Special edition: Closing Loopholes reforms – Far reaching impacts (and risks) for employers

 In Articles

Despite the media and political attention the so called ‘Closing Loopholes’ reforms have attracted to date, many employers remain unaware of the far reaching and significant impacts that these reforms have, and will continue to have, on business into the future. These reforms will leave few employers unaffected. Small to medium business will be as affected as large corporates by many aspects of these new laws. Employers who do not take action to address these changes may face costly, whole of business-threatening outcomes as employees, the Fair Work Ombudsman and unions commence to make use of these sweeping reforms.

The 2 pieces of legislation creating these reforms (the Fair Work Legislation Amendment(Closing Loopholes) Act 2023 (Closing Loopholes 1) and the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 (Closing Loopholes 2), generate the single greatest reform to industrial relations and workplace law in nearly 15 years. We set out below a summary of each area of the reforms introduced by Closing Loopholes 2, much of which commenced on 27 February 2024.

The ‘contractor v employee’ merry-go-round is back, but with the ability for even legitimate contractors to bring ‘unfair contract’ claims in the Fair Work Commission, and with a role for unions

Changes to the definition of employment

The introduction of a new ‘ordinary meaning’ definition of who is an employee and an employer for the purposes of the Fair Work Act2009 (Cth) (FW Act) will determine whether a person is genuinely an employee or a contractor. This definition will be tied to the common law meaning , and the question will be determined by ‘ascertaining the real substance, practical reality, and true nature of the relationship’ between the individual and the purported employer. Persons found to be employees will then have access to all rights under the Act and other legislation. The exception to this is for contractors being paid above the threshold (which is yet to be disclosed) or who give a written ‘opt out’ notice.  The ‘contractor high income threshold’ is expected to be higher than the current high income threshold for employees of$167,500.

This new definition re-introduces the risk of workers being found tobe employees not contractors, bringing with it all of the risks this hastypically attracted. Except that now the fines for the inevitable breaches ofthe Act are exponentially higher in almost every regard (seebelow). Further, this new definition does not resolve the inconsistent definitions of who is an employee and who is a contractor that exist across various other pieces of legislation, which generates risk for employers (such as under tax, superannuation and other laws).

Other increased risks regarding contractors

These changes occur in circumstances where contractors will now be able to bring ‘unfair contract term’ claim in the Fair Work Commission (Commission), where they can have the terms of their contract varied considering fairness between the parties. The Commission may order that all or part of the contract be set aside (such as by changing payment terms, rate of remuneration and notice of termination, amongst other things). A union can bring an application for a contractor under these laws, with contractors earning the contractor high-income threshold being excluded (but who can bring a substantially similar claim under other legislation).

These changes commence on 26 August 2024. Employers should act now to get advice and revise their arrangement with contractors before these laws come into effect and consider which ‘high risk’ contractors ought to be made employees.

Raising the bar for the defence to ‘sham contracting’

In addition, from 1 July 2024, there are changes to the defence businesses have to ‘sham contracting’ claims, making it more difficult to defend a claim. The current defence is that the employer did not know and was not reckless as to whether the contract was for employment rather than an independent contractor arrangement. Now the amended defence requires that the employer “reasonably believed” the arrangement was an independent contractor agreement, which is likely to be harder to establish.

Narrowed category of who can be a casual employee, and changes to how they can attempt to compel their employer to convert to permanent employment every 6 months

New casual employee definition

Another significant change is the new, narrowed definition of casual employment which will mean that fewer employees will be able to be employed and remain employed on a casual basis. This will significantly affect industries with a large casual workforce – ranging from hospitality, tourism, childcare, labour hire and retail amongst others in particular.

Currently, the Act defines casual employment on the basis of whether the offer of employment involves ‘no firm advance commitment to continuing and indefinite work according to an agreed pattern of work for the person.’ The new definition will, however, characterise casual employees by ‘an absence of a firm advance commitment to continuing and indefinite work’ and that the employee is entitled under a fair work instrument or contract of employment to a casual loading or specific pay rate for casuals.

But this will, similar to the new ‘employee v contractor’ test, be determined on the basis of:

  • the ‘real substance, practical reality and true nature of the working relationship’, rather than the terms of the employment contract; and
  • consideration of the totality of the relationship and the degree of control, remuneration, and who decides the hours worked by the employees.

This essentially means that if the relationship changes and shifts from a genuinely casual nature to one where there really is in substance a firm advance commitment to continuing and indefinite work according to an agreed pattern of work, the employment will really be permanent.

Casual conversion regime replaced by ‘employee choice pathway’

Another significant change is to casuals’ pathways to permanent employment. Once these rules commence, employers need no longer follow the current casual conversion process on the 12 month employment anniversary, replacing it with a single pathway for casual conversion at the employee’s request. Casual employees may give written notification they would like to change their employment to part-time or full-time after 6 months’ employment (or 12 months for small business employers). Employers must respond after 21 days, with a range of form, content and notice requirements. This request, if rejected, maybe remade by the employee every 6 months.

An employer may reject the employee notification, on the basis that:

  • the employee does not meet the definition of a casual employee; or
  • there are fair and reasonable operational grounds; or
  • accepting the notification would result in the employer not complying with recruitment and selection processes required by legislation (such as in government).

If the employee is unhappy with the outcome, they can apply to the Commission for it to make a binding decision to make their employment permanent (even where the employer disagrees). For many employers, just having to defend such a claim about how they employ their staff through a costly legal process may be of great concern.

These changes also take effect from 26 August 2024.

Fines increase for companies to $469,500 per breach for (even inadvertent) breaches of awards, enterprise agreements and key provisions of the Act (and to $4,695,000for ‘serious contraventions’). For individuals (directors and managers), fines increase to $93,900 per breach or $939,000 for ‘serious contraventions’

From 27 February 2024, maximum statutory fines for breaches of modern awards, enterprise agreements and key provisions of the FW Act (including breaches of the NES, recordkeeping and pay slip obligations, etc.,) increased fivefold to $469,500 per breach for companies. Maximum fines for individuals (such as directors and managers) increased to $93,900 per breach. The maximum fines for ‘serious contraventions’ increased to $4,695,000for companies, and to $939,000 for individuals. The only exception is for ‘small business employer’ with less than 15 employees on a head count basis across all associated entities where fines remain at $18,780 per breach for individuals or $93,900 per breach for companies.

Lowering the bar for what is a ‘serious contravention’ attracting fines ten times higher

Further, the threshold for what is a ‘serious contravention’ is lowered to such that a person need not have knowingly breached the relevant provision/clause, but rather just that they were ‘reckless.’ The breach need not be systematic or affect multiple employees. A person will be reckless if they were aware of a substantial risk that the breach would occur, and it was unjustifiable to take the risk having regard to the circumstances known to the person.

This makes getting rates of pay and other day-to-day employment activities involving failure to comply with obligations under the FW Act, awards and other instruments, risks that can be business threatening for most SMEs. For decision makers personally (such as directors and managers), this becomes a key asset protection risk.

The Right to Disconnect: What the Closing Loopholes No 2 Bill means for Employers

Closing Loopholes 2 has introduced a new right for workers to disconnect outside of paid hours. Specifically, employees will have a right not to respond to unreasonable out of hours contact from their employer or third parties (such as clients). The right to disconnect permits an employee to refuse to monitor, read or respond to contact, or attempted contact, from an employer or third-party outside the employee’s working hours unless the refusal is unreasonable. Whether the contact is unreasonable will turn on:

  • the reason for the attempted contact;
  • the method of contact (and the ‘level of disruption’ it causes);
  • the extent that the employee is compensated to be available to work during the period in which the contract is made;
  • the extent to which the employee is compensated of working outside ordinary hours;
  • the nature of the employee’s role and the level of responsibility;
  • the employee’s personal circumstances (including any family and caring responsibilities); and
  • whether the contact is required under a law of the Commonwealth, State or Territory.

This will be a protected right for the purposes of the general protections, and accordingly, disciplinary action against employees who have failed to respond outside of work hours will need to be approached cautiously given the risk of a general protections claim this will generate. This may generate greater issues for particular categories of employees – such as for part time employees with caring responsibilities who may be contacted on days off, employers with offices in varying time-zones, or whose operations run 24/7 such as in emergency services, mining, construction, etc.

These changes will also be added to by a new mandatory award term on the right to disconnect, and the Commission will be publishing written guidelines on this new right.

Employers should review their employment contracts and or put in place policies to address any requirement for outside of hours contact, and dealing with compensation for such required availability.

The statutory provisions will commence on 26 August 2024, and from 26 August 2025 for small business employers.

Labour regulation for the road transport industry and ‘employee-like’ workers (including digital platform workers) and giving a role to unions

Closing Loopholes 2 make significant changes to the road transport industry, and for ‘employee-like workers’ for those in the gig-economy. This includes creating laws that apply to particular road transport contractors and to gig-economy workers to provide employee-like protections. These changes include:

  • giving the Commission powers to make minimum standards orders for these two categories of contractors, including to set minimum pay standards, penalty rates and other minimum entitlements;
  • giving the Commission powers to make ‘collective agreements’ (like enterprise agreements) for these workers, and giving unions a right to represent them and be involved in bargaining;
  • giving the Commission powers to make ‘road transport contractual chain orders’ under which it can set minimum standards for ‘road transport employee-like workers’. This will be akin to making instruments that are like ‘awards’ but that apply to particular types of contractor workers in the road transport industry;
  • the introduction of ‘unfair termination’ laws under which particular road transport contractors can challenge their dismissal in the Commission on the basis it was unfair (akin to unfair dismissal laws). Reinstatement and compensation will be potential outcomes;
  • the introduction on ‘unfair deactivation’ laws enabling gig-economy workers to claim in the Commission that their deactivation was unfair (also akin to unfair dismissal laws). Here the Commission can order reactivation only (compensation is not available).

These changes will commence in August 2024, and are likely to substantially change arrangements in the road transport industry as well as within the gig-economy. This is a significant shift for the FW Act to regulate non-employee workers and give to them rights and protections usually only afforded to direct employees.

Other changes as part of Closing Loopholes 2

Other changes introduced by Closing Loopholes 2 include:

  • Changes to right of entry such that union permit holders may enter a workplace to investigate suspected wage underpayments without any advance notice where they obtain an exemption certificate from the Commission: commencing 1 July 2024.
  • In addition to the new delegates rights to represent and communicate with members under Closing Loopholes 1, the Commission is required to insert a delegates’ rights term into all modern awards by 30 June 2024. How much further this award term extends delegates rights is unclear. This means that new awards, enterprise agreements, and workplace determinations will need to include a term relating to the rights of workplace delegates.
  • Review of and potential changes to the model consultation, flexibility and disputes clauses in awards.
  • New rules allowing the transition from a single-interest employer agreement or supported bargaining agreement to a single-enterprise agreement, and for intractable bargaining workplace determinations, terms under the determinations must not be less favorable to employees than the existing enterprise agreement for the same matters: commenced 27 February 2024.
  • Changes to union de-merger rules: commenced 27February 2024.
  • Changes to terms of intractable bargaining workplace determinations where enterprise agreement terms ultimately cannot be agreed, such that any terms already agreed between the parties much be included in the determination made by the Commission (amongst other changes): commenced 27February 2024.

Changes introduced under Closing Loopholes 1

These changes are in addition to the changes introduced by the Closing Loopholes 1, which introduced:

  • New delegates rights such that site union delegates have the rights to:
    • represent the industrial interests of union members and employees eligible to be members;
    • reasonable communication with union members and employees eligible to be members;
    • reasonable access to workplace facilities for the purposes of representing employees; and
    • reasonable access to paid leave (other than for small business employers).

Commenced 15 December 2023.

  • Requirements for union delegates rights clauses in enterprise agreements: commencing 1 July 2024.
  • The criminal offence of wage theft where an employer intentionally fails to pay an amount required under the FW Act, a relevant instrument or superannuation, in full when due. This will be of particular concern to business experiencing cash flow issues and who (for example) pay superannuation late. Fines here are up to $7.825 million, or 3 times the value of the underpayment, whichever is greater. There will be a Voluntary Small Business Wage Compliance Code which has yet to be published: commencing 1 January 2025.
  •  ‘Same job, same pay’ for labour hire employers, where the Commission can make an order that an employer who supplies employees to a ‘host’ employer must pay those employees at least as much as the direct employees of the host employer. These laws will apply more broadly than to traditional labour hire employers (this may include to service contractors, joint ventures and where there are intra company group arrangements): commenced 15 December 2023.
  • Industrial manslaughter laws under federal work health and safety legislation: commencing 1 July 2024.
  • Family and domestic violence as a protected ground under the general protections: commenced 15 December 2023.
  • Small business redundancy counter-exception, where the exemption from the obligation to pay redundancy pay is lost in certain circumstances. There are a range of technical requirements, but in short, an employee of a small business which is bankrupt or in liquidation would be entitled to redundancy pay if retrenched in circumstances where the employer previously employed 15 or more staff. This is to avoid staggered redundancies such that the final 14 employees would not be entitled to redundancy pay: commenced 15 December 2023.

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