As part of the Closing Loopholes No 2 Act, the federal government introduced a number of changes regarding how businesses interact with contractors. An important part of these changes was the new definition of ‘employee’ and ‘employer’.
To determine whether a person in an employee or a contractor, it will no longer be sufficient to simply look at the contract but rather employers must ‘ascertain the real substance, practical reality and true nature of the relationship’ to determine whether there is an employment relationship or a contractor relationship. The legislation introduced some exceptions to the application of the new definition, namely a new ‘opt out’ mechanism for workers who earn above a newly proposed contractor high income threshold.
The Fair Work Commission has now determined that the new contractor high income threshold is to be set at $175,000. If a worker earns over $175,000, the worker can chose to “opt out” of the new definition of ‘employee’ and elect for it not to apply, this is even where the ‘real substance, practical reality and true nature’ of the employees engagement is that they are an employee.
If opting out, a worker will need to provide an ‘opt out’ notice, and be able to substantiate that their ‘earnings’ for work performed under the engagement exceed $175,000. Importantly, the $175,000 cannot be calculated as a collective between different businesses the worker may perform work for, it must be solely between the worker and the one business in question.
Unfortunately, the Fair Work Commission has not clearly defined in the legislation that the $175,000 must be annual earnings, however based on our interpretation and the intent of the legislation, it is likely that the $175,000 is intended to be an annual threshold and not a cumulative one.
Should a worker elect to “opt out”, the test to determine whether or not they are a contractor or employee will revert back to the current common law test which indicates that it is the written contract that defines the nature of the engagement.
What does this mean for employers?
In simple terms, a worker who:
Can from 26 August 2024, elect to remain a contractor rather than be classified as an employee under the new changes to the Fair Work Act.
There are two ways for a worker to ‘opt out’ of the new definition. This is either worker-initiated or business initiated. If a worker is voluntarily opting out, they must provide notice to a business on their own initiative. If the business is initiating the “opt-out”, they must notify workers whose earnings are over $175,000 of their options to “opt-out”, giving them 21 days to respond. Businesses should be aware that a worker may at any time revoke their “opt-out” decision by issuing a revocation notice.
What do employers need to do:
These new obligations are effective from 26 August 2024. Businesses need to carefully review their employee and contractor arrangements and understand the obligations under the new ‘opt-out’ option. There are many obligations on both the business and the worker should opting-out of the new definition be a consideration. Both businesses and workers have obligations around what must be contained in a ‘opt-out’ notice and timeframes must be met.
How We Can Help:
The new definition of ‘employee’ vs ‘contractor’ is complicated, along with the new ‘opt-in’ regulations and you can’t afford to get it wrong! SABC’s team of Consultants are experts in industrial relations and can work with you to conduct a review of your current employees and contractors, explain in detail your obligations under these new changes and assist you with drafting ’opt-in’ notices ensuring your compliance with the legislation.
Our team or Workplace Advisors are also on standby to provide you with advice on the Closing Loopholes legislation.
Contact our Business Advice Hotline on (08) 8300 0000 (select option 1) and we will make sure you are ensuring your compliance.
