Independent Contractors Bill - is there now certainty for employers?

Analysis

Independent Contractors Bill - is there now certainty for employers?

The Government's intention when it introduced the Independent Contractors Bill 2006 into Federal Parliament on 22 June 2006 was to shield independent contractors from State and Territory industrial laws. Does the Bill succeed in this respect and what are the key consequences flowing from the Bill?

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The Government's intention when it introduced the Independent Contractors Bill 2006 into Federal Parliament on 22 June 2006 was to shield independent contractors from State and Territory industrial laws. Does the Bill succeed in this respect and what are the key consequences flowing from the Bill?

Workplace Relations Minister Kevin Andrews said the Bill would 'enshrine and protect the status of independent contractors'. 'This is', he said, 'about the right of all Australians to choose to work for themselves - the right to be their own boss.'

Independent contractors - how many and where are they?

There are a significant number of independent contractors in the Australian workforce, with estimates varying from 800,000 to nearly two million.

Independent contractors comprise a diverse group - from IT and accounting professionals to factory workers, cleaners and fruit pickers. Tradespersons and related workers are the largest group of self-employed contractors, with 27% of all self-employed contractors coming from this occupation (Productivity Commission statistic 2002). Professionals were the second largest group (18.3%), and production and transport workers and labourers made up 10.6%.

Why was the Bill needed and what's the problem?

According to the Government, the flexibility of contractor arrangements is stifled by State and Territory laws that drag contractor relationships into the sphere of employment law. This is done in three ways:

  • some State and Territory laws 'deem' contractors to be employees,
  • in NSW and Queensland, remedies for independent contractors against unfair contracts are in industrial relations laws, and
  • sham contracting arrangements deprive some genuine employees of the protection of employment laws.

Provisions of Bill

The Independent Contractors Bill attempts to combat these perceived problems.

1. Exclusion of State deeming provisions

The Bill excludes the operation of State and Territory laws to the extent that they affect people who are party to a 'services contract', ie independent contractors.

In New South Wales, the Industrial Relations Act 1996 deems workers in various industries to be employees, eg milk and bread vendors, cleaners, bricklayers, painters, outworkers in clothing trades, timber cutters, plumbers and RTA lorry drivers. Queensland, South Australia and Tasmania also have laws deeming certain persons to be employees.

The Bill excludes the operation of these deeming laws, with two important exceptions:

  • contract outworkers in the textile, clothing and footwear industry, the exception being explained as 'a recognition of the unique and vulnerable position of outworkers within the Australian working community' (the Bill provides a default minimum rate of pay for contract outworkers), and
  • transport owner drivers, for whom employment-like conditions may be set by industrial tribunals in NSW and Victoria.

The Bill would also override any future legislation that attempted to confer employee-like rights on an independent contractor.

2. Federal unfair contracts law to override State laws

The Bill introduces a Federal unfair contracts regime that overrides State unfair contracts laws. There are currently unfair contracts laws in New South Wales, Queensland and the Federal jurisdiction which, according to the Government, are problematic in three ways:

  • they 'rest in industrial relations laws when they actually relate to commercial arrangements';
  • duplication leads to uncertainty and confusion; and
  • remedies in NSW and Queensland (eg, compensation orders) go beyond merely considering the terms of a contract and the process by which it was made.
The proposed Federal unfair contracts regime would allow 'services contracts' (ie, involving independent contractors) that are harsh or unfair to be varied or set aside. Compensation could not be ordered. State unfair contracts provisions would be excluded.

3. Sham arrangements

The Bill provides that it would be an offence to falsely represent that an employment relationship is an independent contractor arrangement, or to dismiss persons so that independent contractors could be engaged. The maximum fine for a company would be $33,000.

Clarity or confusion?

Assuming this Bill is passed by Parliament later in the year, will compliance have become easier for employers? Will it be clear what they should do to avoid penalty? Will independent contractors be better off?

In fact there are some gaping holes in the new regime that both employers and workers will have to face.

1. The High Court challenge to the WorkChoices legislation

The Independent Contractors Bill can only achieve the Government's aims if the High Court upholds the Government's WorkChoices legislation. If the High Court were to decide that the Government does not have the constitutional power to enact WorkChoices, similar reasoning would suggest that the Independent Contractors Bill would suffer a similar fate.

2. Only some employers are affected

Only employers who are covered by WorkChoices, ie constitutional corporations, would be covered by the Bill.

3. Definition of independent contractor

The Bill does not define the term 'independent contractor'. Instead, it is stated to apply to those who are independent contractors according to common law principles.

The common law has traditionally distinguished between a contract of service (employees) and a contract for services (independent contractors). The common law test generally used in Australia takes into account factors such as control, the mode of remuneration, the provision and maintenance of equipment, hours of work, who bears the risk, the withholding of tax and the ability to delegate work.

In many cases, this test fails to provide certainty for employers. Bicycle couriers are a good example of this - the NSW Court of Appeal said they were independent contractors (Vabu 1996), the High Court said they were employees (Hollis v Vabu 2001). In the High Court decision, McHugh J warned of the consequences for employers of getting it wrong - it raised, he said 'the spectre of retrospective liability' for income tax, fringe benefits tax, pay-roll tax, superannuation, workers compensation and other obligations. This could be the case if an employer had treated a worker as an independent contractor when in fact the worker was a common law employee.

The difficulty in classifying a worker and the consequences that may arise are shown in the 2006 NSW Supreme Court case Personalised Transport Services v AMP Superannuation Ltd..  A freight courier company paid $133,000 superannuation contributions on behalf of workers (believing them to be employees) to whom it had subcontracted work. The company was later advised that it did not have to make the contributions, but the superannuation fund refused the requested refund. The Court held that the company was entitled to a refund as the contributions had been paid by mistake. It is interesting that in Personalised Transport the Court decided that the couriers were not employees on the basis of the NSW Court of Appeal decision in Vabu, which was effectively overruled by the High Court in Hollis v Vabu.

4. Deeming provisions in other State laws

The Bill only excludes deeming provisions in State industrial laws.

Deeming provisions in other State laws - such as pay-roll tax or workers compensation laws - are not affected. This would mean that the employer would need to treat some workers as independent contractors for industrial law purposes, but as deemed employees for other purposes.

5. Superannuation guarantee obligations

A person who works under a contract wholly or principally for labour is deemed to be an employee for superannuation guarantee purposes, with the employer being obliged to make superannuation contributions on their behalf. The Independent Contractors Bill makes no change to this. Despite the Bill requiring an employer to treat a person as an independent contractor, the employer may have to treat the person as an employee for SG purposes and make contributions on their behalf.

Superannuation contributions made by an employer for a worker who is deemed to be an employee for SG purposes will generally disqualify the worker from receiving tax deductions for their own personal contributions - even if the 9% contributed by the employer is considerably less than the worker would choose to contribute. The contractor will need to consider whether to incorporate to get around this problem.

6. Employers must take care during the transitional period

The Independent Contractors Bill gives parties to a services contract (ie the employer and the independent contractor) a transitional period to rearrange their relationship. The transitional period ends: (a) when the contracting relationship ends if that is within 3 years, (b) 3 years after the Bill commences, or (c) at any earlier time if the parties agree.

When the transitional period ends, the contractor will no longer be entitled to employee-like entitlements such as award wages or leave. The employer would be obliged to pay out any accrued entitlements. If the employer unilaterally converted an individual's status from employee to independent contractor during the transitional period, in addition to being paid accrued entitlements the individual could be entitled to a redundancy payment or to a remedy at State law such as reinstatement.

Employers need to be clear about the application of the complex transitional period rules as they are likely to apply in different ways for different workers.

7. Impact on the worker

Even though the Independent Contractors Bill may have the effect that a worker is an independent contractor, the personal services income rules in the tax legislation may treat workers differently. Unless the workers can prove that they are carrying on personal services businesses, they may, under the tax law, be denied deductions other than those to which an employee is normally entitled.

This means that the workers could not deduct rent, mortgage interest, rates or land tax relating to their residences, or certain payments to associates (eg a spouse) relating to the work being carried out. There may also be tax consequences such as tax being withheld from payments to the contractor.

The effect for a particular individual could be that employee entitlements such as leave and workers compensation are lost when the individual is no longer deemed to be an employee, but the continuation of the effective deeming in the superannuation guarantee and personal services income rules will mean that there is no compensation for the lost entitlements.

Related

Contractors Bill means you can be 'your own boss', says Andrews

Independent contractors Bill a 'double whammy' for professionals, says union

Contractors law threatens pay and conditions of all, says ACTU

  

 

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