Closing the Loopholes: What do directors need to know?


    The federal government’s industrial relations reform agenda is continuing full steam ahead into 2024. The ‘Closing the Loopholes’ reforms are a sweeping series of industrial relations amendments introduced into Parliament in September 2023, which are intended to increase job security, drive up wages and foster collective bargaining. Herbert Smith Freehills analysts outline what directors need to know.

    In light of the significant nature of the proposals, the Bill was quickly referred to a Senate Inquiry, which is due to publish its report in February 2024.

    However, a surprise deal was struck between the government and some key crossbenchers on 7 December 2023, which led to the Bill being split and the first half of the reforms being passed (Part 1 Reforms). The remainder of the proposals (Part 2 Reforms) will be debated in Parliament in 2024.

    The reforms in their totality are significant. They enact the next stage of a legislative agenda designed to shift the power dynamic away from employers, re-introduce a more prominent role for unions in the workplace relations framework and re-emphasise the role of an industrial tribunal in acting as the decision maker in relation to workplace disputes.

    All Australian businesses will be impacted. Directors will need to have an overview of the various confirmed and proposed rolling changes and how these will impact their businesses, so that they can plan ahead.

    In this article, we provide an overview of the Part 1 Reforms and their key implications for directors, and set out what can be expected in Part 2 Reforms.

    Part 1 Reforms

    The Part 1 reforms, which were passed by both houses on 7 December 2023 and will come into force from various staggered commencement dates, include:

    a.     The capacity of the Fair Work Commission (FWC) to make Same Job, Same Pay orders;

    b.     A new criminal offence for wage and superannuation theft;

    c.      Workplace health and safety amendments including a Commonwealth industrial manslaughter offence;

    d.     New rights for workplace delegates and new avenues for them to make general protection claims;

    e.     Strengthened provisions against discrimination in the workplace; and

    f.       Small business provisions in relation to redundancy.

    a)     Same Job, Same Pay / Regulated Labour Hire

    As of 1 November 2024, the FWC will have the power to make ‘labour hire arrangement’ orders. The effect of the order will be that:

    • The company that supplies their employees (suppliers) to another company that uses labour hire (host) is to pay the employees a ‘protected rate of pay’ no less than the full rate of pay they would have been entitled to under the host employment instrument (including loadings and overtime); and
    • The host is to provide information to employers that would enable them to comply with the new obligations to pay the ‘protected rate of pay’.

    Failure to comply may result in civil penalties for body corporates of up to $93,900, or $939,000 for a serious contravention.

    This reform is likely to increase the cost of labour hire, and will see businesses reviewing existing labour hire arrangements and contracts. It may ultimately result in some labour hire arrangements becoming uncommercial, with some companies choosing to directly hire employees or contractors instead.

    Directors will need to engage with management to understand how such changes may impact existing labour and project costs and financial projections/ estimates moving forward.

    b)    Criminalisation of wage theft

    As of 1 January 2025, intentional underpayments (which includes the underpayment of superannuation) will be a criminal offence under federal law. While the offence does not come into effect until 2025, we expect wage theft to continue to be a core focus for the Fair Work Ombudsman throughout 2024. The AICD has previously published an article on wage theft here.

    c)     Criminalisation of industrial manslaughter and various work health and safety amendments

    The Part 1 Reforms have amended the Work Health and Safety Act 2011 (Cth) to establish a new federal offence of industrial manslaughter, to align the WHS Act with the model legislation in force in most states and territories. This change will not affect most employers, given the federal WHS Act only covers Commonwealth departments and agencies, some federal public authorities and non-Commonwealth licensee companies. The AICD has previously published an article on the criminalisation of industrial manslaughter here.

    The Part 1 Reforms also provide for some work health and safety measures aimed at managing the aftermath of serious workplace incidents, giving protection to employees with post-traumatic stress disorder, and extending the functions of the Asbestos Safety and Eradication Agency to include silica related diseases.

    d)    New workplace delegate rights

    Employers must allow workplace delegates to communicate with other employees i the workplace who are current or prospective union members. Delegates must be given reasonable access to the workplace to discharge their duties and, unless the employer is a small business, they must be given paid time to attend training for their delegate role during work hours. These new rights will be protected under the general protections regime in the Fair Work Act 2009 (Cth) (Fair Work Act) and will need to be provided for in modern awards, enterprise agreements and workplace determinations.

    e)     Strengthened discrimination protections

    The Part 1 Reforms strengthen protections against discrimination for employees who have been, or continue to be, subjected to family and domestic violence, by making this a new ‘protected attribute’, prohibiting termination of employment on this basis and prohibiting terms in modern awards and enterprise agreements which discriminate against employees because they are subject to family and domestic violence.

    f)      Changes to the small business redundancy exemption

    Whereas employers with less than 15 employees (‘small business employers’) were previously exempt from the requirement to pay statutory redundancy under the National Employment Standards, the law has been amended to create an exception for employers who did not initially fit this definition but gradually became a ‘small business employer’ during a liquidation or bankruptcy process. The purpose of this amendment is to protect the entitlement to redundancy pay for employees who assist with the winding up process.

    Part 2 Reforms

    As stated above, the Part 2 Reforms are expected to be debated in Parliament in 2024 and include:

    a.     New definitions of the terms ‘casual employment’ and ‘employment’;

    b.     New arrangements with respect to sham contracting;

    c.      The introduction of increased civil penalties for underpayments of wages;

    d.     Changes to the enterprise agreement framework, including changes to features of the agreement making framework that were introduced by the Secure Jobs, Better Pay Act;

    e.     New regulations for the gig economy; and

    f.       Winding back changes allowing registered organisations to de-amalgamate.

    a)     New definition of ‘casual employment’ and ‘employment’

    It is proposed that ‘casual employment’ and ‘employment’ be defined using multifactorial tests that take into consideration the totality of the relationship and not just what the parties agreed to in the contract.

    This will unwind case law which confirmed that when classifying casuals and independent contractors, generally the terms of the written contract will be decisive when ascertaining their status.

    For casuals, regard will need to be had to the way in which the employee works, including but not limited to how often they work, the pattern of work (e.g. whether the employee has set days and times of work), the way the employer engages the employee to work (e.g. whether it is a request and the employee has the right to accept and deny work), and any representations the employer has made about the future of the employee’s employment.

    The reforms also provide a mechanism for casual employees to notify employers that they wish to convert to permanent employment (plus mechanisms for dispute resolution and arbitration).

    For independent contractors, there will be a return to the common law “multi-factorial” test, which involves no exhaustive list of indicia but can include factors such as whether the person has control over the performance of their work and whether they are operating their own business or are integrated as part of the employer’s business.

    The effect of these provisions is to create greater uncertainty when classifying employment relationships.

    If passed, directors should engage with management on how this reform will impact employment contracts including its casual conversion system, use of casual labour and contractors more generally, and whether employees are being appropriately classified in light of the changed tests.

    b)    Changes to the sham contracting framework

    Under the Fair Work Act, an employer must not represent to an individual that a contract of employment is a contract for services under which the individual performs work as an independent contractor. It is proposed that the Part 2 Reforms will change the defence that is currently available to employers who misrepresent an employment relationship as an independent contracting relationship. The amended defence will import an objective test whereby the employer is not liable if, at the time of the misrepresentation, it “reasonably believed” that the contract of employment was actually a contract for services.

    c)     Changes to the enterprise agreement framework

    The government’s reforms to the bargaining landscape through the Secure Jobs, Better Pay legislation have been far-reaching and this article does not propose to cover this topic in detail. However, directors should be aware that the Part 2 Reforms build on these previous changes, including proposals to:

    • Amend how new single-enterprise agreements interact with multi-enterprise agreements, including allowing them to replace in-term multi-enterprise agreements, provided that all relevant employee organisations or the FWC consent to a vote on the new single-enterprise agreement. As part of the approval process, the employer would need to show that the agreement leaves employees ‘better off overall’ than the multi-enterprise agreement being replaced;
    • Revise the kinds of terms that may be included in an intractable bargaining workplace determination; and
    • Establish an ability for multiple franchisees to bargain for a single-enterprise agreement and multi-enterprise agreements.

    d)    New regulations for the gig economy

    The Part 2 Reforms propose to introduce a mechanism for establishing minimum standards for ‘employee-like’ workers in the gig economy. The FWC would be empowered to make a minimum standards order for this purpose, after consultation with relevant stakeholders. Eligible ‘employee-like workers’ would also be able to bring a claim for ‘unfair deactivation.’

    e)     Winding back de-amalgamating changes

    The Part 2 Reforms propose to repeal certain legislative amendments made in 2020 in order to make it more difficult for union amalgamations to be unwound by curtailing the FWC’s ability to accept applications for a ballot of members of a constituent part of a union to withdraw from the union.

    Key takeaways and questions for directors

    The federal government’s reform agenda is fundamentally altering Australia’s workplace relations landscape and directors are grappling with how best to prepare their businesses.

    It is likely that the Closing the Loopholes laws will increase:

    a)     Workplace disputes and the number of FWC matters that employers need to respond to;

    b)     Costs of legal compliance; and

    c)     Labour costs.

    For boards, mitigating risk is a matter of coming to an early understanding of what the changes are, how they might impact the business in a practical sense and what can be done to plan prior to commencement.

    Some of the key questions that boards may want to ask management on the most relevant aspects of  the Part 1 of Reforms are:

    1.     Has management undertaken an audit of its use of labour hire?

    2.     Have existing labour hire contracts been reviewed to see how increased labour costs and other new obligations will be allocated between the parties?

    3.     Does the business need to re-think its use of labour hire in light of these changes?

    4.     How regularly is the business auditing payroll compliance?

    5.     Have underpayments issues been identified and what are the appropriate next steps for prompt remediation (including any self-reporting obligations to the Fair Work Ombudsman)?

    6.     What actions has management taken to ensure that employees are being paid the correct amount (including superannuation)? Has this been documented?

    Authors: Miles Bastick, Partner, Herbert Smith Freehills, Ali McPherson, Senior Associate, Herbert Smith Freehills

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