Australia — Worker Classification

Australia's worker classification framework underwent a fundamental shift on 26 August 2024 when the Fair Work Legislation Amendment (Closing Loopholes) Act 2023 inserted section 15KA into the Fair Work Act 2009, codifying a new whole of relationship test for most national-system employers. This test determines whether a worker is an employee (entitled to minimum wages, paid leave, unfair dismissal protection, and other Fair Work Act protections) or an independent contractor (self-employed, outside the Act's scope).

## Scope: constitutionally covered businesses

The whole of relationship test applies to constitutionally covered businesses engaging workers on or after 26 August 2024. Constitutionally covered businesses include proprietary limited companies (Pty Ltd), foreign corporations, trading or financial corporations formed within the Commonwealth, Commonwealth agencies, bodies corporate incorporated in a territory, and businesses conducted principally in a territory or Commonwealth place. The test does not apply to sole traders, partnerships (unless the partnership is itself a corporation), or most state government employees. For work performed before 26 August 2024, constitutionally covered businesses apply the start of relationship test (the common-law contract-primacy approach established by the High Court in 2022).

## The whole of relationship test: real substance, practical reality, and true nature

Section 15KA directs decision-makers to determine employment status by considering "the real substance, practical reality and true nature of the relationship" between the parties. The test is multi-factorial and examines both the terms of any contract (written, verbal, or a mix of both) and how the contract is performed in practice. The Fair Work Ombudsman's guidance identifies key factors:

• Control: Does the business direct how, when, and where the work is done, or does the worker have autonomy?
• Integration: Is the worker integrated into the business (works exclusively or primarily for one client, uses the business's equipment, presents as part of the business's workforce), or does the worker operate independently?
• Financial risk: Does the worker bear entrepreneurial risk (invoices multiple clients, owns tools and equipment, can profit or loss), or does the business bear all operating costs?
• Ability to delegate or subcontract: Can the worker send someone else to do the work, or must the worker perform it personally?
• Basis of payment: Is the worker paid by the hour, week, or salary (employee indicator), or by milestone, project, or quoted fee (contractor indicator)?

No single factor is determinative. A written contract labeling the worker a "contractor" does not override the practical reality if the day-to-day relationship exhibits employee characteristics. Conversely, a contract that grants the business extensive control, prohibits delegation, and provides tools and equipment may establish an employment relationship even if both parties intended an independent-contractor arrangement.

## High-income opt-out

Workers earning above the contractor high income threshold—set by regulation at $183,100 for the 2025–26 financial year (1 July 2025 onward)—may opt out of the whole of relationship test by notifying the business in writing. If an opt-out is lodged, the start of relationship test (contractual-terms primacy, per the 2022 High Court decisions) applies instead. The worker may later revoke the opt-out. The threshold is indexed annually.

## Relationship to other legislation

The section 15KA definition applies only for Fair Work Act purposes (minimum wages, the National Employment Standards, modern awards, unfair dismissal). It does not alter the meaning of "employee" or "contractor" under:

• Superannuation Guarantee (Administration) Act 1992 (which has an extended statutory definition at section 12(3) covering contracts "wholly or principally for the labour of the person");
• Pay As You Go (PAYG) withholding rules (administered by the Australian Taxation Office);
• Workers' compensation legislation (state- and territory-based, with varied statutory tests);
• Work Health and Safety Act 2011 (which defines "worker" broadly to include most contractors performing work).

A person may therefore be classified as an employee under the Fair Work Act and entitled to annual leave and unfair dismissal protection, yet classified as a contractor for superannuation or tax purposes—or vice versa.

## Sham contracting

Section 357 of the Fair Work Act prohibits an employer from misrepresenting an employment relationship as an independent contracting arrangement. From 27 February 2024, the statutory defense shifted from a "recklessness" standard to a reasonableness test: to defend a sham-contracting allegation, the employer must prove it reasonably believed the worker was a contractor at the time the representation was made. Penalties for sham contracting are civil, enforced by the Fair Work Ombudsman.

Source: Fair Work Act 2009, s 15KA Source: Fair Work Ombudsman — Whole of relationship test Source: Fair Work Ombudsman — Independent contractor changes Source: Department of Employment and Workplace Relations — Meaning of 'employee' and 'employer' in the Fair Work Act 2009

A worker may be classified as an independent contractor under the Fair Work Act 2009 yet still trigger mandatory superannuation contributions under a parallel and broader test in the Superannuation Guarantee (Administration) Act 1992 (SGAA). This cross-system divergence is a major practical trap for businesses engaging contractors in Australia.

## The SGAA section 12(3) deemed-employee rule

Section 12(3) of the SGAA provides: "If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract." A person deemed an employee under this provision is entitled to superannuation guarantee (SG) contributions at the statutory rate, even if they are a genuine independent contractor under common law or under the Fair Work Act's whole-of-relationship test.

The Australian Taxation Office (ATO) administers and enforces superannuation guarantee compliance. Employers who fail to make the required quarterly contributions must pay the superannuation guarantee charge (SGC) to the ATO, which includes the unpaid superannuation, nominal interest, and an administration fee. The SGC is not tax deductible. The ATO may also impose penalties of up to 200% of the charge, and issue director penalty notices making company directors personally liable for unpaid amounts.

## The three-part test: contract, wholly or principally for labour, and work performed

The ATO states that section 12(3) has three elements:

1. There must be a contract (written, oral, or a hybrid of written and oral terms).
2. The contract must be wholly or principally "for" the labour of the person.
3. The person must work under that contract.

The critical element is whether the contract is wholly or principally "for" labour. The ATO focuses on the contractual rights and obligations, not on how the contract was performed in practice—unless the contract is a sham, unenforceable, or has been varied by conduct.

## What the ATO looks for: payment for personal labour, no delegation, and payment by time

The ATO provides practical guidance on when a contractor is engaged wholly or principally for their labour. Make super contributions for independent contractors if you pay them:

• under a contract that is mainly for their labour (more than half the dollar value of the contract is for their labour, rather than for materials, equipment, or a separately costed deliverable);
• for their personal labour and skills (payment is not dependent on achieving a specified result); and
• to perform the contract work personally (the work cannot be delegated to someone else).

If all three conditions are met, the contractor is a deemed employee for superannuation purposes, even if they hold an Australian Business Number (ABN) and invoice the principal as an independent business.

Key indicators supporting a superannuation obligation:

• Payment by time worked: The contractor invoices on an hourly, daily, or weekly basis rather than by project milestone or fixed deliverable.
• No substantial capital equipment or materials: The contractor provides only hand tools or a laptop; the principal supplies workspace, major equipment, or materials.
• Personal performance required: The contract stipulates that the contractor must perform the work personally, or permits delegation only with the principal's consent (a "fettered" right).

Key indicators that section 12(3) does NOT apply:

• Contract for a result or outcome: The contractor is engaged to deliver a specific output (e.g., a completed software module, a repaired machine, a constructed deck) and bears risk if the result is not achieved.
• Use of substantial capital equipment: The contractor provides a truck, excavator, specialized machinery, or other high-value assets necessary to perform the work.
• Right to delegate or subcontract: The contract permits the contractor to send a substitute or subcontract the work without needing the principal's consent.

The ATO considers "normal industry practices" when determining whether the contract is principally for labour.

## Contract with a natural person in their individual capacity

Section 12(3) applies only when the contract is with a natural person acting in their individual capacity (including as a sole trader with an ABN). If the principal contracts with a company (Pty Ltd), trust, or partnership, section 12(3) does not apply, and the principal has no superannuation obligation to the individual performing the work. The ATO confirms: "If you enter into a contract with someone other than the person who'll actually provide the labour—for example, with a company, trust or a partnership—you don't pay super to the person providing the labour."

The existence of an ABN or an invoice bearing a business name does not, by itself, mean the contractor is operating through an interposed entity. The key question is whether the contract itself is with the individual or with a separate legal entity. If a sole trader invoices using their personal ABN, the contract is with the individual, and section 12(3) may apply.

## Calculating superannuation on the labour component

When section 12(3) applies, the employer must pay superannuation on the labour component of the contract. The ATO states: "The minimum super you must pay is the super guarantee percentage of the worker's ordinary time earnings. This is the labour component of the contract."

If the contract separately itemizes labour and non-labour components (e.g., "$800 labour, $200 materials"), the employer pays SG on the $800 labour amount. If the contract does not separately identify the labour component, the ATO will accept a reasonable market value of the labour—for example, the award rate or industry standard for similar work. The employer must keep records demonstrating how the labour component was calculated (SGAA section 79).

The employer cannot discharge the obligation by paying the contractor an additional amount "for super"—the SG must be paid quarterly directly to a complying superannuation fund. The ATO states: "Paying an additional amount equal to the SG rate to the independent contractor on top of their usual pay does not count as a super contribution."

## Domestic workers: the 30-hour exemption

Section 12(11) of the SGAA provides that a person paid to do work wholly or principally of a domestic or private nature for not more than 30 hours per week is not regarded as an employee for superannuation purposes. This exemption applies to individual householders engaging cleaners, gardeners, nannies, or home-care workers. If the domestic worker works more than 30 hours per week, superannuation is payable. The exemption does not apply to businesses that engage domestic workers on behalf of clients (e.g., a cleaning agency that employs cleaners and sends them to residential clients). The ATO guidance states: "A business that pays a worker to perform work of a domestic or private nature for an end-user or client will not be able to rely on the exemption in Subsection 12(11)."

## Relationship to Fair Work Act classification

Superannuation classification under section 12(3) is independent of Fair Work Act classification. The ATO confirms: "In certain circumstances, you must pay superannuation for independent contractors who are deemed to be employees for superannuation purposes."

A worker who is an independent contractor under the Fair Work Act's whole-of-relationship test (section 15KA) and therefore not entitled to minimum wages, paid leave, or unfair dismissal protection may still be a deemed employee under section 12(3) and entitled to superannuation. The reverse is also possible: a worker engaged through a corporate trustee for a family trust may be an employee under the Fair Work Act yet not trigger section 12(3) superannuation because the contract is with the trust, not the individual.

Cross-border employers establishing an Australian presence and engaging local contractors should separately analyze Fair Work Act employee vs. contractor status (for wage, leave, and dismissal obligations) and SGAA section 12(3) status (for superannuation) for each engagement. Both tests turn on the contract terms, but they ask different questions and can yield different answers.

Source: Superannuation Guarantee (Administration) Act 1992, s 12 Source: Australian Taxation Office — Super for independent contractors Source: Australian Taxation Office — Difference between employees and independent contractors

From 26 August 2024, independent contractors earning below the contractor high income threshold can apply to the Fair Work Commission (FWC) to set aside or vary unfair terms in their services contracts under a new regime in Part 3A-5 of the Fair Work Act 2009. This protection operates alongside the worker-classification rules (the whole-of-relationship test under section 15KA and the superannuation section 12(3) test) but applies only when the worker is genuinely an independent contractor. The regime gives the FWC power to rewrite one-sided contract terms relating to remuneration, hours, termination, and other workplace-relations matters, creating a substantive fairness overlay on top of the common-law freedom-of-contract baseline.

Cross-border employers engaging Australian contractors—particularly in standard-form arrangements for gig-economy platforms, consulting services, or ongoing project work—should understand this regime from day one. A contract drafted with a non-Australian contractor template or with terms standard in another jurisdiction (unilateral variation clauses, no-cause termination without notice, payment holdbacks, IP-assignment-without-additional-payment) may be challenged and rewritten by the FWC if an Australian contractor below the income threshold files an application.

## Scope: who can apply, and which contracts are covered

An independent contractor (or a union representing the contractor) may apply to the FWC for an unfair-contract-term remedy if all four of the following conditions are met:

1. The contractor is party to a services contract. A "services contract" is a contract for services that relates to the performance of work by an individual and has a constitutional connection—for example, at least one party is a constitutional corporation (a Pty Ltd company), the Commonwealth, a foreign corporation, or a body incorporated in a territory, or the work is performed mainly in a territory (ACT or NT), or the contract was entered into in a territory. Most contracts with Australian companies satisfy this test.

1. The contract was entered into on or after 26 August 2024. The regime is not retrospective. Contracts signed before 26 August 2024 are not covered by Part 3A-5; contractors earning below the threshold on pre-26-August contracts may instead apply to the Federal Court under the Independent Contractors Act 2006 for a harsh-or-unfair contract review (a separate, court-based regime with a different statutory test). The FWC has no jurisdiction over contracts entered into before 26 August 2024, regardless of how unfair the term.

1. The contractor's annual rate of earnings is less than the contractor high income threshold in the year the application is made. The threshold is set by regulation and indexed annually. For the financial year commencing 1 July 2025, the threshold is $183,100. A contractor earning at or above this amount cannot use the Part 3A-5 FWC remedy; they remain eligible for the Federal Court remedy under the Independent Contractors Act 2006. The FWC has stated that "the contractor high income threshold should not be confused with the 'high income threshold' which only applies to employees" (the employee high-income threshold for unfair dismissal is lower, currently $175,000 for FY 2024–25). The FWC and Fair Work Ombudsman have not yet issued detailed guidance on how "annual rate of earnings" is calculated—whether it is the contract rate, the actual earnings in a calendar year, or the annualized rate for part-year contracts. Practitioners should assume the FWC will look at the annualized contract remuneration in the year the application is lodged, not the prior-year tax return.

1. The challenged term would relate to a "workplace relations matter" if the contractor were an employee. The FWC can only set aside or vary terms that, if the relationship were an employment relationship, would fall within the definition of "workplace relations matters" in section 536JQ of the Fair Work Act. The Fair Work Ombudsman states that workplace relations matters include "remuneration, hours of work and termination," and "other matters that are substantially the same as matters that relate to employees or employers dealt with by or under the Fair Work Act 2009 or state or territory industrial laws." The FWC cannot vary terms relating to intellectual property ownership, confidentiality, restraint-of-trade covenants, indemnities, or dispute-resolution procedures unless those terms have a direct and substantial connection to pay, hours, or termination. For example, a clause stating "the contractor assigns all IP created under this contract without additional payment" might be challenged if the contractor argues the no-additional-payment component is part of the remuneration term, but a pure IP-ownership clause is likely outside the FWC's jurisdiction. The first FWC decision under the new regime (a 2025 case involving an independent personal-care contractor) dismissed an application seeking payment of unpaid invoices, holding that Part 3A-5 gives the FWC jurisdiction to review contract fairness, not to enforce breaches of contract or unpaid amounts—the contractor must sue for debt in a civil court.

## The statutory test for "unfair contract term" — section 536NB

When an application is made, the FWC must determine whether the challenged term is an unfair contract term by considering a non-exhaustive statutory list of factors set out in section 536NB of the Fair Work Act. The FWC guidance and commentary identify the following factors:

1. The relative bargaining power of the parties to the contract. Did the contractor have meaningful opportunity to negotiate the term, or was the contract presented on a take-it-or-leave-it basis? Standard-form platform agreements (Uber, Airtasker, Deliveroo-type contracts) will weigh heavily toward low contractor bargaining power. Individually negotiated consulting agreements with a represented contractor may weigh the opposite way.

2. Whether the contract as a whole displays a significant imbalance between the rights and obligations of the parties. The FWC examines the entire contract, not just the challenged term in isolation. A contract that gives the principal unilateral rights to vary rates, change hours, suspend the contractor without pay, or terminate without notice, while imposing strict performance standards, exclusivity, and personal-performance requirements on the contractor, is likely to show significant imbalance. The FWC will not rewrite the entire contract, but the overall imbalance informs whether a specific term is unfair.

3. Whether the contract term is reasonably necessary to protect the legitimate interests of a party to the contract. A principal may defend a term by showing it protects a genuine business interest. For example, a 7-day termination-notice clause might be defended as necessary to manage workflow continuity; a unilateral rate-variation clause might be defended (though less persuasively) as necessary to respond to market conditions. The burden is on the principal to demonstrate the term's necessity. Generic "business flexibility" arguments are unlikely to succeed without evidence.

4. Whether the contract term imposes a harsh, unjust, or unreasonable requirement on a party to the contract. This overlaps with the imbalance factor but focuses on whether the specific term is harsh in its operation. Examples from commentary and early cases: a clause requiring the contractor to work any hours directed by the principal with no minimum or maximum (harsh because it provides no predictability); a clause permitting the principal to withhold payment for 90 days after invoice without cause (unjust because it shifts all cash-flow risk to the contractor); a clause requiring the contractor to indemnify the principal for any loss arising from the contractor's work, without a materiality or negligence threshold (unreasonable in scope).

5. Whether the contract as a whole provides for a total remuneration for performing work that is less than what employees performing the same or similar work would be entitled to receive under the National Employment Standards, a modern award, or an enterprise agreement. This is a pay-floor comparison. If the contractor's effective hourly or project rate, after accounting for the contractor's own costs (equipment, insurance, superannuation), is below the minimum wage or award classification rate for an employee doing comparable work, that fact supports a finding that the remuneration term (or the contract as a whole) is unfair. The Fair Work Ombudsman and FWC have not yet specified how this comparison should be calculated (gross contractor invoice vs. net after contractor expenses? comparison to base award rate or total employee cost including super and leave loading?). Practitioners should assume the FWC will look at the all-in contractor hourly rate compared to the total award entitlement (base rate + leave loading + super) for an equivalent employee classification. A contractor paid $35/hour for delivery work when the relevant award minimum (inclusive of casual loading and super) would be $32/hour will likely satisfy this factor; a contractor paid $20/hour will not.

No single factor is determinative. The FWC must weigh all factors and form an overall judgment. The legislation directs the FWC to consider whether the term is unfair, not merely whether the contract is commercial or whether both parties agreed to it.

## Remedies: FWC may set aside, amend, or vary the unfair term

If the FWC decides that one or more terms of a services contract are unfair, section 536ND of the Fair Work Act empowers the FWC to make an order to set aside, amend, or vary all or part of the contract. The FWC cannot award compensation for past periods when the unfair term was in effect, and the FWC cannot order the principal to pay unpaid invoices (that is a debt claim for a civil court). The remedy is prospective: the FWC rewrites the contract going forward.

Typical orders might include:

• Setting aside a unilateral rate-reduction clause and substituting a term requiring 30 days' written notice and mutual agreement before any rate change.
• Varying a termination clause from "the principal may terminate at any time without cause or notice" to "either party may terminate on 14 days' written notice."
• Setting aside a clause requiring the contractor to work "such hours as the principal directs" and substituting a term specifying a minimum and maximum weekly hour range.
• Varying a payment term from "invoices payable within 90 days" to "invoices payable within 30 days of receipt."

The FWC's jurisdiction is limited to varying the terms that would relate to workplace relations matters; it cannot rewrite the entire contract or vary terms outside that scope.

## Costs and accessibility: no adverse costs orders, low-cost forum

The Fair Work Act does not provide for adverse costs orders in Part 3A-5 applications. Commentary (citing the analogous Independent Contractors Act 2006 jurisdiction) states that "costs do not follow the event and costs orders are unlikely to be made unless the application is vexatious or unreasonable." This is consistent with the general Fair Work Act rule that each party bears its own costs. The absence of an adverse-costs risk makes it low-risk for a contractor to file an application, and principals cannot credibly threaten "you'll pay our legal costs if you lose" to deter a claim.

The Fair Work Ombudsman can provide free information and informal conciliation for contractors considering an application. Unions may represent contractors in FWC proceedings. The FWC's procedural rules for unfair-contract-term applications are less formal than Federal Court litigation, and the FWC has power to resolve applications by conference, conciliation, or arbitration.

## Interaction with the Independent Contractors Act 2006

Contractors who do not meet the Part 3A-5 eligibility criteria (because the contract was entered into before 26 August 2024, or because the contractor earns at or above the high-income threshold, or because the challenged term does not relate to workplace relations matters) may still apply to the Federal Court or Federal Circuit and Family Court for a review of the contract under the Independent Contractors Act 2006. That Act permits a court to set aside or vary a services contract (or a term of a services contract) that is "unfair" or "harsh," applying a different statutory test. The Independent Contractors Act 2006 applies to all independent contractors (no income threshold) and to all contracts (including those entered into before 26 August 2024), but it requires court proceedings (higher cost, slower, risk of adverse costs orders in some circumstances).

The Fair Work Ombudsman states: "Contractors can apply to the Fair Work Commission ... if both: the services contract was entered into on or after 26 August 2024 [and] the contractor earns less than the contractor high income threshold. ... Contractors can apply to a court for a review of their services contract under the rules of the Independent Contractors Act 2006 if they think the contract is harsh or unfair. This provides different pathways for review for contractors at different income levels."

Practitioners should advise contractors on which forum is appropriate: the FWC (low-cost, accessible, limited to post-26-August contracts and below-threshold earners, limited to workplace-relations terms) or the Federal Court under the IC Act 2006 (higher cost, broader scope, no income threshold, covers all contract terms).

## Practical implications for cross-border employers

Cross-border businesses engaging Australian contractors should:

1. Review all standard-form contractor agreements used in Australia for post-26-August 2024 engagements. Identify terms that may be challenged as unfair under the section 536NB factors: unilateral variation, no-cause termination without notice, payment terms longer than 30 days, no minimum hours or work guarantee, one-sided indemnities, or rates below the employee-equivalent award floor.

1. Consider separately negotiated terms for high-value contractors. Individual negotiation (evidenced by email correspondence, multiple drafts, or the contractor's own legal review) supports a defense under the "bargaining power" and "reasonably necessary" factors.

1. Benchmark contractor remuneration against the relevant modern award. The FWC will compare contractor pay to the National Employment Standards and applicable awards. A contractor paid significantly below the employee-equivalent rate (after accounting for the contractor's own super and leave-cost burden) is more likely to succeed on an unfair-terms claim. Employers should ensure contractor rates are commercially defensible when compared to award minimums.

1. Monitor threshold changes. The contractor high income threshold is indexed annually and may rise with CPI adjustments. The Fair Work Ombudsman publishes the updated threshold each financial year (1 July).

1. Understand that this regime applies even when the worker is genuinely a contractor. Part 3A-5 does not turn contractors into employees. It gives the FWC power to vary unfair contract terms for workers who remain independent contractors under the whole-of-relationship test and who remain outside the superannuation-guarantee and Fair Work Act minimum-wage regimes. A contractor who successfully challenges a contract term under Part 3A-5 is still a contractor—just a contractor with fairer contract terms.

Source: Fair Work Act 2009, Part 3A-5 Source: Fair Work Commission — Independent contractor disputes about unfair contract terms Source: Fair Work Ombudsman — Contractor entitlements and support Source: Fair Work Ombudsman — Independent contractor changes (Closing Loopholes)