Weighing Up the Factors

Understanding the New Employee Definition Under the Fair Work Act

The Fair Work Act is changing. From 26 August 2024, there will be new definitions for “employee” and “employer.” This guide will help you understand these changes and what they mean for your business.

Factors Indicating Employment vs. Contractor Relationship

Weighing Up the Factors

• Balancing Act: To determine if a worker is an employee or an independent contractor, balance all the factors. The goal is to see if the relationship reflects that of an employee/employer or a contractor.
• Entrepreneurial Independence: Consider if the worker is an entrepreneur who owns and operates their own business. Do they represent their own business in their work?
• Guiding Questions: If the answer to these questions is yes, the worker is likely an independent contractor. If no, they are likely an employee.

Understanding whether a worker is an employee or an independent contractor is crucial for compliance with legislation.

Written terms of a contract are paramount. However, the practical application and conduct of the parties also play a significant role in determining the true nature of the relationship​. One of the main factors is the level of control the business has over the worker. Employees typically have their work controlled by the employer, including how, when, and where the work is performed. Independent contractors, on the other hand, generally have more freedom to decide how to complete their tasks​

Employees usually use tools and equipment provided by the employer. In contrast, independent contractors supply their own tools and equipment, which supports their status as running an independent busines

How a worker is paid is another crucial factor. Employees are often paid a salary or hourly wage with tax deducted by the employer. Independent contractors issue invoices for their services and are responsible for managing their own tax obligations​

Employees are not typically liable for the financial risks of their work, whereas independent contractors bear the risks and benefits of their business operations. They are responsible for rectifying faulty work at their own expense​

While the written contract is important, how the parties operate in practice is equally significant. Courts will look at the totality of the relationship, including:

• Consistency of Service: Regular, ongoing work often indicates an employment relationship. Conversely, work performed on an ‘as-needed’ basis suggests a contractor arrangement.
• Supervision: Employees are generally subject to supervision and direction from the company, whereas contractors work independently.
• Presentation: Whether the worker presents as part of the company or operates under their own business identity is also a key indicator​ 

Areas to focus on

• terms of the contract and the degree of control exerted by the employer, determining that the worker was an employee.
• do they operated their own businesses, bare financial risks, and had significant control over their work​

Potential Risks and Next Steps

• Misclassification Risks: If you misclassify workers, they might claim backpay for entitlements. Reckless or knowing misclassification can lead to penalties for sham contracting.
• Backpay Claims: Misclassified employees may claim backpay for leave, overtime, and superannuation since 27 February 2024.
• Penalties: There are penalties under the Fair Work Act for engaging in sham contracting.

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