15 from engaging in ‘sham contracting’. However, we also see situations where contractor agreements have been entered into in good faith, only to be found to be employment relationships at a later date. Where this happens, businesses can be exposed to costly claims. What are the changes from the Closing Loopholes Act? The changes from the Closing Loopholes Act essentially which took effect on 26 August 2024 work to re-establish the test back to one that also considers the substance and practical reality of the employment or contractor relationship, not just the terms of the contractor or employment agreement. This means that the Courts will need to consider both the written contract, and also what happens in your workplace. Who is exempt from the changes? Contractors earning over the ‘contractor high income threshold’ (currently is yet to be determined) will be able to opt out of the new definition of an employee through a notification scheme (telling the Government that you’re opting out). This will mean that, for those contractors, only the written contract will be considered when determining the employment relationship – not how the relationship looks to the disinterested observer (e.g. the Courts) to be operating at some time in the future. While yet to be determined, the ‘contractor high income threshold’ is likely to focus on ‘guaranteed’ income rather than potential income. There will be some transition provisions where contractors can choose to have the previous ‘written terms only’ test apply to them. How can businesses defend themselves against claims of sham contracting? The Closing Loopholes Act also narrows the defences available for responding to claims of sham contracting. Businesses (other than small businesses) will soon need to prove that they reasonably believed that an agreement was a contract for services, and not an employment type relationship. Whether or not this can be established will depend on the relevant circumstances surrounding the claim. This will need to be tested in court to establish what is and isn’t reasonable. However, some markers as to what the courts will see as an indicator of a contracting arrangement include: • If the ‘contractor’ has their own employees or subcontracts working for them; • If the ‘contractor’ is a company (ie. ‘Pty Ltd’ rather than merely a business name); • Has its own substantially visible (in the marketplace) presence as a business, i.e. • commercial office, active website, advertising/marketing campaign, own insurances and accreditation; and • Provides substantial equipment or machinery such that the labour component represents only a part of the value provided to the business. This list is not exhaustive. Further to this, the threshold for what will constitute a serious contravention has also changed, from one that is done knowingly and systematically, to one that is done either knowingly or recklessly. An accidental, inadvertent misclassification of an employment relationship, or a case of a genuine mistake, will not meet this threshold, protecting businesses caught up in these changes. What are the new (increased) penalties? The amendments also signify that new civil penalties for underpayments will apply in instances of sham contracting. This means fines. Companies who are not small businesses face maximum penalties of: - $469,500 (1,500 penalty units) - this is five times the current maximum; or - three times the amount of the underpayment, if the applicant seeks this kind of penalty. The maximum penalties for most provisions will not change for individuals and small business employers. New protections for small businesses There is still good news for businesses grappling with all these changes. In the case of small businesses, evidence of compliance with a ‘Voluntary Small Business Wage Compliance Code’ will mean that a small business will not be prosecuted if they underpay their employees. Details of the Code are yet to be released. Final comments Importantly, this approach is limited to questions as to whether the worker is an employee for the purposes of the Fair work Act. Legislation governing workers compensation, payroll tax, and superannuation have extensions defined in their legalisation that imposes cost/obligations on the business pertaining to some categories of workers, even where the worker is not an employee. If you have any questions about the changes, and how you best protect your business against claims of sham contracting, please do not hesitate to contact Warwick Ryan, Partner in Workplace Relations, Employment & Safety. Employee or Contractor? - What the law says about Sham Contracts CONTINUED FROM PAGE 8 BUSINESS TIPS Our job is to push the boundaries and challenge your thinking in order to achieve the best results together. Ready to take your business to the next level? Strategy Media Buying Digital Marketing Websites Content & Design LEVEL UP YOUR BRAND + + + + www.oddfishmedia.com.au CENTRAL COAST BUSINESS REVIEW FEBRUARY 2025
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