>Assuming this is legal at all according to current employment contracts, it's a huge pain for the new employer's payroll and more stuff to keep track for the employee's income tax.

Is it actually? I run a small business, and have trialled people a few times. I normally just transfer them the $x and report it as a business expense, same as you'd do with a contractor.

Maybe it's not technically 100% compliant, but I'd be incredibly surprised if the tax office kicked up a stink about something so petty.

(Then again, maybe it's just a "she'll be right mate" attitude that permeates even government departments here in Australia)