent Amendments to Australia's Fair Work Act Impact Whether Independent Contractors Are Deemed "Employees"

Deemed Employment of Independent Contractors 

Amendments to the Fair Work Act 2009 (Cth) ("FW Act") that took effect on 26 August 2024 introduced new definitions of "employee" and "employer". Pursuant to the amendments, the Fair Work Commission will apply the "whole-of-relationship test" set out in section 15AA of the FW Act to determine whether an employment relationship exists between a business and its purported independent contractor, whereby the Commission will consider: 

• The real substance, practical reality and true nature of the working relationship; and
• All parts of the working relationship between the parties, including the terms of the contract and how the contract is performed in practice. 

When evaluating the "real substance, practical reality and true nature of the relationship", the Commission will consider several factors, including: 

• The amount of control over how work is performed;
• Financial responsibility and risk;
• Who supplies the tools and equipment;
• Ability to delegate or subcontract work;
• Hours of work; and
• Expectation of work continuing. 

Under the whole-of-relationship test, independent contractor misclassification claims are more likely under the FW Act. A finding of misclassification will result in the misclassified worker being entitled to the rights and benefits afforded to employees. It also opens up new avenues for the worker to pursue claims of unfair dismissal and adverse action taken for a prohibited reason under the FW Act.  

The misrepresentation of an employment arrangement as an independent contractor arrangement is known in Australia as "sham contracting". Businesses that engage in sham contracting can receive financial penalties. To defend a sham contracting claim, an employer must prove that, at the time the representation was made, it reasonably believed the worker was engaged properly as an independent contractor. 

However, employers should also note that the amendments do not apply to the assessment of an employment relationship for pay-as-you-go, or PAYG, tax withholding or superannuation guarantee. There are different tests for these purposes, which must be considered in addition to the test under the FW Act. 

The "Opt-Out" Exception 

Under section 15AB of the amended FW Act, eligible independent contractors may opt out of the application of the whole-of-relationship test, meaning the independent contractor waives his or her right to be deemed an employee under the test, and any accompanying benefits and entitlements, for the duration of the relationship.  

The opt-out exception applies only to independent contractors who are engaged as individuals (rather than through a body corporate) and whose earnings for work performed under the contract for services will exceed a high-income threshold at the time the opt-out notice is given. Until 1 July 2025, the high-income threshold is AU$175,000. This amount is set by the Fair Work Regulations 2009 (Cth) and will be adjusted annually every 1 July. 

However, a worker may revoke his or her opt-out notice at any time by providing the business with a written revocation notice. If this happens, the whole-of-relationship test will apply to their engagement from the date the revocation notice is given onward. Once a revocation notice is provided, no further opt-out notice can later be provided. Accordingly, the benefits of the opt-out exception may only be temporary.  

Notwithstanding a worker's ability to retract the opt-out notice, a business that engages an individual as an independent contractor for fees that exceed the high-income threshold should memorialise the parties' intentions by including a provision in the written agreement whereby the independent contractor opts out of the application of the whole-of-relationship test from the commencement of the relationship. Given that a request to be engaged as an independent contractor at this level of remuneration often is made by a worker because doing so is in the worker's best interests, the inclusion of an opt-out provision should not be controversial.