Navigating the Independent Contractor Vs Employee Classification in Australia

The Fair Work Commission's recent change to the contractor vs. employee classification law in Australia may significantly impact the evolving business and employment landscape.

This regulatory change made in November 2024 prevents companies from hiring independent contractors overseas, especially those based in the Philippines. However, it can be solved with closer attention to work classification policies and adaptable employment solutions.

This blog breaks down classification differences & changes to the law and suggests ways to address them.

A glance at the basics

Who is an independent contractor?

Independent contractors are self-employed individuals who provide services to companies and businesses as per a pre-defined contract.

Independent contractors set their work schedules, choose who and how many clients to work with, and can subcontract the work. They are only expected to submit the deliverables outlined in the contract.

The employer won’t have operational control over the independent contractors, and the contractors aren’t entitled to any of the employee benefits like health insurance, PTO etc.,

Who is an employee?

An employee is a professional who works solely for one organization and is bound by the rules of the employment contract, which is decided by the employer.

Employees are more integrated with the organization's day-to-day operations, and the employer controls when, how, and what the employees work on.

Employees also enjoy employment benefits such as PTO, annual pay raises, and insurance policies and are protected by workplace laws.

The work vs. the worker

The definitions for an independent contractor and an employee are clear. However, in recent times the actual working relationship has become central to how worker classification is perceived.

This means, how much control the employer has over the worker, and whether the worker is solely working for the organization, carries more criteria for the classification.

For instance, say a business hires an overseas worker as an independent contractor, but the role demands the individual to be more involved and dedicated toward organizational operations. So, the individual works only for that organization, and the employer keeps an eye on how, when, and what the worker does.

In such cases, even though that worker is designated as an independent contractor on the contract, the law will recognize that worker as an employee of the organization.

What does this new regulation mean for Australian employers?

The new regulation introduced in November 2024 is a direct result of the growing worker misclassifications. Similar to how strict it is in the US, the Australian law will now closely inspect how workers are classified.

Some key changes include:

• Prevention of overseas contractors: Australian employers and business owners can no longer engage with foreign workers as independent contractors if the role responsibilities and nature of the work feel more integrated with that of an employee.
• Focus on actual work: The law holds up the need to assess the actual working relationship and use it as the basis for worker classification rather than just looking at the contract.
• Additional compliance cost: For employers and business owners who have long relied on the services of independent contractors from the Philippines, this regulation necessitates them to re-evaluate their working relationship and possibly convert the contractors to full-time employees. This may invite increased expenses owing to regulatory obligations.

Insights from the Fair Work Commission

The Fair Work Commission (FWC) has played a key role in shaping the perception of worker classifications.

A critical example is an event where an overseas worker’s contract was overlooked due to the actual working relationship, role integration level and factors like supervision and usage of company resources.

Why this change matters

1. This new law protects worker rights and ensures workers receive necessary benefits while keeping things fair and transparent.
2. This regulation reduces the risk of worker misclassification and avoids unnecessary costs for the employer like back payments for taxes and social security contributions.
3. This law encourages Australian businesses to imbue fair work policies and transparent business practices.

This ultimately increases the trust factor of Australian businesses and attracts even more skilled talent.

What can Australian employers do?

Here are a few things that Australian businesses can do to adapt to the new regulatory change.

1. Conduct a thorough self-assessment: Employers should review the worker relationship.
   
   1. Check if the individual works solely for your organization, and has a fixed work schedule.
   2. See how much the worker relies on your business systems to carry out the task.
   3. See if the worker does any task outside of the contract.

Answering these questions should help you determine the worker’s status.

2. Review and update contracts: If you feel the independent contractor’s work is more aligned with that of an employee, update/convert the worker contract to truly reflect the role of the worker.
3. Prepare for increased cost: As you convert contractors to full-time employees, it results in additional compliance costs.
4. Consult experts: You should also seek expert advice to manage any worker classification issues that are specific to your business.

A solution that helps Australian employers

As Australian businesses adjust to this new change, one solution is rapidly gaining popularity - An Employer of Record (EOR).

An EOR is a third-party organization that legally employs your overseas employees without a local entity.

As the official employer of your workers, an EOR handles payroll, benefits and compliance as per local laws.

Skuad is one such EOR partner that is trusted by over 600+ businesses globally.

With a unified dashboard for onboarding, payments, and benefits all your overseas employees can be managed from one place.

Moreover, the automated compliance checks by Skuad EOR ensure your business stays up-to-date with any new changes to local laws and regulations.

For more information, book a demo today.