The Difference between Contractors & Employees: What the new Independent Contractor Changes Mean for Businesses
Our friends at Parkston Lawyers provide some great guidance for business owners!
The difference between contractors and employees is an essential distinction that businesses must understand, influencing everything from tax obligations to employment rights and operational strategies.
On August 26, 2024, significant changes to the classification of independent contractors took effect. These new regulations are designed to protect workers from misclassification and ensure they receive appropriate benefits. For businesses, this means reassessing workforce classifications and potentially adjusting practices to comply with the updated rules.
What’s new as of August 26, 2024?
As of August 26, 2024, businesses need to use specific tests to determine whether a worker is a contractor or an employee. The appropriate test depends on when the working relationship began, and the type of business involved.
1. Start of relationship test (before August 26, 2024):
This test is used to assess the worker’s status at the beginning of the relationship, based on what the parties agreed to, usually as outlined in a contract. The contract can be written, verbal, or a mix of both. Any changes to the contract over time are also considered in this assessment.
2. Whole of relationship test (from August 26, 2024):
The whole of relationship test considers the practical reality of the working relationship, including how the contract is performed in practice. It looks beyond simply the contract terms to assess the real substance and true nature of the relationship.
The whole of relationship test
The whole of relationship test, effective from August 26, 2024, requires businesses to examine the entire relationship between the worker and the business. This includes the degree of control the business has over the worker, who bears the financial risk, who supplies the tools and equipment, and whether the worker can delegate or subcontract work.
This test applies to constitutionally covered businesses for work performed from August 26, 2024 onwards. If the working relationship or the manner in which work is performed has changed since the start of the relationship, businesses need to reassess the worker’s classification under this new test.
For example, if a contractor was originally hired with a high degree of autonomy but over time has come under more direct control of the business, the nature of the relationship may have shifted, making them more likely to be classified as an employee under the whole of relationship test.
For those workers who earn more than the contractor high income threshold, they can opt out of using the whole of relationship test by notifying the business for whom they perform work in writing, and they can instead use the start of relationship test (discussed below). From 1 July 2024, the contractor high income threshold is $175,000.
The start of relationship test
For work performed before August 26, 2024, the start of relationship test is used. This test evaluates the worker’s classification based on the original agreement between the parties. It remains relevant for certain businesses and situations even after August 26, 2024.
State referred national system businesses, such as sole traders and partnerships in states like New South Wales and Victoria, will continue to use the start of relationship test. Additionally, constitutionally covered businesses may still use this test for work performed before the changes took effect or if the worker has opted out of the whole of relationship test.
Sham contracting
Sham contracting involves misrepresenting an employment relationship as a contracting arrangement, which is illegal and can result in significant penalties. Businesses must ensure their contracting arrangements are genuine and comply with the law. If there’s uncertainty about a worker’s classification, seeking legal advice is advisable to avoid potential issues.
Regulated workers
Certain contractors are classified as regulated workers and are subject to additional rules and protections. Regulated workers include those in specific industries, such as digital platform workers or road transport contractors. These workers may have entitlements that are more similar to employees than traditional contractors.
For example, employee-like workers doing digital platform work may have certain protections related to pay rates, work conditions, and safety standards. Businesses engaging regulated workers need to be aware of these additional obligations to ensure compliance.
Entitlements and support
Contractors generally do not receive the same entitlements as employees, such as paid leave, superannuation, or unfair dismissal protections. However, regulated workers and certain contractors in specific industries may have additional entitlements.
Businesses engaging contractors should ensure they provide the necessary support and meet any legal obligations related to the worker’s classification. This includes clear communication about the nature of the working relationship and ensuring that contracts are up to date and reflect the reality of how work is performed.
Conclusion
The August 26, 2024, changes require businesses to properly classify their workers. By understanding the differences between contractors and employees and applying the right tests, businesses can ensure compliance and avoid legal pitfalls.
As these changes impact the business landscape, at Parkston lawyers we assist clients with advising on these changes and reviewing contracts, ensuring they meet the new regulations. By doing so, our clients can navigate this transition smoothly and continue to operate successfully.
Article written by Linda Di Trocchio at Parkston Lawyers.
Our team at Highview have worked closely with Linda and the team at Parkston Lawyers for over 10 years. She is a Highview Trusted Specialist that we refer our clients to with confidence.
For further information, contact Linda via email: linda@parkstonlaw.com.au or phone: 9989 0912