Are You Misclassifying Your Workers? The Whole of Relationship Test Explained
As a Business Owner, Are You at Risk of Breaching Employment Laws?
Incorrectly classifying an employee as a contractor can have serious legal and financial consequences for businesses. With the whole of relationship test coming into effect on 26 August 2024, constitutionally covered businesses must ensure they are correctly classifying workers—or risk breaches of employment law, back payments, penalties, and legal action.
If you're unsure whether your workers are employees or contractors, seeking advice from a commercial lawyer in Sydney or an employment lawyer in Sydney can help mitigate risks and avoid costly disputes.
What is the Whole of Relationship Test?
From 26 August 2024, businesses that fall under the constitutional national system must use the whole of relationship test to determine whether a worker is an employee or a contractor. This replaces the previous start of relationship test and takes a holistic approach to assessing employment relationships.
For businesses operating in inner west Sydney, Summer Hill, and surrounding areas, it is crucial to understand how this test impacts your workforce and your legal obligations. If you're unsure about classification, consulting a commercial lawyer near me can provide clarity.
Who Uses This Test?
The whole of relationship test applies to constitutionally covered businesses, which typically include:
Businesses with 'Pty Ltd' or 'Ltd' in their name.
Employers under the Fair Work Act.
For work performed before 26 August 2024, the start of relationship test still applies. This test may also be used if a worker opts out of the new test due to exceeding the contractor high-income threshold.
How the Test Works
The whole of relationship test considers the real substance, practical reality, and true nature of a working relationship. Businesses must assess:
Control over work – Who decides how, when, and where work is done?
Financial risk – Does the worker bear responsibility for profit or loss?
Provision of tools and equipment – Who supplies the necessary resources?
Ability to subcontract work – Can the worker delegate tasks?
Work hours – Are hours fixed or flexible?
Expectation of ongoing work – Is there a continuous working relationship?
Misclassifying workers can lead to significant legal and financial risks. If you're uncertain, speaking with an employment lawyer in Sydney can help protect your business.
The Cost of Misclassifying Employees as Contractors
Incorrectly classifying workers can result in serious penalties, including:
Unpaid wages and entitlements (annual leave, sick leave, superannuation)
Back pay liabilities if an employee was underpaid
Fines and penalties under the Fair Work Act
Legal claims for unfair dismissal or wrongful termination
Tax and superannuation penalties from the ATO
A commercial lawyer in inner west Sydney can help you audit your workforce, review contracts, and ensure compliance.
If you are unsure how these factors apply to your business, a commercial lawyer near me can help assess your worker relationships and prevent compliance risks.
Case Study: Peter’s Story
Peter starts working for a cleaning company in September 2024. His employer, Alfred, calls him a contractor, but after reviewing his work arrangement, Peter realises he might actually be an employee.
Peter’s contract states:
He must wear a uniform with the company logo.
He records start and finish times and submits timesheets.
He follows specific cleaning procedures directed by Alfred.
He is paid hourly and Alfred covers tax and superannuation.
He cannot subcontract his work to someone else.
After evaluating his work conditions under the whole of relationship test, Peter realises he is an employee, not a contractor. This means he is entitled to employee benefits, such as minimum wage, leave entitlements, and superannuation contributions.
What Can Peter Do?
If Peter believes he has been misclassified, he can take the following steps:
Speak to His Employer
Peter can discuss his concerns with Alfred and request a correction in his employment classification, including back pay and superannuation.
Seek Legal Advice
If Alfred refuses, Peter can consult an employment lawyer in Sydney to explore legal options.
Lodge a Complaint with the Fair Work Ombudsman (FWO)
The FWO can investigate and order back payments if Peter was misclassified.
Check for Superannuation Entitlements
Peter can report unpaid super to the ATO, which can enforce payments from Alfred.
Consider Taking Legal Action
If necessary, Peter can file claims through the Fair Work Commission or a small claims court.
Seek Union Support (If Applicable)
If Peter is part of a union, they can advocate for his rights.
How Business Owners Can Avoid Legal Risks
As a business owner, it’s crucial to review your worker classifications to avoid legal disputes. A commercial lawyer in Sydney can help you:
Conduct workforce audits to ensure correct classification
Draft employment contracts that comply with the new test
Minimise risks of back pay, penalties, and legal claims
Understand employer obligations under the Fair Work Act
At Connected Legal + Commercial, we specialise in employment law, contractor agreements, and workplace compliance. If you're a business in inner west Sydney, Summer Hill, or greater Sydney, our commercial lawyers can help you stay compliant with Fair Work regulations.
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DISCLAIMER
The content given herein is provided for information purposes only. It is general in nature and does not constitute legal advice and should not be used as such. Formal legal advice should be sought in particular matters.
Connected Legal + Commercial does not accept any liability to any person for the information (or use of such information) which is provided herein or incorporated into it by reference.
The information is provided in good faith on the basis that all persons accessing the content undertake responsibility for assessing its relevance and accuracy and will seek appropriate formal legal advice accordingly.