Determining whether an individual is classified as an employee or contractor holds significant implications for all parties involved. The distinction delineates the rights, entitlements, and responsibilities each bear within the scope of their engagement.
Why is this distinction important?
The question of whether someone is an employee or contractor is an important one, as it dictates the entitlements and protections afforded to individuals under the law. Employees enjoy various rights, including access to leave entitlements and greater protections under the Fair Work Act 2009 (Cth). These protections include protection against adverse action and protection from unfair dismissal.
Conversely, someone classified as an independent contractor would not be entitled to benefits such as leave entitlements, superannuation contributions and the security that comes with being an employee. This is because they operate as a separate entity running their own business, and are not a member of the business they are doing work for.
In essence, employees work in and are part of your business, while independent contractors provide services to your business.
The test for whether someone is an employee or contractor.
In recent cases, the High Court of Australia emphasised the importance of the terms of a contract when determining whether a worker is classified as an employee or independent contractor. A contracts terms were essential to determine whether a worker is an employee or independent contractor. This would be different if the contract was subject to any allegations of sham or variation.
However, with the enactment of the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024, this has changed. The assessment has now shifted towards evaluating the substantive nature of the relationship between the individual and the employer. According to the new definition in section 15AA, “employment” is defined by the real substance, practical reality, and true nature of the relationship between an individual who may be an employee and a person who may be an employer. This reflected a departure from the High Court’s test outlined above (which prioritised written contracts).
Section 15AA of the amended legislation underscores the importance of assessing the genuine dynamics of the relationship beyond contractual terms. This departure from the previous emphasis on written contracts allows for a more holistic evaluation post-contract formation.
What factors can we consider?
The Section 15AA amendment effectively reinstates the ‘multifactorial’ approach set out in Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1 and Hollis v Vabu [2001] FCA 44. This draws the employer’s attention to various factors a court will consider in discerning employment status. While not exhaustive, some factors include:
- the degree of control exerted by the business over the worker;
- whether the worker is provided with tools and equipment, or whether they are required to procure their own;
- whether uniforms are required to be worn;
- whether the worker is entitled to be paid annual leave or personal carer’s leave;
- whether the worker is permitted to delegate or subcontract work;
- whether the worker receives payment of a salary, or whether they are compensated after the completion of a specific task;
Notwithstanding the above, courts have continually observed that there is no definitive list of factors to consider and note that the significance of these factors varies case by case.
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