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The landscape in which businesses could confidently engage parts of their workforce under independent contractor agreements has changed markedly over the past 3 years, with increasing scrutiny of independent contractor arrangements from the Fair Work Ombudsman and the Australian Tax Office. In response, we’ve seen an uptick in uncertainty and, understandably, concern about the potential for workers who were engaged as independent contractors to ultimately be considered as employees at law.
What’s changed?
Over the past few years, the test applied to determine whether a worker is an employee or an independent contractor has been subject to change. Traditionally, an approach called the multi-factorial approach was adopted, which involved an assessment of the totality of a working relationship. Factors (known as indicia) such as control, integration, financial risk, independence, and ability to delegate or subcontract were all things commonly considered in determining a worker’s classification.
In 2021, in its decision of WorkPac Pty Ltd v Rossato [2021] HCA 23, the High Court of Australia upheld the validity of engaging workers as casual employees on the basis of written contractual terms, even if a working relationship in practice suggested that an employee should have been a permanent employee because of a firm advance commitment to continuing and definite work. This aligned with the then-Morrison government’s legislative amendments in 2021, which sought to define casual employment by reference to any terms agreed at the outset (i.e. placing emphasis on the written contract rather than the actual conduct of the parties).
This focus on contractual terms as decisive set the stage for two major decisions of the High Court in February 2022: 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. In these, the High Court determined that any written agreement should also have weight in respect of the employee-contractor distinction. The High Court said that if parties had entered into a lawful written agreement, the terms of that agreement were particularly significant in determining the nature of the worker’s engagement. Primacy was awarded to written contracts, limiting the relevance of post-contractual conduct and the multi-factorial approach – a result likely to favour a business’s position, by emphasising the businesses’ rights and duties’ written into the contract over the practical reality experienced by a worker. However, the High Court left the door open for some uncertainty, being willing to decide on a worker’s status by reference to contractual terms only if the contract was recorded in writing, was clear and had not been varied or challenged for invalidity.
In August 2024, in response to Personnel Contracting and Jamsek, the Albanese government amended the Fair Work Act 2009 (Cth) to include a different statutory test to determine whether a worker is an employee or contractor. The test was introduced under section 15AA of the Act, requiring an assessment of the "real substance, practical reality and true nature of the relationship". This means that the test Australian courts and regulators now apply reflects the multi-factorial approach rather than the High Court’s contract-centric guidance – in effect, reinstating the test that was in place pre-2022. This was an unsurprising move by a Labor government which made no secret of its interest in regulating the gig economy, decasualising the workforce and increasing job security for workers.
The risks of a misclassification?
In the event of a successful misclassification claim by a worker, a business may be exposed to liability in respect of unpaid superannuation, leave entitlements and payroll tax, as well as penalties under the Act and/or superannuation legislation. Liability to cover the worker’s legal costs for bringing a successful claim may also arise.
Only last month, an IT specialist engaged by Energy Action as an independent contractor was held to have been an employee for 14 of his 15 years with the company, with the Federal Court of Australia valuing his leave entitlements alone at more than $100,000 – see Cropper v Energy Action (Australia) Pty Ltd (No 2) [2025] FCA 663. This demonstrates why it is more important than ever for businesses to ensure alignment between their independent contractor’s terms of engagement and the practical reality of how they work, both from the outset of engagement and throughout.
While the multi-factorial test is ultimately one of overall impression, key factors that will be more indicative of an employment relationship rather than a principal-independent contractor relationship (i.e. big red flags) include:
· Exercising a high degree of control and direction over the worker as to how, when and where work is performed;
· Requiring the worker’s personal performance of work, and preventing them from delegating or subcontracting work;
· Paying the worker a fixed, regular amount referable to the time they spend rather than on a results or milestone-basis;
· Imposing an obligation of exclusivity which prevents or limits the worker’s ability to undertake other concurrent work;
· Providing the worker with business-owned equipment, such as a laptop or mobile phone; and
· Paying the worker superannuation, deducting tax from their fees, and/or affording them paid leave entitlements.
This is a good starting point for an assessment of your business’s level of risk, though the list is not exhaustive and the weight ascribed to each indicium will vary on a case-by-case basis.
Are contractor agreements a thing of the past?
The new section 15AA of the Act is not fatal for independent contracting and businesses can continue to engage independent contractors, but it needs to be done mindfully. We recommend seeking advice appropriate to your businesses’ individual circumstances. Some options which could be considered include:
Using an appropriate independent contractor agreement, ensuring it does not contain terms consistent with an employment arrangement (e.g. a requirement for certain hours of work). It should be a document distinct and separate from any employment contract template.
Ensuring that the relationship in practice reflects the terms of the written agreement, actively reviewing and monitoring the engagement and the worker’s relationship with your business on a continuing basis (i.e. don’t ‘set and forget’). If the worker appears to be working as an employee, either employ them or alter the arrangement to be arm’s-length.
Contract with an incorporated entity rather than an individual in their personal capacity. An individual having an ABN will not necessarily be determinative in the event of a claim.
If your independent contractors earn over the high-income threshold (currently $183,100), consider discussing the possibility of an opt-out notice with them pursuant to section 15AB of the Act. We note that this alone is unlikely to be a sufficient safeguard as an opt-out notice can be withdrawn.
If your business cannot take the steps set out above, engaging independent contractors as casual employees is an alternative worth considering to avoid any risk arising under section 15AA of the Act.
If you engage independent contractors and you haven’t reviewed their contracts and working arrangements lately, now is the time.
Contact Amy or Emma if you’d like more information or need assistance.