Independent Contractors Bill

By Joe Catanzariti.

Key Points:
Services contracts involving a corporation may soon to be beyond the reach of State Industrial tribunals and a range of State laws.

In September 2004, in the lead-up to the last Federal election, the Prime Minister announced plans to protect the right to work as, or engage, an independent contractor. The Independent Contractors Bill 2006 (Cth), released on 22 June 2006, sets out how the government proposes to do that.

In broad overview, if passed into law in its current form, the Bill would:

• apply to a contract with a company (or a small range of other entities) that relate to an independent contractor performing work ("corporate services contracts")
• free corporate service contracts from (predominantly State) laws that treat a contractor as an employee or allow the contract to be vetted by an industrial tribunal, although outworkers and transport owner drivers will still be able to access State laws; and
• allow a party to some, but not all, corporate services contracts to go to Court to challenge the contract as "unfair or harsh".

The shift reflects the Federal Government's view that independent contracting arrangements should be governed by commercial law and not industrial law.

Who will be covered?

Not all commercial arrangements will be subject to the Bill. Instead, to have the benefit of the Bill, a contract must:

• involve an independent contractor as a party to the contract
• relate to the performance of work by an independent contractor; or
• include any of the following entities as a party (as the independent contractor performing the work, or as the party wanting the work done):
• a "constitutional corporation" (that is a foreign, trading or financial corporation)
• the Commonwealth
• a Commonwealth authority
• a body incorporated in a Territory; or
• a person or body that has its principal place of business in a Territory.

Alternatively, the contract must be entered into, or the work must be performed primarily, in a Territory.

The Bill does not apply to:

• purely commercial arrangements that are not connected with the performance of work by a contractor; or
• contracts that do not involve a company (whether as the independent contractor or as the party hiring the contractor's services).

These contracts are outside the intended scope of the Bill, and the pre-existing system of State regulation stays in place for them.

Who is an independent contractor?

The Bill does not change who is an independent contractor. It would leave it to the parties to decide how to engage the services of any worker (to use a neutral term), and relies on the existing common law test of who is an employee and who is not.

State laws - what will be removed and what will be left?

State laws that regulate any of the following matters will not apply to corporate service contracts:

• pay
• leave
• hours of work
• enforcing contracts
• terminating contracts
• making, enforcing or terminating agreements (other than employment contracts) that determine terms and conditions
• disputes between employers and employees
• industrial action; or
• any other matter substantially the same as a matter dealt with the under the Workplace Relations Act 1996 (Cth).

State laws continue to regulate corporate services contracts about all matters not on this list, including:

• discrimination and equal opportunity
• superannuation (though they may be subject to Federal superannuation laws)
• workers' compensation
• occupational or workplace health and safety
• child labour
• public holidays
• deductions from wages or salaries
• industrial action affecting essential services
• jury service
• professional or trade regulation
• consumer rights
• taxation; and
• outworkers.

The Bill does not affect contractors' existing rights to use the common law, laws of equity or other State or Federal laws not typically associated with employment.

Special cases

The Bill also does not disturb the operation of State laws that regulate road transport owner drivers or outworkers. Together, the 25 August report of the Senate inquiry vested with responsibility for reviewing the Bill, and the reception its report has received, suggest that the Bill may be made into law in its current form, subject to a small number of amendments designed to confirm outworkers' ongoing ability to access protections provided by State laws.

A new look unfair contracts regime for corporate services contracts

The Bill creates a new unfair contracts regime for parties to corporate service contracts, to replace State regimes and the regime previously administered by the Australian Industrial Relations Commission. Under the Bill the Federal Court or the Federal Magistrates Court may decide whether a corporate services contract is "unfair or harsh" unless the contract falls into one of two excluded classes of contract. No challenge can be made to the fairness of a corporate services contract if the independent contractor performing the work is a company, unless a director of the independent contractor (or a family member of the director) "wholly or mainly" performs the work[1], or if the contract is for the provision of domestic services to another party to the contract.

As a result, an independent contractor can challenge the fairness of the terms of their contract to perform work if:

• they contract as an individual and the other party to the contract is a company; or
• they contract through their own services company and a director of the services company wholly or mainly performs the work as is typically the case in consultancy arrangements by those with specialist skills and/or experience.

In determining whether the corporate services contract is "unfair or harsh" the Court may consider the relative bargaining positions of the parties, whether any undue influence or pressure was exerted, whether the contract provides a total remuneration less than that of an employee performing similar work, and any other matter the Court thinks relevant. The Court may vary or set aside whole or any part of a contract it finds is unfair, but it must do no more than overcome the particular unfairness it finds in any particular case. The effect of the changes and the continued reliance on the common law test of who is an employee and who is a contractor, is to offer individuals who contract with a corporation the option of pursuing unfair dismissal before the Australian Industrial Relations Commission, based on a claim that they were, in truth, an employee, or pursuing unfair contract, before the Federal Court or the Federal Magistrates Court.

Transitional arrangements

State laws (including laws requiring contractors to be treated as employees and unfair contract laws) will regulate corporate services contracts made before the Bill comes in effect for a transitional period of up to three years. Parties to those contracts can "opt in" to the new regime at any time before the end of the transitional period by express agreement. An "opt in" agreement will remove pre-existing arrangements from the reach of State unfair contract laws.

Sham arrangements

When releasing the Bill, Workplace Relations Minister, the Hon. Kevin Andrews MP, also released the Workplace Relations Legislation Amendment (Independent Contractor) Bill 2006 (the "WR Bill"). The main purpose of the WR Bill is to stop employers from entering into "sham" contractor arrangements and to introduce penalties for doing so.

The WR Bill prohibits any person from deliberately misrepresenting an employment relationship as an independent contracting arrangement, or an independent contracting arrangement as an employment relationship. A person will not misrepresent deliberately if they:

• believed they were not misrepresenting the true nature of the arrangement; and
• could not have reasonably been expected to know otherwise.

Large entities, employers with a human resources function or a member of an industry association that can offer workplace advice may find it difficult to rely on this defence, since it is unlikely to be "reasonable" for an entity to misunderstand the true position when it has access to such sophisticated workplace relations advice. Of course, obtaining legal advice and understanding the position might avoid the issue altogether.

The Bill also prohibits employers from dismissing, or threatening to dismiss, an employee if the sole or dominant purpose is to engage the person as a contractor to perform the same work, and from making false statements to induce former or current employees to enter into independent contracting arrangements to perform the same work they perform or performed as an employee.

If a Court agrees that parties have entered into a sham arrangement or any other prohibition has been breached, it can order penalties of up to $33,000 for a company or $6,600 for an individual. Multiple breaches may be costly.

Conclusions

The changes should provide some comfort to companies who engage the services of genuine independent contractors and who record the terms of engagement in a well-drafted written agreement that reflects accurately how the relationship operates in practice. The civil penalties available for sham arrangements suggest that all employers would be well-advised to:

• think carefully about the best way to engage workers;
• look at existing contracts and make sure the paperwork matches the way contractors operate in practice;
• undertake periodic reviews of whether work practices and paperwork match; and
• have a clear, written contract with all contractors that reflects accurately the true nature of their engagement.