Author
Andrew Gray  
Partner

Murray Kellock  
Partner
T +61 3 9643 4172

Sydney
Andrew Gray  

Perth
Robert Lilburne  

Canberra
Ian Johnson  


29 June 2006

New Federal independent contractors legislation has significant implications

The Federal Government introduced into Parliament on 22 June 2006 the Independent Contractors Bill 2006 (IC Bill), together with consequential amendments to the Workplace Relations Act in the Workplace Relations Legislation Amendment (Independent Contractors) Bill 2006 (WRA Bill).

The proposed legislation is a further step towards establishing a single national workplace relations system and has significant implications for the use of independent contractor arrangements. The key changes are the:

  • introduction of a single national scheme for the review of independent contractor arrangements on grounds of “unfairness” which will provide a forum for contractors to challenge the terms of their engagement, including termination entitlements
  • removal of protections for certain independent contractors who are deemed employees under State legislation, and
  • penalties for parties who enter into “sham” independent contractor arrangements ie, engaging a person as a contractor when legally they should be characterised as an employee.

Significantly, the proposed legislation does not affect liabilities and obligations which may arise under superannuation, payroll tax and workers compensation legislation which impose employment related liabilities and obligations for some independent contractors.

Purpose of the legislation

The stated purpose of IC Bill is to recognise and protect the unique position of independent contractors in the Australian labour market.

The principal objects of the IC Bill are:

  • to protect the freedom of independent contractors to enter into services contracts
  • to recognise independent contracting as a legitimate form of work arrangement that is primarily commercial, and
  • to prevent interference with the terms of genuine independent contracting arrangements.

The Government’s policy rationale is that genuine independent contactor arrangements should be governed by principles of commercial and contract law, not by industrial and employment law. The IC Bill seeks to achieve this outcome by overriding various State employment and industrial laws that currently impact upon independent contractor arrangements.

Who the IC Bill applies to

The IC Bill applies to “services contracts”. A services contract is a contract for services to which an independent contractor is a party and relates to the performance of work by the independent contractor.

The IC Bill does not provide a definition of independent contractor. Accordingly, the term has its normal common law meaning. The common law test to distinguish between employees and independent contractors has proved difficult to apply in practice to many work arrangements. The IC Bill does not change this so the difficulties encountered when attempting to apply this test will continue.

The IC Bill does not apply to all independent contractors due to constitutional limitations. A services contract is only subject to the Bill if it has a “requisite constitutional connection”. This requires:

  • at least one party of the services contract to be either a:

 

i) constitutional corporation

ii) commonwealth authority, or

iii) body corporate incorporated in a Territory, or

  • the services contract to have a sufficient connection to a Territory which requires one of the following conditions to be satisfied:

 

i) the work under the services contract is wholly or principally to be performed in a Territory in Australia

ii) the services contract was entered into in a Territory in Australia, or

iii) at least one party to the services contract is a natural person who is resident in, or body corporate that has its principal place of business in, a Territory in Australia.

What the IC Bill does

The key implications of the IC Bill are:

  • the abolition of State industrial legislation which deems independent contractors to be employees in certain circumstances or provide employee related entitlements to independent contactors. This is subject to:

 

i) a three year transitional period which retains the protection of State legislation for existing contractors, and

ii) the preservation of existing protections for outworkers and owner drivers,

  • implementing a single national system for the review of independent contractor arrangements on grounds of unfairness and abolishing the existing State unfair contract jurisdictions (such as those that exist in New South Wales and Queensland), and
  • providing specific protection for outworkers in the textile, clothing and footwear (TCF) manufacturing industry.

The IC Bill is supplemented by the WRA Bill which imposes penalties for certain conduct including, most significantly, employers entering into “sham” independent contractor arrangements.

Exclusion of State laws

The IC Bill overrides State industrial and employment laws that provide employment related entitlements to independent contractors. The IC Bill overrides any State laws that:

  • deem a party to a services contract to be an employer or employee. Legislative deeming provisions exist in New South Wales, Queensland, South Australia and Tasmania. These provisions typically operate to deem certain types of “vulnerable" contractors performing particular types of work to be employees. For instance, in New South Wales, individuals performing work as cleaners, bread and milk vendors, carpenters, joiners or bricklayers (among others) are deemed to be employees for the purposes of employment and industrial entitlements
  • confer or impose rights, entitlements, obligations or liabilities on a party to a services contract in relation to “workplace relations matters” - these include matters such as remuneration, allowances, leave entitlements, hours of work, termination of contracts, disputes or industrial action, and
  • provide a court with an ability to vary or avoid a services contract on the grounds of “unfairness” (ie, State unfair contracts provisions).

The situation is complicated by transitional arrangements which provide the relevant State laws (other than unfair contract laws) are not overridden immediately upon commencement of the IC Bill. The State laws continue to apply to existing contracts (including a new contract which is a “continuation of an existing contract” within the meaning of the IC Bill) for a period of 3 years after commencement of the Bill. In the meantime, parties are provided with an ability to enter into a “reform opt-in agreement” which will result in the State laws ceasing to apply immediately from the date on which such an agreement takes effect.

The cessation of these deeming provisions either due to expiration of the 3 year transitional period or through the operation of an opt-in agreement will have significant implications for businesses who currently engage independent contractors deemed to be employees under the State legislation and for the terms of engagement of these workers. For instance, accrued leave entitlements of these “deemed employees” will become payable upon them ceasing to be a deemed employee.

The IC Bill also expressly preserves the operation of State laws protecting:

  • outworkers, and
  • owner drivers and contract carriers or any instruments (for instance, collective contract of carriage determinations) made under these laws namely:

 

i) the provisions of the NSW Industrial Relations Act that apply to drivers of public vehicles and contract carriers, and

ii) the Owner Drivers and Forestry Contractors Act 2005 in Victoria.

The preservation of these laws relating to owner drivers is a sensitive political issue. The Government has indicated that it is preserving these provisions for the moment given the “special circumstances of owner drivers”. However, the Minister has stated that it is not the Government’s intention to replicate these State provisions over time and we expect to see further change in this area. The Transport Workers Union can be expected to strongly oppose changes in this area.

Significantly, the IC Bill does not override other legislation extending the common law meaning of employee to apply to certain independent contractors. This includes superannuation legislation and State payroll tax and workers’ compensation legislation. Accordingly, the difficulties encountered in applying this legislation to independent contractors and determining whether superannuation, pay-roll tax and workers’ compensation premiums need to be paid will continue to be a compliance issue for business.

A National unfair contracts regime

The Bill overrides State unfair contract provisions and introduces a new national unfair contracts regime. It also repeals the existing unfair contract provisions in the Workplace Relations Act which have had limited operation in practice.

The proposed national contract review provisions enable a party to a services contract to apply to the Federal Magistrates Court or the Federal Court for a review of their services contract on the ground that the contract is “unfair” or “harsh” and provide a remedy for this.

The Government has made it clear that these independent contractor provisions should not be seen as providing a remedy for “the big end of town” or for commercial arrangements (the New South Wales unfair contract provisions have been used in this way in the past). An incorporated independent contractor may only apply for review of a contract where the work the contract relates to is wholly or mainly performed by a director of the company or a family member of the director. The IC Bill also allows a financial cap to be imposed on unfair contract claims by regulation, if a need for this is demonstrated.

The Government has stated that the Federal unfair contracts regime is intended to have a narrower operation than the current systems in New South Wales and Queensland. This is reflected in the IC Bill which specifies the criteria that the courts will take into account when determining unfairness which include:

  • the relative bargaining strength of the party to the contract
  • whether unfair tactics or undue influence/pressure was applied
  • whether total remuneration is less than that provided to an employee performing similar work (although a court must have regard to independent contractor rates in a particular industry), and
  • other matters relevant to deciding harshness or unfairness.

If a court is of the opinion that the contract is unfair it may set aside or vary part or all of the contract. The orders made should be limited to returning the parties to as close as possible to the position that would have existed had the unfairness identified by the court not existed. The court also has the power to make interim orders so as to preserve the position of a party to a services contract and also grant injunctive relief.

Costs will only be awarded in limited circumstances, namely, where proceedings are vexatious or unreasonable or where a party unreasonably causes another party to incur loss.

Contract outworkers in the textile clothing and footwear industry

In recognition of the vulnerability of outworkers in the TCF industry, the IC Bill provides for a default minimum rate of pay for contractor TCF outworkers which would operate where an outworker is not guaranteed a minimum rate of pay under State and Territory law.

Records must be kept in respect of TCF outworkers. Workplace inspectors are provided with right of entry powers to inspect compliance.

Prohibitions on certain conduct in relation to independent contractors

The WRA Bill introduces various prohibitions on certain conduct relating to contractors into the Workplace Relations Act.

The amendments make it an offence to:

  • misrepresent a person to be an independent contractor when they are an employee at common law (ie, entering into a sham arrangement). The offence is not committed where the employer reasonably believes the person to be independent contractor
  • dismiss an individual so the employer can engage the individual as an independent contractor. This offence has a reverse onus of proof which requires an employer to show the dismissal was not for this reason, and
  • make a false statement to persuade a person to become an independent contractor.

The maximum penalties that apply to these offences are $6,000 for an individual and $33,000 for a body corporate.

Timing of the legislation

The Government has referred the IC Bill to a fast track Senate inquiry that will report on 25 August 2006. With the Government holding the balance of power in both houses, the legislation is expected to be passed shortly after this date.

We will keep readers informed of developments in this regard.

More information

If you would like to discuss how the proposed legislation may impact upon your business, please contact us.