Running a real estate business can be a bit like walking a tightrope, especially when it comes to figuring out whether a team member is an employee or an independent contractor.
This isn’t just a minor detailโgetting it wrong can lead to serious legal, financial, and reputational headaches.
From hefty fines to back taxes and potential lawsuits, the risks are real, writes O*NO Legal – The Real Estate Agentsโ Lawyer Founder, Kristen Porter.
At its core, an employee is someone who works under an employer, following their direction, while an independent contractor runs their own business and provides services on their own terms.
Starting August 26, changes to the Fair Work Act will affect how businesses determine if a worker is an employee or contractor. The new Section 15AA will look at the overall nature of the relationship, not just what’s written in a contract.
Through the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 a new section 15AA will be inserted which will affect how you determine who an โemployeeโ is. New sections 15AB, 15AC, and 15AD will also be added to address the operation of section 15AA.
How will the Fair Works Updates affect employee vs contractor determinations?
Under the new section 15AA, whether an individual is an employee for the purposes of the Fair Work Act, is to be determined by ascertaining the ‘real substance, practical reality and true natureย of the relationship.’
This means the totality of the relationship between the parties needs to be looked at. This includes the terms of any contract and also includes how the contract is carried out and how the obligations are performed in practice.
However, the amendments also allow for eligible individuals to opt out of the statutory rule of interpretation so that their relationship will be assessed only on the common law, that is, what is set out in the written contract between the parties.
This does not automatically mean that a contractor is not an employee. If the written contract contains terms that are more applicable to an employment relationship, then the contractor is likely to be considered an employee.
Section 15AB: This clause allows for an employer/principal to elect for section 15AA to not apply.
To opt out, an employer/principal may give written notice to a worker before section 15AA starts operating, saying the worker can opt out if they think the relationship might turn into an employer-employee one because of section 15AA.
This notice may also be given on or after section 15AA commences. The worker can also give an opt out notice to the principal/employer.
However, the employer/principal or worker can only give an opt out notice if they believe the workers earnings are above the contractor high income threshold when notice is given.
We are still waiting on the contractor high income threshold to be determined so opt out notices cannot be issued until the threshold is set.
Section 15AC: If the opt-out notice is given before section 15AA comes into effect (August 26), then the new section will not apply to the relationship, until and unless it is revoked. If the opt-out notice is given on or after section 15AA commences, then the provisions in section 15AA stop applying on the day the notice is given and will not apply until the notice is revoked.
Section 15AD: A worker who has given an opt-out notice can revoke it at any time. To do this, they must give a written revocation notice to the employer/principal the worker wants section 15AA to apply to. A revocation will apply on the day it is given. A worker can only give one revocation notice per relationship.
What is the practical effect of this new legislation?
Since the section 15AA amendment hasn’t been enacted yet, we won’t know the practical factors it considers until the courts start applying it.
Likely, we are back to the courts being allowed to look behind the contract, and now to the ‘real substance, practical reality and true natureย of the relationship’, which may prove to be even broader than the multi-factor test.
What should I do now?
Risk management, principals and individual ABN contractors should review the โreal substance, practical reality and true natureย of the relationshipโ compared to what is in the contract.
If there are concerns that the โreal substance, practical reality and true natureย of the relationshipโ is closer to an employment relationship, then it would be prudent to consider using the opt-out provisions, especially if both parties want to maintain a contractor relationship.
Closing Loopholes or creating uncertainty?
Engaging individual ABN contractors has always been a risky proposition and there is a high likelihood they will be deemed employees for super and workers compensation purposes anyway.
If there is any doubt that the individual contractor you are engaging will be considered an employee, it is better to just put them on as an employee.
So, what can you and your agency do to be prepared for these changes:
- Review Contracts & Practices: Ensure your contracts reflect the practical realities of the working relationship.
All individual contractors must hold the appropriate licence to run their own agency so that limits the contractor options for real estate agents and that โfactorโ is likely to tend towards a contractor relationship.
Align your work practices with the new legal standards to avoid discrepancies and make sure your contracts include set off clauses in case a contractor is deemed to be an employee and owed employee entitlements. - Communicate With Workers: Inform your workers about the changes and how they might be affected. Provide training to ensure everyone understands their rights and obligations under the new legislation.
- Consider the Opt-Out Provisions: Use the opt-out provisions if there is a risk the multi-factor approach will result in the contractor arrangements already in place being considered an employment relationship, particularly if you and your contractor would prefer for the common law to apply, i.e. a contractor relationship determined only by the contract between the parties.
Donโt forget about the sham contracting rules
To further complicate matters, we canโt forget about the sham contracting rules. A sham contract is when the contract says one thing, but in practice you do something totally different.ย
For instance, if a real estate agent convinces an inexperienced person without the appropriate licence to be a contractor through a company instead of being an employee (with all the protections in the Real Estate Industry Award for employees, particularly sales employees) then that would be a problem, and likely to be considered sham contracting.