The Definition of Employee and Employer, and Sham Contracting

As of August 2024, significant changes are coming to the Fair Work Act with the introduction of a new definition for ‘employee’ and ‘employer’. This update is designed to provide a clearer framework for distinguishing between employees and sub-contractors, with a focus on the true nature of working relationships rather than just the terms of a contract.

Key Changes to Consider

1. Holistic Approach to Defining Relationships

The new definition will require a comprehensive assessment of the working relationship. This includes evaluating the real substance, practical reality, and true nature of the job, rather than relying solely on the written contract. This approach also applies to determining whether someone is an employer or principal for sub-contractors. To provide further information:

• Real Substance: The actual job demands beyond the formal description.
• Practical Reality: How the role functions in practice, including any unpredictable scheduling.
• True Nature: Whether the job is long-term or project-based.

2. Potential Impact

These changes may lead to different characterisations of some working relationships, which could affect the associated rights and obligations. For instance, if the actual working arrangement deviates from the contract terms, this could result in a reclassification of the employment status – that being from sub-contractor to employee and therefore employee entitlements being afforded to the person.

3. Exclusions from the New Definition

The new definition does not apply to:

• Individuals who are only part of the national workplace relations system because their state has referred powers to the Commonwealth.
• Existing laws relating to tax, superannuation, and workers' compensation, which will continue to use the previous definitions of ‘employee’ and ‘employer’.

Changes to Sham Contracting Defence

Effective 27 February 2024, the legislation has also been updated to protect against sham contracting—a practice where an employment arrangement is falsely presented as an independent (or sub) contractor arrangement. The new ‘reasonableness’ test replaces the previous ‘recklessness’ test, requiring employers to demonstrate that at the time the representation was made, they reasonably believed the worker was engaged as a sub-contractor.

Addressing Unfair Contract Terms

Sub-Contractors can now challenge unfair terms in their services contracts by applying to the Fair Work Commission. The Commission can determine if a term is unfair and order amendments or changes. However, this remedy is not available to contractors earning above the contractor high-income threshold, who may instead apply to court for a review of their contract under the Independent Contractors Act 2006.

Other considerations when engaging a sub-contractor

When engaging a sub-contractor, a plumbing business needs to consider:

1. Superannuation – if the person is providing mainly labour, they are considered an ‘employee’ for superannuation guarantee purposes.
2. Workcover – a person providing labour only, they may be considered a ‘worker’ as set out in the Workers’ Compensation and Rehabilitation Act 2003 (QLD) and therefore would need to be covered for workplace injuries/illnesses.
3. License requirements – ensuring the principal contractor has the correct license class to engage a sub-contractor.

Employers and contractors should review their contracts and practices to ensure compliance with the new definitions and rules. If you have any questions about managing workforce arrangements, please feel free to reach out to the MPAQ Advisory team for assistance at advice@mpaq.com.au or phone us on 07 3273 0800. 

Article written by Citation HR