Australian businesses engaging contingent workers should be aware of substantial changes in the regulation of labor hire arrangements.

The Fair Work Legislation Amendment (Closing Loopholes) Act 2023 amends the Fair Work Act 2009 to allow employees, unions and host employers (companies engaging with labor hire workers) to apply to the Fair Work Commission for an order that labor hire employees in Australia must be paid at least what they would receive under a host business’s enterprise agreement. The “closing of the labor hire loophole” aims to stop companies from underpaying workers through the use of labor hire. The loophole allowed companies to agree on a pay rate with their employees and subsequently bring in labor hire workers, compensating them at a lower rate.

The changes, also known as the “same job, same pay” measures, are considered landmark changes in Australia’s labor hire industry. While the legislation officially came into effect on Dec. 15, 2023, regulated labor hire arrangement orders will not come into effect until at least Nov. 1, 2024, which allows clients of labor hire firms time to prepare for the upcoming changes.

According to the Recruitment, Consulting & Staffing Association, the peak body for the recruitment, staffing and workforce solutions industry across Australia and New Zealand, the legislation will make it much more difficult for businesses to understand and meet their obligations under employment law.

“Indeed, the Department of Employment and Workplace Relations has acknowledged to RCSA that under proposals before the parliament, there are a number of elements that will need to be tested in the court before business will have certainty or clarity around what is expected of them to comply,” said Brooke Lord, RCSA’s head of advocacy and policy.

Although the recent labor hire legislation is complex, it’s essential for buyers to grasp key insights before entering into agreements with contingent workers.

Whom Will it Affect?

The Fair Work Commission may make an order in the following circumstances: 1) where one or more workers are supplied by a labor hire agency to perform work for a host business; and 2) an enterprise agreement (or other employment instrument) that applies to the host business would apply to the labor hire workers if they were employed directly for work of that kind.

The changes do not apply where employees are working for a host business under a training arrangement, or where the host is a small business employer (employing fewer than 15 employees).

What Differences Are Expected?

Labor hire workers covered by an order of the Commission will be entitled to be paid at least what they would receive under the host’s enterprise agreement (or equivalent public sector determination).

However, the commission can only make an order if it is satisfied that the host’s enterprise agreement would apply to the labor hire worker if they were directly employed. The Fair Work Commission can also only make the orders if it would be fair and reasonable with respect to certain considerations, such as existing pay arrangements, the duration and location of the work being performed and the industry in which they operate.

According to the Australian government, the revisions do not affect the wages of host employees or labor hire workers who are already receiving at least the equivalent of what they would be entitled to under the host’s enterprise agreement. Labor hire employers can request information from hosts to assist their compliance with this obligation, where information is needed to calculate the correct rate of pay, and hosts must comply with such requests.

The changes also include requirements for calculating termination payments when the employment of a labor hire employee covered by an order comes to an end.

Companies that are using the services of labor hire firms are required to apply to the commission to vary existing orders when there is a change in circumstances, such as a change in staffing firms or where the relevant enterprise agreement is replaced.

The RCSA recommends businesses look to “ensure they are engaging with reputable firms ideally that have both a labor hire license (should they be operating in a state that has a labor hire licensing scheme in place) as well as membership of RCSA, which comes with an enforceable code of conduct, endorsed by the ACCC (The Australian Competition and Consumer Commission).”

“Certainty and clarity are paramount for businesses, who are generally keen to ensure they are meeting their employment obligations,” Lord said. “The uncertainty introduced through these changes will make navigating employment law much more complex and difficult for all businesses.”

Australian law firm Maddocks cautioned that while applications for regulated labor hire arrangement orders can be made now, no orders can come into effect until Nov. 1. However, it added that there are anti-avoidance provisions that prohibit actions taken for the purpose of avoiding regulated labor hire arrangement orders that have been made, regardless of whether they are yet in force.

Anticipated Costs

Meaghan Bare, employment partner at Maddocks, said the changes have the potential to increase the costs that will be charged for the provision of workers and “to increase the scope for businesses to become caught up in disputes about labor hire arrangements.”

According to the RCSA, while there may be slight increases in administrative costs to respond to the changes, the larger impact is likely to be to the flexibility of staffing arrangements. While Lord cautioned that it may be too early to know the effect on costs, “many businesses may find working with labor hire firms a more cost-effective and less risky option for engaging non-permanent workers, depending on how complex the changes ultimately become.”

Conditions to the Orders

The Fair Work Commission must not make an order unless it is satisfied that the work to be performed for the host employer is not for the provision of a service rather than the supply of labor.

Crucially, the provisions include a default three-month exemption period from orders (if made) so as not to impact labor hire for surge work or where a short-term replacement worker is needed. This period can be shortened or lengthened in exceptional circumstances on application to the commission.

Bare noted the most significant effects are not automatic; rather, they rely on a party, such as a union or employee, to make an application to the Fair Work Commission.

While November seems far away, buyers engaging with labor hire firms are advised to seek additional counsel and acquaint themselves with the legislation.