The government has now introduced the Fair Work Amendment (Contractor High Income Threshold) Regulation which sets the new contractor high income threshold.
This update will deal with the impact that this threshold has on the new “opt out” mechanism for employees who earn over $175,000 and how ‘opting out’ works in practice.
1. Overview of the ‘opt out’ mechanism
Under a new “opt out” mechanism introduced by the Closing Loopholes No 2 Act, workers who earn above $175,000 (the new contractor high-income threshold) will have the option to “opt out” of the definition of “
employee” under section 15AA of the Fair Work Act, when it commences on 26 August 2024.
This new employee definition will require an assessment of the ‘
real substance, practical reality and true nature’ of a work engagement to determine whether it is an employment engagement or that of a contractor. The totality of the relationship between a worker and a business must be considered, including both the contractual terms as well as how the contract is performed in practice.
If a worker earns over $175,000, the worker can choose to “opt out” of the new definition of ‘employee’ and it will not apply, even where the ‘
real substance, practical reality and true nature’ of their engagement is that they are an employee.
Where a worker elects to ‘opt out’, the test to determine 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.
Practically speaking this means a worker:
- who is engaged as a contractor; and
- who earns over the $175,000 (the new high income threshold)
can from 26 August 2024
choose to remain a contractor, notwithstanding the changes to the Fair Work Act.
This is likely to be an appealing option for many businesses as it will likely provide greater certainty and less risk that a contractor engaged may be captured by the definition of ‘employee’ now or sometime into the future, raising issues of outstanding entitlements and termination rights. Additionally highly paid contractors will be able to keep their independence, flexibility, and financial arrangements.
2. Earning over $175,000
For a worker to be eligible to provide an ‘opt out’ notice, their ‘
earnings’ for work performed under the relationship with the business engaging them, must exceed $175,000. This threshold must be met for each separate business a worker is engaged to work for (i.e. it is not a collective total of what a worker might earn from multiple businesses).
Interestingly, the legislation and regulation giving rise to the ‘opt out’ process does not identify with any particular clarity that the $175,000 earnings threshold is an ‘annual’ amount. Based on our understanding of the intent of the drafters, and the likely practical application of the opt-out mechanism, businesses should assume that the $175,000 threshold is an annual threshold (and not a cumulative one). This means that the opt-out mechanism will be available to workers on what is in effect ‘salary’ above $175,000.
For the purpose of determining which payments are included, when assessing whether a workers income exceed $175,000, section 322 of the Fair Work Act sets out what is including in an employee’s ‘earnings’ as follows:
| 'Earnings include |
'Earnings' do not include |
|
|
- payments the amount of which cannot be determined in advanced
|
- amounts applied or dealt with in any way on an employee behalf
|
|
- the agreed money value of non-monetary benefits
|
- contributions to superannuation
|
- any other amounts or benefits prescribed by regulation
|
- amounts presecribed by regulation
|
3. The ‘Opting Out’ process and requirements
There are two ways in which a worker ‘opting out’ can occur:
- Worker-initiated Opt-Out: Workers can voluntarily provide an ‘opt out’ notice to a business on their own initiative.
- Business-Initiated Op-Out: Business can notify workers earning over $175,000 of their option to opt out, giving them 21 days to respond.
If a business decides to notify a worker about ‘opting out’ it must state that:
- due to the commencement of the new definition under section 15AA, the relationship may become one in which the worker may be considered an employee of the business instead of a contractor; and
- that the worker may give the business a notification that they wish to ‘opt out’ of being covered by the new definition at section 15AA; and
- the worker has 21 days to provide the ‘opt out’ notice.
When providing an opt out notice a worker must state in writing that:
- the worker elects that section 15AA of the Fair Work Act does not apply to their relationship; and
- the worker considers that their earnings for work performed under the relationship exceeds the contractor high income threshold of $175,000 at the time of giving the opt out notice.
A business or worker can provide an ‘opt out notice’ to each other at any time after 26 August 2024. However a contractor can only give an ‘opt out’ notice once during their relationship with a business.
4. If a worker no longer wishes to ‘opt-out’
Workers may, at any time, revoke their op-out decision by issuing a “revocation notice” expressing their desire to revoke their election to ‘opt out’ in writing.
Things to Consider
The prospect of contractors being found to be employees is a live issue for many businesses.
Businesses need to keep in mind that simply because a worker earns less than $175,000 per year does not make them an employee under the Fair Work Act, such workers still need to satisfy the new definition of employee under the Act to be employees.
Equally, merely because a worker earning over $175,000 refuses to ‘opt-out’ or indeed revokes their previous ‘opt-out notice’, this does not mean that such worker will necessarily become an employee. Workers still need to satisfy the new definition of employee under the Act to become an employee.
For many high earning workers engaged as contractors, the nature of their engagement (e.g. specialised skills, high levels of control over work product, clear contractual provisions) will suggest they are contractors regardless of any opt-out mechanism. For some workers however, where the ‘real substance, practical reality and true nature’ of their engagement is ambiguous and potentially ‘employment-like’, the opt-out mechanism may present an option for businesses to pursue.
Need assistance?
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.
Related resources