In 2022, the High Court decided that the terms of a written contract will determine whether a person is an employee or a contractor in two landmark cases. In Personnel Contracting¹ and Jamsek², which we have previously discussed, a majority of the High Court held that where a comprehensive written agreement exists, the question of whether an individual is an employee is determined with reference to the rights and obligations found in the terms of that contract, unless the contract was not entirely in writing, created confusion or was a sham contract.

With these decisions the High Court effectively overturned the previously accepted multifactorial test³, which until that point had been applied consistently by Australian courts and tribunals. This previous approach broadly involved the assessment of the ‘totality of the relationship’ by considering the post-contractual conduct of the parties. No single criteria was decisive and the test evolved over time to include, for example, the degree of control and authority over work.

The High Court’s decisions in Personnel Contracting and Jamsek clarified the written contract was the key factor in determining employee or contractor status. Most employers welcomed these decisions, which meant clearly defined employment contracts or contractor agreements could provide certainty for all parties.

However, the situation may now change again as the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023 seeks to insert an interpretative principle that would, in effect, reinstate the multifactorial test.

The Closing Loopholes Bill

According to the Closing Loopholes Bill’s Explanatory Memorandum, the proposed amendments are aimed at enhancing fairness so that the ordinary meanings of ‘employee’ and ‘employer’ are determined by reference to the “real substance, practical reality and true nature of the relationship with reference to the totality of the relationship between the parties”. This requires considering:

• the totality of the relationship between the parties
• the terms of the contract governing the relationship, and
• the manner of performance of the contract.

In most work relationships, the question of an individual’s employment status is not controversial. Where this is the case, the amendments are intended to have little or no impact. If the question of an individual’s work status does arise, the proposed amendments will ensure that a fairer test applies in characterising the relationship. By doing so, the amendments aim to close the ‘loopholes’ for vulnerable workers who have low bargaining power, do not legitimately run their own business, or who operate in the grey area between employee and independent contractor status.

Importantly, while the terms of the written contract between the parties will be a relevant factor, the contract will no longer be determinative as was the case in Personnel Contracting and Jamsek, especially where it does not reflect the real nature of the working relationship.

By considering the true nature of the relationship, the proposed provision – Section 15AA under the Fair Work Act 2009 (Cth) – will ensure that disguised employments, which seek to evade or weaken the legal obligations of an employment relationship, are legally ineffective. Interestingly, a legislative note asserts that proposed section 15AA was introduced directly in response to Personnel Contracting and Jamsek.

It is also worth noting the proposed changes will not affect the meaning of the terms ‘employee’ and ‘employer’ as used in other Commonwealth legislation, such as superannuation, income tax and workers’ compensation.

Implications for employers, principals and their insurers

The proposed amendments effectively facilitate a return to the multifactorial approach that was used by courts and tribunals before the High Court’s decisions in Personnel Contracting and Jamsek. This change, if enacted, will result in an arguably fairer test for determining whether a person is an employee or an independent contractor.

As the proposed approach will consider written agreements between the parties, as well as take a broader view of the totality of the working relationship, it is important to ensure that contractor agreements accurately reflect the intention and scope of the parties’ relationship to avoid future claims being made for employee-like entitlements.

These agreements should:

• reflect the independent contractor’s authority to exercise control over the performance of their work, including how, when and where the work will be performed
• establish that the contractor is running their own independent business, which is separate and distinct to the principal’s and is not a subordinate of the principal’s business – this can be done by expressly acknowledging that fact in writing and permitting the contractor to work for others, and
• confirm that any variations or waivers must be approved and agreed to in writing, and that the contract reflects the entire agreement between the parties.

It will also be important for principals to allow contractors to:

• generate their own goodwill and have ownership over the intellectual property they create
• have their own clients and not be subject to any exclusivity or restraint to the principal
• market their services to potential clients as part of their own business
• have an unfettered contractual right to subcontract, assign or delegate their services or obligations under the contract, ideally without prior approval of the principal’s business, and
• exercise control over how, where and when the work is done.