Government nails down the final plank of WorkChoices, new independent contractors laws

The new independent contractors laws are designed to protect the status of independent contractors and minimise regulation created by industrial relations laws. But will they go far enough to avoid the confusion and risks associated with contracting to individuals? Will the new law simply open the door for more labour hire firms to move into the civil construction industry and will unions lose more power?

Facts & figures The Productivity Commission estimates about 10.1% of people in employment in Australia worked as self-employed contractors and other research shows this has grown by 15% in the 10 years up to 1998. In the construction industry this figure is much higher around 25% of construction workers.

Labour hire workers represented around 3% of all employed persons in 2002 in Australia; this also is much higher in the construction industry. Labour hire is becoming a more common type of employment in Australia as well as internationally. It is estimated that around 25% of independent contractors are in a dependent employment relationship and this is the area where there are risks of liability for principal contractors.

When an employee is engaged, employers must make provisions for annual leave, leave loading, long service leave, payroll tax, workers' compensation, superannuation, deal with fringe benefits tax and income tax issues, and be aware of anti-discrimination, OH&S and rehabilitation laws. Most of these are not an issue when engaging subcontractors.

The political angle

In 2004 the coalition election policy included a platform for creating new independent contractors laws, enshrining and protecting the status of independent contractors, and encouraging independent contracting as a wholly legitimate form of work.

In government its approach has been to link this reform to general industrial relations reform and therefore there was opposition to this from the Labor Party and Democrats. So until the coalition gained a majority in the Senate, like WorkChoices the new laws have been impossible.

Unions particularly have been against widespread use of independent contracting and labour hire and have attempted to slow down the introduction of these laws. The government has also watered down some of the proposed law, probably out of fear of widespread industrial action by truck drivers represented by the TWU.

Blockades in past decades by owner drivers have been damaging for governments and the economy. Other commentators have indicated that the move is to further undermine the status of unions in the economy and reduce union membership to lower levels thus weakening the Labor Party's support base.

As part of the consultation process, there have been two parliamentary inquiries in 2004 and 2006, and a ministerial discussion paper in 2005. The government has also announced that at the beginning of 2007, there will be a public consultation process with a discussion paper, regarding a review to be undertaken about rationalising and achieving nation-wide consistency of laws protecting owner-drivers in NSW and Victoria.

The main areas of reform the government is looking for includes:

_ Preventing federal awards and agreements from containing clauses which restrict the use of independent contractors or labour hire workers, or which seek to put conditions on their engagement (for example, prescribing they have the same conditions as employees);

_ Protecting independent contracting arrangements as commercial arrangements, not employment arrangements, under the law;

_ Addressing inappropriate state and territory legislation which `deems' independent contractors to be employees for the purpose of workplace relations regulation, including by over riding that legislation where appropriate; and

_ Ensuring that `sham' arrangements are not legitimised and preventing state and territory legislation from impacting negatively on labour hire and contracting arrangements.

What the consultation and inquiries found

The inquiries have raised a few more questions that add to the uncertainty as to what the new laws will provide. Particularly the lack of a clear definition of who is and who is not an independent contractor has been raised. Despite business lobbying for a simple definition, the new law seeks to keep the complex common law multiple factor test which will mean you will probably still need some advice on the arrangements you use or intend to use.

The House of Representatives Committee looked at the status and range of independent contracting and labour hire arrangements; ways independent contracting can be pursued consistently across state and federal jurisdictions; the role of labour hire arrangements in the modern Australian economy; and strategies to ensure independent contract arrangements are legitimate.

It recommended the government: maintain the common law approach to determine employment status and distinguish between employees and legitimate independent contractors when drafting federal legislation; adopt components of Australian income tax assessment alienation of personal services income legislation tests to identify independent contractors; use the National Skills Shortage Strategy to develop a program of skills development and a best practice guide targeted at the labour hire industry; improve and more clearly delineate responsibilities among labour hire agencies and host businesses in relation to OH&S; review workers' compensation schemes ; establish a voluntary labour hire industry code of practice by 2007 endorsed by the Australian Competition and Consumer Commission; establish resources for small business; preserve the legal status of independent contractors as small businesses and regulate them as small businesses under commercial rather than industrial law; provide alternative dispute resolution procedures and extend jurisdiction of the Federal Magistrates Court to hear unfair contracts matters.

New protections

In May this year the Minister announced that the new protections in Independent Contractors Act, would create significant new protections for independent contractors, by protecting their right to be truly independent contractors and from being roped into state laws which effectively force them to be `employees'. Also that `sham' contracting would be penalised by the Office of Workplace Services (OWS). Owner-drivers and textile, clothing and footwear outworkers in NSW and Victoria only will be exempted during a 3-year transitional period.

New federal unfair contracts law

These new laws will replace the existing state and federal unfair contracts laws. By overriding state unfair contracts legislation, using the corporations power, these laws provide access to a magistrate's court for cases where unfair or harsh conditions have been imposed in a contract. These types of claims will therefore be dealt with more as commercial matters than employment matters.

The legislation

There are 2 pieces of legislation which make up the changes, the Independent Contractors Bill 2006 and the Workplace Relations Legislation Amendment (Independent Contractors) Bill 2006 which amends the Workplace Relations Act .

The Independent Contractors Bill 2006 protects the freedom of independent contractors to enter into services contracts by:

_ Recognising independent contracting as a legitimate form of work arrangement that is primarily commercial;

_ Preventing interference with the terms of genuine independent contracting arrangements.

_ Excluding state and territory laws which deem as employees many independent contractors entering commercial agreements with employers;

_ Introducing transition arrangements for those workers previously deemed by state and territory laws to be employees but who would now be independent contractors; and

_ Retaining existing protections for TCF outworkers and road transport owner-drivers in NSW and Victoria and unfair contract provisions enabling application to a federal court for the review of services contracts on the grounds that they are harsh or unfair.

The Workplace Relations Legislation Amendment (Independent Contractors) Bill 2006 creates new prohibitions and penalties for:

_ Deceptive misconduct by employers or contract principals in relation to their employees or contractors;

_ Misrepresentation of an employment relationship as one of independent contract;

_ Knowingly making false statements to a worker with the intention of persuading or influencing the worker to become an independent contractor;

_ Dismissing or threatening to dismiss an employee for the purposes of re-hiring that employee under an independent contract to engage in similar work.

How will construction businesses need to prepare?

Development of management systems will be crucial, to avoid practices that may result in unfair contract claims or fines for misrepresentation, false statements or deceptive misconduct when engaging contractors. Specialist advice may be required for outsourcing work currently done by employees to contractors. Transmission of business issues also exist when buying, selling or outsourcing a business and are more complicated when independent contractors are involved.

Particular care will be needed when selecting, engaging and terminating contractors as it is yet to be seen if the new unfair contracts provisions will become as much of a headache as unfair dismissal laws have been. Preparation, thorough checking and regular review of contracts will become an essential management task.

Avoiding disguised arrangements will be important: if they appear to be shams the onus will be on the employer or principal contractor to defend any prosecutions. Management of risks by checking all subcontractors' arrangements, particularly labour hire firms that could have sham arrangements, will be important as will be supervision and OH&S responsibilities.

Is it worth the trouble?

Despite the risks and the political motivations behind the new laws, the use of independent contractors effectively gives businesses another way of supplementing their workforce requirements with higher skilled or lower cost workers, or could be used to change the risk profile of the business. The use of these flexibilities in conjunction with collective agreements or Australian Workplace Agreements (AWAs) allows further flexibility in larger organisations.

Generally business has been given opportunities that further expand their WorkChoices options. But care will be needed as you walk through the minefield.

* Geoff Stevenson is a workplace relations consultant contactable on 0427743633 or

industrialrelations@gmail.com