28 Sep Employee vs Contractor: The New Rules HR Needs to Know
For anyone in HR who thought the employee versus contractor question was settled by the 2022 High Court decisions, the last 18 months have been a whiplash. What looked like a stable legal framework – where a well-drafted contract essentially determined the classification – has been replaced by a return to the older, messier approach that looks at what actually happens in the working relationship. The change is significant, the compliance risk is real, and most HR teams are still working out what it means in practice.
If your organisation engages independent contractors – and most do, whether for specialist work, project overflow, or ongoing service arrangements – the legal ground has shifted underneath those relationships. This article walks through what changed, why it matters, and where HR should be focusing attention right now.
Recent Changes To Employee & Contractor Laws
The Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 introduced a new section 15AA into the Fair Work Act 2009, which took effect on 26 August 2024. The amendment overturned the approach the High Court had established in 2022 in CFMMEU v Personnel Contracting Pty Ltd and ZG Operations Australia Pty Ltd v Jamsek, where the terms of a written contract had become the dominant factor in determining whether someone was an employee or an independent contractor.
Under the new regime, the Fair Work Commission applies what’s known as the “whole-of-relationship test.” When assessing whether an employment relationship exists, the Commission now considers the real substance, practical reality and true nature of the working relationship, and looks at all parts of the relationship between the parties – including the terms of the contract and how the contract is performed in practice.
That last part is where the operational risk sits. It’s no longer sufficient to have a well-drafted contractor agreement. If the day-to-day reality of the arrangement looks like employment – the level of control exercised, the financial risk borne by the worker, who supplies the tools and equipment, whether the worker can genuinely delegate – the Commission can find that the person is an employee regardless of what the paperwork says.
The Factors That Now Matter
The multi-factorial test reintroduced by section 15AA considers several practical indicators of the true nature of the relationship. The most important ones for HR to understand:
Control over how the work is performed. If your organisation dictates when, where, and how the work is done, that points toward employment. Genuine contractors control their own methods and schedule within the scope of what they’ve been engaged to deliver.
Financial risk and profit exposure. Employees are paid for time. Contractors bear commercial risk – they can profit from efficiency, and they can lose money on a job that runs over. If a “contractor” faces no meaningful financial risk beyond not being paid for hours worked, the classification is weak.
Who supplies tools and equipment. A worker using their own significant equipment (vehicles, specialist tools, software licences purchased at their own cost) looks more like a contractor. A worker using your equipment on your premises looks more like an employee.
Ability to delegate. Genuine contractors can typically send someone else to do the work in their place. Employees generally cannot. If your contractor agreement prohibits delegation, or the reality of the arrangement makes delegation impossible, that’s an employee-leaning indicator.
Whether the worker operates their own business. Multiple clients, their own ABN and insurance, marketing themselves publicly, invoicing on their own terms – all point toward genuine independent contracting.
No single factor is decisive. The Commission weighs them together and asks what the relationship really looks like.
The High-Income Opt Out
There’s one meaningful escape hatch. Under section 15AB, contractors earning above the contractor high income threshold – set at $190,100 for the 2026-27 financial year – can provide a written opt-out notice, in which case they’ll be assessed under the older contract-focused test rather than the whole-of-relationship test. The opt-out can be revoked by the worker at any time by written notice.
For HR teams engaging senior specialist contractors – consultants, senior developers, executive interims – the opt-out is worth considering during onboarding. It provides genuine certainty about classification for those relationships, provided the worker actually earns above the threshold and provides the notice in the correct form.
Below that income threshold, there is no opt-out. Every contractor relationship is potentially subject to the whole-of-relationship test.
Where The Risk Lands for HR
The changes have real teeth. If a worker your organisation has classified as a contractor is found to actually be an employee, the exposure includes back-payment of superannuation, leave entitlements, and any award or enterprise agreement payments that would have applied. It can include penalties for sham contracting, which the Closing Loopholes changes made easier for regulators to pursue – to defend a sham contracting claim, an employer now has to prove that at the time the representation was made, they reasonably believed the worker was engaged as a contractor.
The relationships most exposed to reclassification risk tend to share characteristics: long-running engagements with a single client, high levels of integration into the client organisation’s operations, contractors who work fixed hours from client premises using client equipment, and workers with no other clients. If any of those descriptions fit contractors your organisation currently engages, they warrant a fresh look.
What HR Should Be Doing Now
Three practical actions worth taking in the next 90 days:
First, audit the contractor relationships your organisation currently has. Categorise them by risk – high risk are the long-running, integrated, single-client arrangements described above; lower risk are the genuine short-term specialist engagements with workers who have other clients and their own business infrastructure. The high-risk ones need attention.
Second, look at the actual working practices, not just the contracts. Sit down with the hiring managers who engage these contractors and understand what really happens day to day. Contracts saying the contractor has autonomy over methods don’t count for much if the reality is that they’re being directed like an employee.
Third, get proper legal advice on the borderline cases. This is not a DIY area. The consequences of getting classification wrong are significant enough that engaging employment lawyers – firms like Connolly Suthers that provide employment and industrial relations advice as a core practice area – is proportionate to the exposure. A structured review with proper legal input costs far less than a Fair Work claim, an ATO audit, or a superannuation shortfall notice.
For contractor arrangements the organisation wants to keep as contractor arrangements, the review might result in changes: renegotiated terms, adjusted working practices, high-income opt-out notices where eligible, or in some cases a decision to convert the relationship to genuine employment because that’s what it actually is.
The Broader Shift
The Closing Loopholes changes are part of a broader direction in Australian workplace regulation. Employee misclassification has moved from being a technical HR issue to a genuine compliance priority for both the Fair Work Ombudsman and the ATO. Casual employment rules changed. Independent contracting rules changed. The right to disconnect came in. The regulatory environment for how organisations engages non-standard workers is more complex than it was five years ago, and it’s continuing to move.
HR teams that treat this as a compliance problem to solve once and forget will find themselves out of step within a couple of years. The teams that build a rolling review process – checking classifications annually, updating contracts and practices as regulations change, and engaging proper legal advice when the questions get hard – will spend less on remediation and less on penalties. The maths on doing this properly is straightforward. The organisations that don’t are the ones that end up in the case law.
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