New Energy Experts Insights – How will the Closing the Loopholes Act affect the renewable energy industry with James Simpson – Part II

In this New Energy Experts Insights, we sit down for a second interview with James Simpson to discuss the recently passed Fair Work Legislation Amendment (Closing Loopholes) Act 2023 (Closing the Loophole Act) as it affects labour hire in the renewable industry.

To read part I of this series where we discussed who will build Australia’s renewable energy transition, click here.

Key Takeaways:

  1. The Closing the Loophole Act aims to address concerns about labour hire arrangements undercutting Fair Work Act regulations.
  2. The Act requires regulated hosts to pay labour hire employees the same as direct employees for equivalent work.
  3. The legislation is complex, posing compliance risks for regulated hosts engaged in labour hire.
  4. The Act exempts businesses with fewer than 15 employees and operates on an opt-in basis, triggered by applications to the Fair Work Commission for a regulated labour hire arrangement order (RLHAO).
  5. An amendment excludes service providers from the legislation to prevent unintended consequences for genuine contractors providing specialised services rather than labour.
  6. While the legislation may not lead to widespread direct engagement of labour by regulated hosts, it could affect the ability of labour hire companies to win contracts if hosts opt for price certainty by increasing direct employment.
  7. There are concerns that the minimum pay threshold could act as a ceiling, limiting labour hire employees’ ability to negotiate higher rates.
  8. In the short term, the impact on the renewable energy sector may be limited due to high demand for labour. In the long term, labour hire’s attractiveness may decrease.

What is the impact of the Closing the Loophole Act on Australia’s system of labour hire?

Labour hire represents 1.2% of the overall Australian workforce. The term labour hire describes an indirect employment relationship in which a regulated host (essentially an employer) contracts with a labour hire company to provide labour hire employees in return for a fee, rather than employing those labour hire employees directly.

Part 6 of Schedule 1 to the Closing the Loophole Act was enacted in response to the growth of labour hire arrangements, as regulators were concerned regulated hosts (particularly in the mining, agriculture and transport sectors) were using labour hire arrangements to undercut bargained rates which must be provided to employees under the Fair Work Act 2009.

Put simply, the Closing the Loophole Act requires regulated hosts to pay labour hire employees the same amount they would pay their employees for the same job. To effect this, the Closing the Loophole Act empowers the labour hire employees, regulated hosts (or their employees) and unions to apply to the Fair Work Commission (FWC) for a regulated labour hire arrangement order (RLHAO). A RLHAO will require regulated hosts to pay labour hire employees at least the amount prescribed under a regulated host’s enterprise bargaining agreement (EBA) (or equivalent public sector determination). However, the FWC may only make an order relating to remuneration (the power does not extend to prescribing non-monetary benefits).

The Closing the Loophole Act commenced on 15 December 2023, although certain provisions will not commence until later in 2024. Any RLHAO made by the commission will not come into effect until 1 November 2024.

Is the use of labour hire to circumvent minimum pay requirements a prevalent issue in Australia? What practical impact will it have on labour hire companies?

I don’t believe the provisions will impact the majority of regulated hosts. However, given the complexity of the legislation, the potential for non-compliance will be an ongoing risk for regulated hosts engaged in labour hire.

These changes are going to take time to process, and whether the mischief these provisions seek to cure eventuates remains to be seen. The Law Council in its submission (to the Senate Education and Employment Legislation Committee inquiry into the Fair Work Legislation Amendment Bill 2023) stated that these provisions ‘are highly complex and it is likely that many employers will be unable to implement them without significant administrative assistance’. I think this view is correct, as there are serious questions around whether the legislation will redress major problems.

There are significant exemptions in the Closing the Loopholes Act. In particular, the provisions do not apply to businesses that employ fewer than 15 employees (the rationale being to reduce the administrative burden on small businesses).

It is also an ‘opt in’ type scenario; the provisions are only triggered when a labour hire employee, regulated host (or its employee) or union applies to the FWC for an RLHAO against the regulated host.

Finally, the Fair Work Commission has broad discretion in making RLHAOs, and there are some practical uncertainties regarding the Closing the Loophole Act’s application. The complexity of the changes means there will be ongoing uncertainty. There will be cases brought before the Fair Work Commission that will likely be narrowly interpreted and so offer limited broader guidance.

A late-stage amendment to the Closing the Loophole Act also made it clear that the changes would not apply to service providers. What is the purpose of excluding service providers?

When the bill (the draft of the Closing the Loophole Act) was presented to parliament, members of industry raised concerns that the text could be read, unintendedly, to apply more broadly than just to labour hire arrangements. The key concern was that the provisions would apply to people who are genuine contractors providing specialised services, rather than those engaged to provide labour.

This concern arose because there was no clear carve-out for service providers from the proposed laws. Rather, the Fair Work Commission was required to consider, as a factor, whether the arrangement was for the provision of services (as opposed to the provision of labour) when determining whether it was fair and reasonable to make an RLHAO.

In response to complaints by industry, the bill was subsequently amended to make clear that the Fair Work Commission must not make a RLHAO unless it is satisfied that the performance of the work is not or will not be for the provision of a service. This is a mandatory exclusion rather than a decision-making factor. In assessing whether an arrangement is for the provision of labour or services, the Fair Work Commission must consider factors such as the involvement of the regulated host (including the ability to direct, supervise or control), the extent to which the regulated host’s systems must be used, and whether the purported labour hire is subject to industry or professional standards.

Do you think this will lead to the regulated hosts engaging labour directly (in place of contracting with labour hire companies)? Is there still a place for labour hire companies?

The short answer is yes. However, in respect of labour hire companies, I suspect that it will potentially have a significant impact on their ability to win work if regulated hosts are tempted to defer to price certainty by increasing their employed labour. Of course, the amendments do not encompass non-monetary benefits such as leave entitlements and so labour hire companies will still likely offer a more economical alternative to the regulated hosts than directly engaging labour.

As the renewable energy sector is largely project-based, there will also always be a role for labour hire to plug specific gaps, especially during the construction phase.

The changes will implement a minimum threshold of pay for labour hire employees. Do you consider that this minimum threshold may also act as a ceiling, and that labour hire employees will have difficulty negotiating higher rates?’

Andrew McKellar, CEO of ACCI, said that ‘This Bill means that labour hire employees won’t receive the pay rates they negotiated, but instead rates negotiated by other employers and employees they have never met. Labour hire employees will become the only employees in the country denied any role in negotiating their wages’.

Whether this is true or not remains to be seen. The big issue is that no one really understands how this will play out in practice. There are all different sorts of permutations of outcomes, intended and unintended, that could flow from the changes. This may include a restructuring of the market for labour in certain industries.

However, there is a great opportunity for labour hire companies to offer results-based pricing instead of contracting on a schedule of rates basis. We might see a business model shift where labour hire companies begin to contract in the same way that subcontractors do – i.e. fixed price contracts.

How significantly will the Closing the Loophole Act impact the renewable energy sector?

In the short term, I don’t expect there will be a substantial change to labour hire in the renewable energy sector, as there is a huge demand for both skilled and unskilled labour. Due to the current skills shortage, the terms and conditions of labour hire agreements in the renewable energy sector are usually well above awards and enterprise bargaining agreements.

The effect of these provisions may mean labour hire eventually becomes less attractive, however, this issue is more likely to arise down the track.

The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.

James Simpson leads Hamilton Locke’s workplace and employment practice. James’ experience spans across advisory and litigation in employment and labour law. This includes complex employment litigation, organisational restructuring, industrial relations management, international workplace law, Equal Employment Opportunity (EOO) and discrimination, work health and safety, and major workplace investigations.