Many Australian businesses operate on the assumption that if a worker has signed a contractor agreement, the question of whether they are an employee or an independent contractor has been resolved. It is a reasonable assumption and also, since the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024, a legally dangerous one.
The reforms introduced through the Closing Loopholes legislation represent one of the most significant changes to Australian workplace law in recent years. For businesses that engage contractors as part of their workforce, understanding how these changes affect existing and future arrangements is now essential.
How the law changed and why it matters
In 2022, the High Court delivered two landmark decisions: Personnel Contracting and Jamsek. Together, the decisions confirmed that where a written contract clearly defined the relationship between the parties, the terms of that contract would generally determine whether a worker was an employee or an independent contractor. This became known colloquially as the "contract is king" approach.
Detailed contractor agreements subsequently became a common risk management tool.
That approach was significantly altered in 2024 with the introduction of section 15AA of the Fair Work Act 2009 (Cth), which established what is known as the "whole of relationship" test. Courts and regulators are now required to consider the true nature of the arrangement, rather than relying solely on how the relationship is described in the contract.
This means that a worker may be treated as an employee, even where both parties have signed an agreement describing the relationship as one of independent contracting. The written agreement remains important, but it is no longer the sole consideration.
What regulators actually look at
As the description used in a contract no longer determines the outcome, the Fair Work Ombudsman and the Australian Taxation Office (ATO) consider a range of practical indicators when assessing a working arrangement.
One of the key considerations is the level of control exercised by the business. A worker who is directed as to when they work, how they perform their duties and the methods they must follow is more likely to be characterised as an employee.
Other factors that may indicate an employment relationship include where a worker:
- Cannot delegate or subcontract their work;
- Uses equipment provided by the business;
- Bears little or no commercial risk if something goes wrong;
- Works exclusively for one business; or
- Is presented to clients as part of the organisation.
No single factor will determine the outcome. However, where a number of indicators point towards an employment relationship, the description used in the contract is unlikely to be decisive.
There is one important exception. Workers earning above the Contractor High Income Threshold, currently $183,100 from 1 July 2025, may choose to opt out of the whole of relationship test under section 15AB of the Fair Work Act 2009 (Cth). Where a valid opt-out is in place, greater weight may be given to the terms of the written agreement. However, this exception will not apply to most contractor arrangements.
The shift in the sham contracting defence
The 2024 reforms did more than change how workers are classified; they also narrowed the defence available to businesses facing sham contracting allegations.
Previously, an employer could avoid liability by demonstrating that they had not acted recklessly. A genuine belief that a worker was properly engaged as an independent contractor could provide protection.
However, a business must now be able to demonstrate that there were reasonable grounds for engaging a worker as an independent contractor.
Relying solely on a standard template agreement or a general assumption about the nature of the relationship may no longer be enough. Businesses must also consider how the arrangement operates in practice, as ignorance of how work is actually performed will not provide a defence.
The financial consequences of getting it wrong
Misclassification can have significant financial consequences, particularly because liabilities may accumulate over the full duration of the arrangement.
Under the Fair Work Act 2009 (Cth), civil penalties for sham contracting can reach up to $99,000 for smaller businesses. For businesses with 15 or more employees, penalties can be the greater of $495,000 or three times the underpayment amount, per breach.
In addition to penalties, a business may also be required to back-pay employee entitlements under the National Employment Standards, including:
- Annual leave;
- Personal leave;
- Public holiday entitlements;
- Overtime; and
- Redundancy pay.
These liabilities may extend across several years of the working relationship.
Superannuation obligations can further increase the financial exposure. Under the Superannuation Guarantee (Administration) Act 1992 (Cth), workers who are found to be employees must receive superannuation contributions. Unpaid superannuation does not simply need to be repaid, it may also attract the Superannuation Guarantee Charge. This includes interest, administration fees and additional penalties that can reach up to 200% of the original unpaid amount.
Businesses should also be aware that the Fair Work and superannuation regimes do not always align. In broad terms, where a worker is engaged primarily for their labour rather than to achieve a specific result, superannuation may still be payable, even where the worker is properly classified as an independent contractor for Fair Work purposes.
Assuming that the same classification applies across both regimes can be a costly mistake.
What current enforcement looks like
Recent enforcement activity demonstrates that sham contracting remains an area of focus for regulators. More recently, in Fair Work Ombudsman v Doll House Training Pty Ltd [2024], the Federal Court considered an arrangement in which three employees were dismissed, or threatened with dismissal, before being re-hired as independent contractors to do the same work. The arrangement attracted regulatory attention because, despite the change in contractual status, the nature of the work and the practical reality of the relationship remained largely unchanged. The Fair Work Ombudsman successfully prosecuted the matter, with penalties of almost $200,000 being imposed.
Regulators are also taking a more coordinated approach to enforcement. The Fair Work Ombudsman and the Australian Taxation Office (ATO) are working together to target high-risk industries including construction, road transport and professional services.
Data matching is also being used to compare ABN income reported by sole trader contractors against company payroll records. Arrangements that do not reflect a genuinely independent business enterprise are more likely to come under scrutiny.
What businesses should be doing now
If contractor arrangements have not been reviewed since the 2024 reforms or if they have been in place for an extended period without reassessment, the risk is real and accumulating.
Many contractor relationships were established under a legal framework that has changed significantly in recent years. As a result, arrangements that were once considered appropriate may no longer reflect the current legal position.
Identifying and addressing potential issues before concerns are raised by a regulator or former worker can significantly reduce exposure and provide greater certainty for businesses moving forward.
At Aubrey Brown Lawyers, our commercial and employment law team assists businesses in reviewing contractor and workforce arrangements.
If you have questions about your obligations, contact our team on 02 4350 3333 or visit aubreybrown.com.au.
