New definition of employment

In August 2024 the Fair Work Act 2009 introduced a new definition of employment. It is now based on a ‘whole of relationship’ test to decide whether someone is a contractor or an employee. This replaces the old ‘start of relationship’ test and may affect how you engage contractors.

This resource will explain what the new definition is, how it works in practice, some exemptions, and tips to help you stay compliant.

What is the new definition of employment?

Under the whole of relationship test, whether a person is an employee must be determined by ‘ascertaining the real substance, practical reality and true nature of the relationship’, which must consider the totality of the relationship. In considering this, the test further looks at:

• the terms of the contract, and
• how the contract is performed in practice.

How does it work?

Instead of relying on the terms of the written contract, you now consider factors such as:

• who has control over when and how work is performed,
• how payment is made (whether on a project basis or on an hourly rate),
• who carries the risk for making a profit or loss on each job,
• who supplies the tools and equipment,
• whether the work is expected to be ongoing, and
• whether the worker can delegate the work to others.

Someone signing a contract with the understanding that they are a contractor could later be found to be an employee. This means they may become entitled to leave, maximum weekly hours, redundancy pay, right to disconnect and other entitlements under the National Employment Standards (NES) and modern awards. Find out more about employees vs contractors.

It is important to note that the above relates to the context of ‘employment’. Different definitions of ‘employee’ vs ‘contractor’ can apply across a range of government agencies and legislative instruments, for example, in relation to Workers Compensation, or for taxation purposes, including Payroll tax.

Exemptions

High income contractors can ‘opt out’

If a contractor earns more than the contractor high income threshold ($183,100 in 2025/26), they can ‘opt out’ of the new definition by giving written notice before the relationship starts. Once they have opted out, the old start of relationship test (i.e. the terms of the written contract) will determine whether they are a contractor or an employee, regardless of any later changes to their work, as long as the contract itself remains unchanged.

The contractor can also revoke their opt out notice at any time by giving written notice.

State referred businesses

The new definition does not apply to non-company businesses such as sole traders and partnerships in NSW, SA, QLD, VIC and TAS, and certain state or local government officers.

Best practice

If your business operates as a ‘Pty Ltd’ or ‘Ltd’, you’ll need to take a truly holistic approach to ensure the person you’re engaging is a genuine contractor, not an employee. Beyond having a formal subcontractor agreement in place, in practice you need to:

• give your contractor real control over how the work is done and let them set their own hours to complete each task,
• require them to bring their own tools, equipment and insurance, and/or
• ensure they can delegate or subcontract the work if they choose.

The HIA Project and Period Trade Contracts clearly outline the key terms between contractors and principals. These include defining the scope of works, setting a fixed price for the project, confirming the contractor’s right to delegate work, and requiring them to provide and use their own tools and resources. These features help demonstrate the parties’ intention to establish a contractor relationship rather than an employment one. HIA recommends using these contracts, which are available for purchase in hard copy or online via Contracts Online.

Remember: no single factor is decisive and every aspect of your specific circumstances will be taken into account.

Defence

If you misrepresent an employment arrangement as an independent contractor arrangement, you might be heavily penalised for sham contracting. You might also be exposed to employee dismissal claims and failure to pay entitlements.

To defend such a claim, you must prove that you reasonably believed the worker was engaged as a contractor at the time the representation was made.

To find out more, contact HIA's Contracts and Compliance team

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