Navigating the New Workplace Laws: How Employers Can Prepare for Changes in Contractor and Employee Classifications

by Jun 5, 2024All Posts, Human Resources


From August 26th, 2023, Australia will implement significant new regulations that further define the distinction between contractors and employees. For employers, understanding these changes is crucial as they will impact how you classify and manage your workforce. Paul Dugan, principal at DMAW Lawyers, offers valuable insights into these upcoming changes and provides guidance on how employers can ensure compliance and minimise risks.

Understanding the New Regulations

The upcoming regulations are part of the second tranche of the Fair Work Legislation Amendment (Closing Loopholes No. 2) Bill 2023. This legislation aims to clarify the criteria for determining whether a person is classified as a contractor or an employee. According to Dugan, the new laws will require looking beyond the terms of the contract to the actual nature of the working relationship.

“The legislation will expressly say that, in determining whether a person is an employee, it’s necessary to look at the practical reality and the true nature of the relationship,” Dugan explains. This means employers must not only consider the contractual agreement but also how the contract is executed in practice.

Key Considerations for Employers:

Right of Delegation

One critical factor in determining contractor status is the right of delegation. This means that if a person can subcontract the work to someone else, they are more likely to be considered a contractor.

“It’s a key consideration of employment that you personally have to do the work and you can’t get someone else to do it for you,” Dugan elaborates. Ensuring that your contracts reflect this aspect can help in correctly classifying workers as contractors.

Opt-Out Notices

Under the new regulations, contractors earning above a certain threshold—yet to be determined—can provide an ‘opt-out’ notice to the business, indicating that the new rules will not apply to them. However, this opt-out can be revoked at any time, which would then bring the relationship under the new definitions.

Minimising Financial Risks

Employers face significant financial risks if individuals classified as contractors are later found to be employees. This could result in liabilities for backpay, annual leave, award rates, and penalty rates. Dugan warns that the financial implications could be severe if multiple contractors make such claims.

“You might find that that $30,000 that you might have to end up paying to contractor A who’s found to be an employee, then turns into a claim by hundreds of contractors,” Dugan says. “And therefore a claim for millions of dollars for those back pay entitlements.”

Steps to Prepare:

Review Contracts
Carefully examine your current contracts to ensure they accurately reflect the nature of the working relationship. Consider factors like the right of delegation and other criteria that distinguish contractors from employees. Ensuring your contracts are fit-for-purpose and accurately describe the relationship is essential.

Seek Legal Advice

Navigating these changes effectively requires competent legal advice. Legal counsel can provide guidance on whether your current contractor arrangements comply with the new regulations. Having a legal expert review your contracts can help in making necessary adjustments and ensuring compliance.

Evaluate Administrative Practices

It’s not just about what’s written in the contract; it’s also about how the contract is administered. Ensure that the day-to-day operations align with the contractual terms. Any discrepancies between the contract and practice can lead to legal challenges. Regularly reviewing and updating your administrative practices to match contractual obligations is crucial.

Legal Defense Against Sham Contracting

One of the critical defenses against allegations of sham contracting is demonstrating a reasonable belief that the engagement was genuinely as a contractor. Seeking legal advice can support this defense. “If the person reasonably believed that they were engaging someone as a contractor, then they can’t be prosecuted,” Dugan explains. Legal advice can serve as a strong factor in defending against claims of sham contracting.

With the new workplace laws coming into effect in August, it’s essential for employers to proactively review and adjust their contractor arrangements. By understanding the practical realities of these relationships and seeking appropriate legal advice, businesses can better prepare for the changes and minimise potential financial risks. Stay informed, ensure your contracts and practices align with the new regulations, and take steps now to protect your business and maintain compliance.

Final Thoughts

Adapting to these changes requires a proactive approach. Employers should take this opportunity to thoroughly review their workforce arrangements and ensure they are well-prepared for the new regulations. By doing so, you can safeguard your business against potential legal and financial repercussions, ensuring a smooth transition into the new regulatory landscape.

By addressing these elements comprehensively, you can navigate the complexities of the new workplace laws with confidence and maintain a compliant, productive work environment.

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