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New federal law on Independent Contractors

The Federal Government, acting on an election pledge, has introduced a Bill to recognise and regulate independent contractors. According to the government, the new law aims to “enshrine and protect the status of independent contractors and encourage independent contracting as a wholly legitimate form of work”.

However, although the new law will be a welcome step, it does not go far enough. By deliberately staying clear of workers compensation, OHS and discrimination issues, the new law goes only part of the way to solving the problems faced by contractors and the businesses that engage them (see Missing the Point).

Employers First™ has long advocated the recognition of independent contractors and argued that they should be removed from the purview of industrial relations laws, which are designed to regulate employment conditions. Their treatment as de facto employees in many cases, ostensibly for their “protection”, has led to muddled legal thinking – the victims of which have often been not only the contractors themselves, but also genuine employers who have engaged them through their businesses. At last there is recognition, even by the International Labour Organisation (ILO), that contractors should be regulated by the principles of commercial and contract law (see I Yam What I Yam in the February 2006 edition of Employers Adviser™).

Why a new law?

The Productivity Commission conservatively estimates the number of independent contractors in Australia to be around 800,000. The figure is likely to be much higher, with growing numbers of Australians attracted to the freedom and flexibility that self-employment brings. Unions have traditionally resisted this trend and claimed that businesses “exploit” contractors, who require the protection that only organised labour, and its political allies, can deliver. So contractors have been lumped into the industrial relations arena together with regular employees in most State jurisdictions. The Federal Government had pledged to “stop this regulatory excess and deliver on its promise”.

Definitions

The Bill does not provide a definition of “independent contractor”, and has rejected a parliamentary committee’s recommendation that the Personal Services Income test, as used by the Australian Tax Office, be adopted. So the new law relies on the common law’s approach to deciding whether a person is a contractor or not – depending on the facts of each case. This approach essentially looks at a whole series of factors to determine the true nature, or totality, of the relationship between the “contractor” and the “employer”. This will make outcomes less certain and leave it up to courts, rather than the parties themselves, to decide.

State deeming provisions

The Bill sets out to override State provisions that deem certain classes of independent contractors to be employees. The effect of these provisions is to change the nature of a working arrangement under state law from one of independent commercial contract to one of employment, bringing contractors into the web of industrial relations regulation. State deeming laws lead notoriously to absurd situations with often arbitrary and irrational results. The Federal Government gets it right when it points out that in various States:

…an independent contractor who drives a bus can be deemed to be an employee, while a taxi driver is not; or a person who packages goods under a contract for services is deemed to be an employee if they do so at their home, but not if they do so on business premises; a blind installer is deemed to be an employee but a plumber is not.
In NSW, “deemed” workers include milk vendors, cleaners, carpenters, joiners or bricklayers, painters, bread vendors, outworkers in clothing trades, timber cutters and suppliers, plumbers, drainers or plasterers, blinds fitters, council swimming centre managers or supervisors, ready-mixed concrete drivers, RTA lorry drivers and others.

The government intends to use the “corporations power” in the Australian Constitution to achieve this end. But the overriding of the deeming provisions, to be phased in over a transitional three-year period, extends only to “workplace relations” issues. The Bill says that these issues cannot be applied to a party to a “services contract” who is deemed to be an employee or treated as an employee. They include minimum (and other) terms and conditions of employment, settling of industrial disputes, regulating industrial action and regulating termination of employment.

Importantly, certain matters are not regarded as “workplace relations” issues, meaning that laws dealing with these matters could continue to apply to the parties in a services contract. They include workers compensation, OHS, discrimination, taxation, superannuation, consumer protection and other laws. In other words, the Bill stops short of true independence for contractors and continues to regulate for their “protection”.

Exclusions

The Bill retains further protections under NSW (and other State) laws by excluding owner-drivers and clothing and footwear outworkers from the new laws. Owner-drivers will still be able to bargain collectively with transport operators, and have conditions and other rates set by an industry tribunal. The outworkers will come under the protection offered by the new Australian Fair Pay and Condition Standard if they are not otherwise protected by a State law that guarantees their remuneration. These protections are considered to be unique and industry-specific, with a future review promised.

Sham arrangements

The Bill introduces penalties for any employers who might use “sham” independent contracting arrangements to avoid obligations to their employees. Businesses could be fined for:

misrepresenting an employment relationship as an independent contracting relationship, or attempting to do so at the time a contract is entered into
making statements to an employee to persuade or influence them to become an independent contractor where the employer knows the statement to be false
dismissing, or threatening to dismiss, an employee with the sole or dominant purpose of re-engaging them as an independent contractor.

Unfair Contracts

The “unfair contracts” provisions of the federal Workplace Relations Act will be removed and inserted into the new Bill. The aim is also to override the unfair contracts jurisdictions of the States, allowing contractors to bring cases to the Federal magistrates Court and then the Federal Court. Individual contractors who are incorporated business entities, or members of their family who performed the work, will be given the right to bring unfair contracts claims. The federal unfair contracts system would have a “narrower set of considerations when considering unfairness” than under the State regimes. Courts would be required to consider market forces, relative bargaining strength of the parties, unfair tactics or pressure, the rate of remuneration as compared with that under an employment contract and other harsh and unfair provisions.
The new Bill has already been criticised by union groups and various State governments. Politically, this was to be expected. But the ultimate success or failure of the new independent contractor laws will depend on whether they foster or hinder the freedom and entrepreneurship the Federal Government claims to champion.

Missing the Point
Contractors independent – but not for workers compensation

One of the main aims of the new Independent Contractors Bill is to overcome the unfair deeming provisions in states such as NSW – but only so far as industrial relations are concerned. The Bill misses the point to the extent that it applies only to “workplace relations matters”, which have been specifically defined to exclude areas such as workers compensation, occupational health and safety and discrimination.

The many business in NSW that have had the contractors they deal with deemed as workers by WorkCover NSW are justified in arguing that they continue to be subjected to equally, if not more, damaging deeming provisions in the NSW workers compensation legislation. Many companies have faced massive and unexpected premium increases following audits that have deemed their contractors to be workers. (see Unfair Deemed Worker Laws in the August 2005 edition of Employers Adviser™)

Questions that are to the point are:

If contractors are now to be protected in respect of regulation by industrial relations law and industrial tribunals, why should this protection (and recognition of their independent commercial status) not be recognised for workers compensation purposes?
If it is considered necessary to give contractors a particular status for industrial relations purposes, why has the Federal Government not gone that extra yard and offered them protection for workers compensation?

Workers compensation is usually the second largest labour cost (after wages) faced by small businesses. As long as the status of contractors remains uncertain in this area, small to medium businesses will continue to face ever increasing workers compensation premiums when contractors are deemed to be their employees – according to a completely arbitrary process determined by WorkCover and applied by its auditors – a process which is neither transparent nor certain.