Uncertain identity - the quagmire for business and workers

A key driver for business, the economy and workers, is having certainty of the operating environment in which all parties engage. Uncertainty inhibits informed decisions, thwarts investment and exposes all parties to the risk of unexpected costs and outcomes.

The recent High Court of Australia decisions in CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2 provided workers and businesses greater certainty as to their status as employees or independent contractors, based on the terms of their contract. As the Court, conscious of its responsibilities, said:

It is the task of the courts to promote certainty with respect to a relationship of such fundamental importance. 

The High Court held that where the parties freely commit the terms of their relationship wholly in writing, then the contract is solely used to determine the status of their relationship.

Yet, with the passing of the Fair Work Legislation Amendment (Closing Loopholes No 2) Act 2024, in about six months time that certainty will be eroded. We will be returning to a state of affairs that the High Court said was an incorrect application of the law.

In this bulletin, we examine the changes made to the Fair Work Act 2009 (Cth) by the Closing Loopholes No 2 Act and the implications for business and workers.

The changes

For the first time, the FW Act will contain provisions setting out how the parties, a Court and the Fair Work Commission, will determine the nature of a working relationship.

The new section 15AA inserted by the Closing Loopholes No 2 Act will provide:

For the purposes of this Act, whether an individual is an employee of a person within the ordinary meaning of that expression, or whether a person is an employer of an individual within the ordinary meaning of that expression, is to be determined by ascertaining the real substance, practical reality, and true nature of the relationship between the individual and the person.

The above is some unusual Parliamentary drafting. It remains to be determined whether references to the ‘real substance’, ‘practical reality’ and ‘true nature of the relationship’, embody individual tests or are one collective idea. We suspect it is a collective concept.

The overuse of language calls into play the approach of the Courts prior to the recent High Court decisions. It had been the approach of the Courts for many decades to examine not only the contract to determine whether the relationship was employment or not, but to look at the totality of the relationship, including how the relationship operated practically by applying a multifactorial test.

Consistent with that approach, the new section 15AA(2) says that, for the purposes of ascertaining the real substance, practical reality, and true nature of the relationship:

(a) the totality of the relationship between the individual, and the person must be considered; and

(b) in considering the totality of the relationship between the individual and the person, regard must be had not only to the terms of the contract governing the relationship, but also to other factors relating to the totality of the relationship, including, but not limited to, how the contract is performed in practice.

Those provisions do not however answer the central question: whether the worker is an employee or contractor. It just means the task is more complicated and complex.

The legislation also contains some unnecessarily complex provisions permitting high income threshold individuals to elect to be a contractor and opt out of the new provisions. But consistent with the uncertainty created, these laws introduce an ability for the opt out notice to be revoked; a very unsatisfactory situation.

Implications 

The changes are made on the assumption that workers were being exploited and wrongly characterised by Courts as independent contractors. That assumption ignored the fact that:  

• in Personnel Contracting, the High Court held that the construction worker was an employee and prior to that, in the case of Hollis v Vabu Pty Ltd [2001] HCA 44, a bicycle courier was found to be an employee and not contractor

• in Jamsek the partnership that owned and operated a heavy vehicle was, consistent with long established legal precedent, an independent contractor.

The High Court was clear that contractual labels as to the nature of the relationship were not determinative of the issue, but rather that regard had to be had to all the terms of the contract having regard to the various established indicia.

The outcome of these recent High Court decisions was to strike a careful balance providing better certainty for business and workers. As the High Court astutely observed when talking about the multifactorial test:

Such a test is apt to generate considerable uncertainty, both for parties and for the courts. That uncertainty is exacerbated where it is contended that the test is to be applied in respect of the parties' conduct over the whole course of their dealings with each other.

The effect of these new legislative changes is also likely to reintroduce further disputation between worker and the business. We are likely to return to the days where both business and workers fight over their status for extra entitlements; where the only real winners are lawyers.

The reality is that determining the nature of the working relationship is a dynamic and an impressionistic process over which views can reasonably differ. As was the case prior to the recent High Court decisions, outcomes varied based on the facts in each case.

Examining the contract, and the way in which the contract and relationship operates on a day-to-day basis, can be an expensive and lengthy exercise. It might be the case that the relationship may - based on how it evolves and operates over many years - ebb in and out of being an employment and contractor relationship. Such a position is entirely unsatisfactory with no certainty of outcome.

The lack of certainty of outcome, exacerbated by these new laws, is counterintuitive. The Closing Loophole legislation is designed to ensure that employees receive their entitlements. That design is undermined by legislation that introduces uncertainty.

Perhaps the design is even more ideological and stark. It may be that the design is to compel business to simply engage workers, and especially those on the edges, as employees. That design however thwarts individual choice and entrepreneurialism.

Tips for business

It is critical that business use the next six months to undertake a wholesale review of the different relationships it has with its workers to ensure consistency with the FW Act. A failure to be compliant can lead to exposure to damages and significant penalties. Business needs to assess whether the apparent freedom of a contractor relationship outweighs the benefits of control and good faith in an employment relationship.

For workers engaged as independent contractors, it is critical that business:

• review the services contract to ensure it supports a principal and contractor relationship 

• review, in a systematic way, how the relationship operates in practice to ensure it reflects the contract and a principal and contractor relationship

• make any adjustments and pull appropriate levers to keep the balance well in favour of a contractor relationship

• train managers to ensure they engage with the workers in a manner consistent with the established arrangements and do not undermine the contractor relationship.

Engaging a worker as an independent contractor will require more careful and stringent management to avoid unintended consequences for business. If the intention is for there to be a genuine commercial ‘contract for services’ (not a personal employment ‘contract of service’) wherever possible:

• contract with a service company, partnership or other business structure; not the actual worker

• do not refer to employment concepts, such as leave or other employment policy entitlements

• structure internal communications and systems to contract manage contractors, including through different email and IT identifiers

• ensure that the focus of the relationship is on the quality and timeliness of the service outcome, not on how work must be done

• pay for services rendered in accordance with agreed service standards by way of a tax invoice.

Author: James Mattson