In Australia there are a significant number of independent contractors, with estimates ranging from 800,000 to 2 million. The Federal Government has long criticised the states for their legal arrangements governing contractors. The criticism comes from the fact that state laws drag contractors into the sphere of employment law regulation.
On 22 June 2006 the Federal Government introduced the Independent Contractors Bill 2006. The intention of the Bill was to shield independent contractors from state and territory industrial laws.
What’s in the new Bill?
1. Safeguards against contractors wrongly falling into the employee basket
The Bill excludes the operation of state and territory deeming provisions where laws allow a tribunal to deem a certain category of contractor as employees. The effect of these changes is to stop state tribunals deeming contractors to be employees and, thereby, creating a legal personality of employment contract where the contractor never intended such arrangement to be entered in too.
There are two important exceptions to the exclusion of the deeming laws:
- Contract outworkers in textile clothing and footwear are excepted on the basis that they are recognised as a unique and vulnerable category of outworker within the Australian working community. As a result, the Bill provides a default minimum rate of pay for such contract outworkers.
- Transport owner drivers for whom employment law conditions have been set by industrial tribunals in both New South Wales and Victoria.
2. A federal unfair contracts regime, which purports to override state unfair contracts laws
State unfair contracts laws currently exists in New South Wales and Queensland. The proposed federal contracts laws would allow contracts involving independent contractors for the harsh or unfair to be varied or set aside. Compensation is not a feature of the new federal bill. This is a major departure from existing state unfair contracts provisions, which traditionally provide for significant compensation where contracts have been found to be harsh, unfair or unconscionable.
3. No tolerance for misrepresentations
It will be an offence under legislation to misrepresent an employment relationship as an independent contractor relationship and an offence to dismiss employees in favour of contractors.
A maximum fine of $33,000.00 per offence has been provided for in the Bill.
Determining relationships… employee or contractor?
There is little doubt that the federal Independent Contractors Bill 2006 will change the landscape in regulating contractor arrangements, at least as far as New South Wales and Queensland is concerned. Significantly, the Bill will only cover those employers and employees who are covered by the WorkChoices legislation.
The multi factor test will be used to determine the service type. A number of indicia are taken into account to assess whether an arrangement is a contract of service (employment) or alternatively, a contract for services (independent contractor). A multi factor test provides criteria including control, the mode of remuneration, whether invoices are provided, provision of tools and maintenance of equipment, hours of work, tax arrangements, the ability to delegate work, whether there is a truly independent relationship and an assessment of who bears the risk.
The principal authority for the multi factor test is the case of Hollis -v- Vabu, a High Court decision of 2001 in which the High Court warned of the consequences for employers getting it wrong.
The High Court raised the spectre of retrospective liability for income tax, fringe benefits tax, payroll tax, superannuation, workers compensation and other legal obligations. This could be the case where an employer had treated a worker as an independent contractor when, in fact, the worker was a common law employee.
A transitional period
The Independent Contractors Bill 2006 allows parties to a contract a transitional period to rearrange their relationship.
That period ends when:
- the contracting relationship ends, if that is within three years; or alternatively
- three years after the Bill commences; or
- at any earlier time if the parties agree.
When the transitional period ends, a contractor will no longer be entitled to be provided with employee-like entitlements such as award wages or leave. The employer will be obliged to pay out any accrued entitlements. If an employee unilaterally converts from employee to independent contractor during the transitional period, then in addition to being paid accrued entitlements, the employee could be entitled to a redundancy payment or a remedy at state law such as reinstatement.
Employers will need to be very precise about the application of the complex transitional period rules as they are likely to apply in different ways for different workers
What do government and industry leaders think about the Bill?
The Independent Contractors Bill is said by government to protect the freedom of contractors to bargain with their principals and prevent workplace relations systems being used to determine their status. To that end, the Federal Government has indicated that it will spend $15 million over four years on an independent contractor’s education and enforcement campaign.
Workplace Relations Minister, Kevin Andrews, has made it clear that in addition to an education campaign, existing compliance and enforcement roles will be enhanced to deal with increased requests for assistance and to investigate and enforce penalties for sham arrangements under the Independent Contractors Bill. That means that employers will be facing increased audit pressure on their relationships with both employees and contractors, and employees need to be vigilant to ensure that their arrangements stand to the test of scrutiny. The enforcement role is undertaken by the Office for Workplace Services.
The New South Wales government has labelled the Independent Contractors Bill 2006 a sham itself. Minister John Della Bosca indicated that there was a fear that the new laws would make it easier for companies to sack their workforce and re-employ them as contractors to escape their workplace health and safety and workers’ compensation responsibilities and not pay superannuation.
Similarly, the ACTU has attacked the new Independent Contractors Bill as a further threat to job security. ACTU president, Sharon Burrow, said the new laws would make it easier for big business to replace existing workers with so called independent contractors.
As can be seen from the above, the institutions involved in workplace regulation i.e. state governments and the ACTU, do not support the new Independent Contractors Bill 2006 and given their respective prosecutions of the High Court challenge to the Work Choices legislation, resistance to the Contractors Bill can also be expected to be maintained.
Get it right!
This is a critical area for employers to get right. Before employers embark on any significant change to either their employment or contractor arrangements, they should get appropriate legal advice to avoid exposure for legal liability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.