Historically “independent contractor” arrangements have been common place in the Allied Health Industry. With the introduction of the Fair Work Act in 2009, the changes to employment legislation mean over the last decade we have seen a shift towards employment. 

Common Misconceptions:

While there can be cases where a worker is a legitimate independent contractor, it has also been common for “sham contracts” to exist where employers have incorrectly assumed their workers were contractors, for reasons such as:

• They have an ABN and invoice me so they are a contractor
• They have a contract that states they are a contractor
• They want to be a contractor so they get a “higher” $ value per treatment, rather than an employee paid a “lower” hourly rate under the Award
• It is common place in the industry, I was engaged as a contractor prior to starting my own business, so I will also engage them as a contractor

There have been several changes over the past few years, but with the Labour Government’s industrial relations policy to improve job security for workers, more change is coming from August 2024. They view independent contracting arrangements as insecure, and therefore they are one of many items included in legislative changes taking effect in 2024.

Assessing whether a worker was a contractor or employee:

Prior to 2022, the “mulit-factorial” test was applied to asses whether a worker was an employee or an independent contractor. This involved a holistic consideration of all formal and practical aspects of the working relationship, with a key consideration being control of the way work is performed.
Practically, this meant that courts would not restrict themselves to the terms of the written agreement in interpreting the nature of a relationship, but also looked at the realities of the parties’ post-contractual conduct.

In addition to control, some other key considerations included the ability for the worker to delegate work to others, whether they were paid for time or to achieve a result, whether equipment was provided for them and whether they operated their own independent business and was free to accept work with others.

Two High Court Cases that changed the approach in 2022:

The risk of independent contractors being determined as employees was reduced under the High Court decisions of Personnel Contracting and Jamsek.

The High Court moved away from the multi-factorial approach, primarily relying on the legal rights set out in a written contract. A written contract still needed to have terms distinguishing it as an independent contractor / principal relationship – simply naming a worker as a contractor was not sufficient or determinative. Central to the assessment was the extent to which the worker:

• has the authority to exercise control over how, where and when the work will be performed; and
• can be said to be running an independent enterprise, as opposed to being merely subordinate to the principal’s business.

The multi-factorial test and post contractual conduct could still be relevant if it was alleged that the contract is a ‘sham’ or if there was a lack of written agreement. Under the Fair Work Act 2009 (Cth) (FW Act), you must not:

• misrepresent an employment relationship as an independent contracting arrangement (s 357 of the FW Act);
• knowingly make a false statement to persuade or influence an employee to become an independent contractor (s 359 of the FW Act).

To succeed with a claim of sham contracting, previously it was necessary to establish that the person knowingly or recklessly engaged in the conduct.

Legislative changes taking effect in August 2024:

Fair Work Legislation Amendment (Closing Loopholes No. 2) Bill 2023 has been passed with changes to the definition of an employee and employer to take effect from August 2024.

The Fair Work Ombudsman outlines that to determine if a worker is an employee or an independent contractor, the following must be considered:

• The real substance, practical reality and true nature of the working relationship; this includes outworkers.
• All parts of the working relationship between the parties. This includes the terms of the contract and how the contract is performed in practice.

In effect, this overrides and replaces the approach adopted by the High Court in the Personnel Contracting and Jamsek decisions – which relied primarily on the written contract – and takes us back to the multi-factorial approach that applied previously.

Applying the new definition may:

• mean that some working relationships are characterised differently; and
• result in different rights and obligations for people affected.

In practice, this means that workers who are currently categorised as “independent contractors” may actually be employees when the legislative changes occur – thus exposing employers to the risk of “sham contracting” claims.

Defending a claim of sham contracting from February 2024:

The Labor Government stated the current defence is not effective at deterring sham contracting, as it was too easy for an employer to establish (the subjective defence) that they did not know the person should have been an employee and did not act recklessly.

The new (objective) defence will require employers to prove they “reasonably believed” that the worker was an independent contractor, not merely that they did not know and were not reckless in their actions.

The size and nature of the employer’s enterprise is the only mandatory consideration in how the courts will make this decision; however they may also consider “any other relevant matters”, examples of which include the following:

• the employer’s skills and experience;
• the employer’s industry;
• how long the employer has been operating;
• the presence or absence of a designated human resources team within the employer’s enterprise; and
• whether the employer sought legal or other professional advice about the proper classification of the individual and if so, acted in accordance with that advice.

Importantly, this means that if you have received advice that based on the practical reality and nature of the relationship with your worker that they should be an employee, and you ignore this and engage them as a contractor, you are unlikely to be able to defend a claim of “sham contracting”.

What about superannuation:

What about room rentals or facilities management?

Depending on how you operate your business you may wish to utilise a “facilities management agreement” to avoid the grey area of contracting.

You still need to be prepared to ensure the arrangements avoid legal risks of sham contracting, as simply calling it a facilities management does not change the actual relationship, its legitimacy depends on the totality of the circumstances of the relationship.

Where to from here?

If you currently have contractors, or are considering engaging contractors, you need to consider the definition provided by the Fair Work Ombudsman that takes effect from August 2024. This may result in:

• You offering them employment as they should be categorised as an employee; or
• You negotiating changes to their contract so that the practical reality and nature of the working relationship actually reflects that of a contractor (if this is possible in your business).

If you currently have contractors, and are concerned it is “sham contracting” you should act swiftly (don’t wait until August 2024) as the new defence to sham contracting has already commenced which could put you at risk of a claim that you are unable to defend.

If you would like to discuss offering employment to any of your existing contractors, or are seeking to hire new employees, please book in a Free 15 Minute HR Clarity Call to get started.

If you are seeking advice on retaining contractors or utilising facilities management agreements, we suggest you seek Legal Advice. Please send us an email at info@hrforhealthleaders.com.au and we’ll be happy to share some recommendations with you.