Independent contractors: new national system of reviewing unfair contracts and ban on shams

By Hedy Cray.

Key Points:
New federal legislation relating to independent contractors, operative from 1 March 2007, provides a national system to review independent contracting arrangements and excludes certain State and Territory laws. Legislation introducing protection against "sham" independent contracting arrangement by employers is also operative.

The main provisions of the Commonwealth Independent Contractors Act 2006 became operative on 1st March 2007. The main aims of this Act are stated to be to:

• protect independent contractors’ freedom to enter into service contracts;
• "recognise independent contracting as a legitimate form of work arrangement that is primarily commercial"; and
• prevent interference with "genuine independent contracting arrangements".

The Act introduces a national scheme for regulating "services contracts". What is a "services contract"? This is defined in section 5 and the following are relevant to this definition:

• "Services contract" is defined as one with an independent contractor as a party.
• The term "independent contractor" is not defined, although section 4 provides that it is "not limited to a natural person". This means that the common law principles will remain the source of authority for determining whether a worker truly is an independent contractor or an employee.
• The "services contract" must have as one of its parties a corporation (trading, financial or foreign), the Commonwealth (or Commonwealth authority) or a body incorporated in an Australian territory. This provides the "requisite constitutional connection" under section 5(1) and (2).

Reviewing unfair contracts: Federal Court or Federal Magistrates Court

The legislation essentially provides a national system for review of unfair services contracts by the Federal Court or the Federal Magistrates Court.

Provisions of the Workplace Relations Act 1996 before the Work Choices amendments, which enabled such review of unfair contracts on the basis of the contract being unfair or harsh, are now contained (with some minor changes) in the new Independent Contractors Act 2006, and enable the court to order the contract to be set aside (in whole or in part) or to make an order varying the contract.

National system

The main significance of this legislation, however, relates to the introduction of a national system. Part 2 of the Act excludes certain State and Territory laws. Under section 7, a law of a State or Territory will not affect "the rights, entitlement, obligations and liabilities of a party to a services contract" where that law is one of the following:

• a deeming law, which purports to deem or treat a party to a services contract to be an employer or employee for the purposes of a law relating to a "workplace relations matter"
• a law which confers or imposes on a party to the services contract "rights, entitlements, obligations or liabilities" which would be "workplace relations matters" in an employment relationship; or
• a law which expressly enables a contract to be amended, varied, set aside or declared void by a court or tribunal.

Defining "workplace relations matter"

These "workplace relations matters" are listed in section 8 paras (a) to (i) to include matters such as remuneration and allowances; leave; hours of work; enforcing or terminating contracts as well as agreements; disputes and their resolution; industrial action by employer or employee; any other employment matter dealt with under the Workplace Relations Act or an industrial law of a State or Territory and any matters specified under the Regulations.

Interestingly there is a list of excluded matters under section 8(2). Those which are not "workplace relations matters" include — superannuation; workers compensation; occupational health and safety; child labour; taxation; and discrimination.

What is the effect on the operation of State or Territory laws?

Firstly, the effect of the excluded list of matters under section 8(2) is that State or Territory laws will still operate in respect of these matters – eg. in the area of workers compensation.

Secondly, there is an express provision in the Act which means that State and territory laws still apply in respect of outworkers; chapter 6 of the Industrial Relations Act 1996 (NSW) regulating contracts in the road transport sector; the Owner Drivers and Forestry Contractors Act 2005 (Vic), plus some legislative provisions nominated in the Regulations - which include security of payments in the building industry under legislation of New South Wales, Victoria and Queensland.

However, the major impact of the new legislation relates to:

• the exclusion of the operation of certain state laws outlined above in respect of workplace relations, thereby overriding some State deemed employee legislative provisions; and
• the exclusion of the operation of state unfair contracts jurisdictions.

The provisions relating to excluding the operation of laws which enable contracts to be reviewed on an unfairness ground will clearly affect many independent contractors who would ordinarily be able to seek redress under the NSW unfair contracts jurisdiction in the Industrial Relations Act 1996. The main impact of these provisions, then, is to exclude this avenue for redress by independent contractors in NSW and to embrace them within the scope of the national system.

"Sham" independent contracting arrangements

The Workplace Relations Amendment (Independent Contractors) Act 2006 (Cth) has also become operative. It brings a new Part 22 to the Workplace Relations Act 1996 (Cth) dealing with "sham" independent contractor arrangements.

Essentially the new sections provide as follows:

• a person is prohibited from misrepresenting either an existing or a proposed employment relationship as an "independent contracting arrangement" (sections 900 and 901)
• it will be a defence to such a misrepresentation if the person either did not know that the contract was one of employment as opposed to a contract for services, or was not reckless about so knowing (sections 900(2) and 901(2))
• an employer is prohibited from dismissing (or threatening to dismiss) an employee where the sole or dominant purpose is to "engage the individual as an independent contractor to perform the same work, or substantially the same work, under a contract for services" (section 902); and
• a person is prohibited from making false statements where the purpose of such statements is to induce an employee or former employee to contract with the person as an independent contractor to do the same (or substantially the same ) work for the employer( section 903).

The penalty section, section 904, enables a monetary penalty to be imposed on the person contravening the relevant provisions and, in certain cases, for injunctive relief to be granted. The new provisions are expressed to be civil provisions so will not give rise to criminal offences.

Implications of the new laws relating to independent contractors

The federal Independent Contractors Act 2006 brings in a new national system for review of independent contracting arrangements, largely excluding the operation of State laws. The main impact will be on the unfair dismissal jurisdiction in New South Wales so far as it relates to independent contractors.

The amendments bringing in new Part 22 to the Workplace Relations Act will provide some additional obligations on employers. There is new protection for employees, or prospective employees, against misrepresentations as to their contract being that of principal employer and independent contractor, and employers may need to seek advice about these penalty provisions. Further, employers will need to be very careful to ensure that any dismissals of employees and their replacement with independent contractors performing largely the same work do not contravene the new provisions.

Employers who are uncertain as to the true nature of their arrangements with workers — are they employees or contractors? — should seek legal advice.

Thanks to Marilyn Pittard for her help in writing this article.

For further information, please contact Hedy Cray.