Latest Workplace News

Express Newsletter: Contractor high income threshold revealed

The Australian Government yesterday, 22 August 2024, revealed that the contractor high income threshold for ‘opt out’ arrangements from the new definition of who will be an employee or contractor will be $175,000 per year, which is the same as the employee high-income threshold. This announcement came just 4 days prior to its commencement. The opt out arrangement for contractors who earn over $175,000 per year is part of the recent tranche of workplace reforms with the Fair Work Amendment (Closing Loopholes No. 2) Act 2024.

Narrowed definition of who can be a contractor

From 26 August 2024, the Closing Loopholes No. 2 reforms will narrow the definition of who can be a contractor and who must be an employee, overturning the current definition which is the result of two key High Court decisions Personnel Contracting and Jamsek which focus on the terms of the employment contract. This definition gave certainty to businesses by allowing parties freedom to contract as principal and contractor.

Under the test from 26 August 2024, what will now be required is looking to the ‘real substance, practical reality and true nature of the relationship’ which essentially takes away the freedom and certainty moving forward when engaging workers as contractors. It focuses on how the relationship relates in practice. Many workers currently engaged as contractors will now need to be re-engaged as employees.

Opting out of the new, narrower definition

However, the legislation also introduces the concept of an ‘opt out’ notice from this new definition. What this means is that anyone today or up until 26 August who meets the current broader definition of a contractor, and who earns as much or higher than the high-income threshold of $175,000 per year, will have the ongoing option to ‘opt out’ of the new employee and employer definition by providing an opt out notice to the principal business. However, an opt-out notice can be revoked at any time by the contractor.

Risks of getting it wrong

Misclassifying employees as contractors instead of employees have exponentially more severe consequences under the Closing Loopholes No. 2 reforms including fines of up to $93,900 per breach for non-small business individuals or $469,500 for non-small business companies. Other consequential contraventions can lead to multiple contraventions can lead to multiple contraventions where fines can increase to up to $4,695,000 per contravention.

What employers should do

Employers should:

• consider whether their contractors are eligible to remain as contractors under the opt out arrangement and then seek advice regarding putting in place valid opt out arrangements;
• if ‘opt out’ is not available, seek legal advice regarding whether such contractors can safely remain as contractors or must be converted to employment; and
• whichever relationship the workers will be engaged via, carefully drafted (but straightforward) contracts will be key to minimising the risk and regulating the relationship moving forward.