The long awaited new ‘contractor high income threshold’ has today been set at $175,000 under the new Fair Work Amendment (Contractor High Income Threshold) Regulations 2024.
This new threshold, which aligns with the existing employee high income threshold figure, is critical in understanding the practical effect of the Closing Loopholes No 2 reforms. The new threshold will be relevant to determine who is an employee and who is a contractor, which contractors can exercise new Fair Work ‘unfair dismissal’ rights as well as which contractors can challenge ‘unfair’ contractual terms.
In this article, we will provide an overview of the significance and implications of the new ‘contractor high income threshold’ for the evolving legal landscape surrounding the relationships between businesses, employers, and contractors. We will also provide a summary of what these changes mean for employers in the lead up to the 26 August 2024 and beyond.
In the coming days we will explore each the following impacts in greater detail:
- Opting out of the new ‘employee’ definition
- Independent contractors’ right to contest unfair terms
- Unfair termination and deactivations
1. Opting Out of the New ‘Employee’ Definition
Starting 26 August 2024, the new statutory test of what it means to be an ‘employee’ under section 15AA of the Fair Work Act will take effect. This new test will require an assessment of the ‘real substance, practical reality and true nature’ of a work engagement.
Alongside the introduction of the new ‘employee’ definition, the Closing Loopholes No.2 Act also introduced a new ‘opt out’ mechanism for workers who earn above the ‘contractor high income threshold’. Workers who earn above this threshold, set at $175,000, can either voluntarily or after being notified by a business, choose to “opt out” of being covered by the new definition of ‘employee’ under section 15AA of the Fair Work Act. They can do this even where the ‘real substance, practical reality and true nature’ of their engagement is that of an employee.
If a such a worker elects to ‘opt out’, the new statutory definition of ‘employee’ under section 15AA will not apply to them from the day the notice is given. This means that the determination of whether they are a contractor or employee will revert to the current common law test, as set down by the High Court in Personnel Contracting and Jamsek, a question usually resolved by reference to their written contract. A worker can also revoke an opt out notice at any time by giving written notice.
The practical effect of this change means that workers who:
1) are currently engaged as contractors; and
2) who earn over the contractor high income threshold
can choose to remain as contractors, notwithstanding the changes to the Fair Work Act.
For many businesses, this will be an attractive option as it will mean they can continue to classify a relationship as one of business and independent contractor with a degree of certainty, thereby avoiding the considerable headache of potential breaches of employment laws, unpaid employment entitlements and dismissal rights. Experience suggests that high earning contractors will also have an interest in retaining their contractor status, presumably on financial grounds.
2. Independent contractors’ right to contest unfair terms
As a result of the Closing Loopholes changes, from 26 August 2024, contractors who earn below $175,000 will be able to bring a dispute in the Commission about terms in their service contracts related to workplace relations matters where they believe a term is ‘unfair’.
If the Commission is satisfied that a service contract contains an ‘unfair term’ they will be able to make orders to set aside all or part of the contract or amend or vary all or part of the contract. Such orders could conceivably be made about how contractors are paid, how they can be terminated and the manner in which they provide services.
Independent contractors earning above $175,000 will remain subject to the Independent Contractors Act 2006, through the courts.
3. Unfair Termination and Unfair Deactivations - A New dawn for Unfair Dismissals?
From 26 August 2024 two new ‘unfair dismissal’ jurisdictions will be established for contractors; covering gig workers who are ‘unfairly deactivated’ and road transport contractors who have their contracts ‘unfairly terminated’.
In order to be eligible to access these two new jurisdictions, contractors (either gig workers or road transport contractors) will need to earn less than the ‘contractor high income threshold’ of $175,000.
Significantly, particularly for road transport contractors, in determining who can bring a ‘contractor dismissal’ claim, there is no requirement to assess the actual costs incurred by a contractor in providing their services. This means that road transport contractors who operate large vehicles and who earn more that $175,000 will not have access to an unfair termination claim, regardless of the fact that these operators may spend a significant proportion of their earnings in operating and maintaining their large vehicle.
Smaller vehicle operators earning less than $175,000 will now have an ‘unfair termination’ route, while the majority of gig-workers will be able to pursue an ‘unfair deactivation’ claim.
What this all means for business?
Review your Contractor Arrangements: Where the payment to a contractor exceeds $175,000, consider the opt out system to minimise risk.
Notify Contractors of ability to ‘opt out’: Notify in writing contractors whose earnings for work performed under the relationship exceeds $175,000 that they can ‘opt out’.
Assess contractor status: For any contractors who do not respond with an opt-out notice, consider their status under the new statutory ‘employee’ definition and if necessary, transition these workers to an employment contract.
Revocation Process: Establish a processes to quickly respond to any contractors who revoke their ‘opt out’ notices in the future.
Contract Review: Examine service contract terms for unfairness and take proactive steps to ensure any unfair terms have been deleted or amended. A traditional outlook that one-sided or unfair contractual clauses are enforceable and risk-free simply because ‘the other side agreed to it’ is now likely high risk for many contracts.
Industry specific measures: Businesses in the gig and road transport industry who engage contractors who earn below $175,000, subject to receiving further detail about the Codes, should prepare for the new termination protections by putting in place steps (similar to those an employer takes prior to terminating an employee’s employment who is covered by unfair dismissal laws) prior to termination.
If you require any specific assistance in relation to the new contract high income threshold, including with issuing notifications to employees who earn over the threshold, our team is available to assist. Please contact us at info@ablawyers.com for tailored advice and support.
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