30 January 2007
This is a layperson’s guide to the Independent Contractors Act. It should not be taken as a legal interpretation. Some alterations to this guide may be required after further legal consideration.
It looks specifically at the implications of the new legislation for
- Independent contractors themselves (and)
- Those who engage independent contractors.
Links to the legislation
Contents
Practical implications for:
Overview
What the law does: Protections
The legislation gives new protections for independent contractors that have not been available before. Specifically:
- Unfair contracts review;
- Prevention of sham contracts;
- The voiding of State laws that deem independent contractors to be employees for industrial relations purposes.
Who is covered by the laws?
Independent contractors who work as
- individuals or
- partnerships or
- use their own small company. (But you must do the work yourself.)
and the commercial contract is with a
- corporation or
- The Commonwealth or a Territory.
When do the laws apply?
- The laws come into effect sometime in the first half of 2007. (The Act lists by June 2007, but Government statements have indicated that it might happen earlier)
- For new contracts, the laws will apply immediately.
- For existing and continuing contracts, there is a three-year transition period, but the unfair contract provisions of the Act apply immediately the laws come into force. If you have an existing contract, you can enter the new protections by signing an ‘opt in’ agreement.
Who is not covered?
- Clothing outworkers;
- Owner-drivers in NSW and Victoria.
What issues are not covered?
This law has no impact on 12 specific matters including:
- Federal tax (PAYG, PSI)
- Superannuation
- Workers’ Compensation
- Payroll tax
- Anti-discrimination and Equal Opportunity laws
- Occupational Health and Safety laws
Each of these areas is covered by specific Federal or State/Territory legislation.
Some Details
Structure of the law
There are actually two pieces of legislation.
- The Independent Contractors Act 2006. This covers definitions, the scope of the law, unfair contract provisions and transition issues.
- Amendments to the WorkChoices laws. These covers sham contract issues.
Both pieces of legislation are short but complicated to read—particularly because of the frequent recourse to double negatives. In parts, the legislation is highly confusing.
Definition
The definition of an independent contractor is that used under common law. An independent contractor is a person who works under a commercial contract. Common law has a set of rules to identify the commercial contract. But because the Commonwealth only has constitutional reach over corporations, the Act only applies when at least one party is a corporation.
Commercial contracts between any combinations of two individuals, partnerships or trusts are not covered by this Act.
Unfair contracts
- If a contract is unfair, action can be taken in the Federal Magistrates Court.
- One of the parties to the contract must make an application.
- There is a list of matters that a Court considers when determining whether a contract is unfair—for example, harshness, application of duress, etc.
- The Court can (a) void a contract (b) change a contract to remove the unfairness. Damages or fines cannot be applied.
Sham contracts
- A sham contract is a contract which is in truth an employment contract but which someone presents as, and pretends to be, a commercial contract.
- A sham contract prosecution can be taken by the (a) Office of Workplace Services (OWS), (b) the worker (c) a union.
- Fines (of up to $33,000) apply against anyone who creates and applies a sham contract. If the accused could prove that they genuinely believed the contract was a commercial contract, no conviction or fines would apply.
In practical terms, a prosecution would proceed as follows:
- Someone (OWS, worker or union) would allege that a sham contract existed.
- An application would be made to the magistrate or federal court. A case would have 3 distinct parts:
(a) The contract would need to be studied and subject to the common-law test to determine if it was a commercial or employment contract. All the standard common-law processes would apply. If the court decided that the contract was a commercial contract, the case would go no further.
(b) If the court decided that the contract was in fact an employment contract, the accused would have the opportunity to prove that they had made a genuine mistake. In practical terms, much of the evidence obtained in establishing the true nature of the contract would be used to determine if the accused had intended to create a sham contract or had made a genuine mistake.
(c) If the court found that the accused had intended to create a sham contract, a fine could be imposed.
Practical implications of the new laws (and what you need to do), as they apply to (a) Everyone, (b) Employees, (c) Independent contractors, and (d) Businesses that engage independent contractors
Everyone: Definitions settled
The most important aspect of the Independent Contractors Act is that for the first time there is a clear statute definition of what an independent contractor is. But that statute definition simply reinforces what is already the common-law definition.
ICA says that this is important. For more than a decade, many commentators and industrial relations activists have been saying that the common-law definition is complicated. ICA has maintained that it is not. The common law requires some simple understandings that are very much common sense. People tend to know if they have an employment contract or a commercial contract. To assist the formation of such knowledge, ICA has produced a one-page check list.
ICA believes that there is no reason why anyone should not have a good idea of which contract type they have. The necessary knowledge can be gained quite easily.
Further, ICA has looked at other suggested definitions that have been promoted in Australia. These have always been highly confusing and, if implemented, would have created much more confusion than they fixed. An example was the Australian Democrats’ attempted amendments to the Independent Contractors Bill in 2006. The amendments were well-intentioned, but ICA found them unworkable.
Employees: Sham contract protections
Being an independent contractor is primarily about a shift in mental attitude. If you are genuinely an independent contractor, you don’t want a boss-worker relationship but rather a client-to-client relationship. It’s a big shift in mental approach to work arrangements. And it’s not for everyone. And just because a written contract may say that it’s an independent contractor contract, that doesn’t make it one at common law. The courts regularly reject such contracts and find them in fact to be employment contracts.
The sham contract arrangements under the Independent Contractor laws provide an important protection for employees who find themselves being conned. Action can be taken and fines can be imposed.
But it’s also vital to understand that genuine mistakes can be made by businesses that engage workers. Often businesses will want to use independent contractors because they want a business-to-business client relationship. It’s often better business. But businesses can put in place the wrong processes without realizing that they have. It’s important that they, too, are protected so that genuine error does not lead to fines.
Further, workers must not con businesses. If businesses genuinely want to use independent contractors, and seek people to work as independent contractors, it’s not fair that a worker who wants to be an employee takes the work on contractor terms and then wants to complain afterwards.
The key to this is balance. The intentions of all parties must be clear, honest and respected. The sham contract arrangements do enable action to be taken, but the honest intentions of the parties can constitute a clear and reasonable defence.
Independent Contractors: Unfair contracts
The sham contract arrangements are not relevant to people who want to be independent contractors. But the unfair contract provisions are relevant and important.
One of the most common complaints that ICA receives from independent contractors is about unfair clauses in contracts. These complaints exhibit common patterns, with alleged ‘commercial’ contracts containing clauses that
- Enable the engager to change the terms of the contract without agreement from the independent contractor.
- Specify that the contract is for a set term, but allow the engager to cancel the contract at a moment’s notice, without payout clauses or penalty to the engager.
Further, the contracts can
- be of a standard format that have been poorly modified to meet the specific needs of the job in question. This frequently leads to misunderstanding and dispute.
- have complex language that confuses rather than clarifies terms, and may mask terms of which the independent contractor may not be aware.
These sorts of contract problems are common and almost endemic in some industry sectors.
ICA always recommends that independent contractors take great care with their contracts, raise any such concerns and seek modifications. Sometimes, jobs happen so quickly that there is not time for this to occur, or the engager puts the proposition on a ‘take it or leave it basis’. Often these sort of contracts look like shams. They may in fact be shams. They are certainly often unfair and bad business practice. ICA recommends that independent contractors confronted with such situations should at least deliver a plainly written letter to the engager setting out such concerns and disagreements, even if the job is accepted.
If a dispute arises regarding a contract, independent contractors now have a clear avenue to the Magistrates Court to allege unfairness. Clauses such as the ones discussed above would be clearly taken into consideration in such cases.
ICA also recommends that if the contract is reasonable, and there is, for example, a simple dispute over payment, independent contractors should look at the trader-to-trader small claims dispute tribunals available in most States. These work exactly like consumer affairs tribunals, cost about $50 to lodge a claim, and solicitors are often banned for disputed amounts below $10,000. We have recommended this approach to several independent contractors. One recovered $3,500 in two months. Unfair contract actions are not necessary in these instances.
Businesses engaging independent contractors
The Independent Contractors legislation raises the performance benchmark for businesses that engage, or want to engage, independent contractors.
Many businesses find the business-to-business type relationship significantly better than the old worker-boss relationship. There is a higher level of maturity in the relationship, leading to better results. However, higher quality management systems are needed. With independent contractors it’s not good enough to ‘bark orders’ or make demands. That’s reflective of employment. Working with independent contractors means bringing both parties to an understanding of the mutual business needs and outcomes required. To be successful, contracts must reflect the mutual and common needs in the arrangements. The contracts must deliver equal rights to control the contract. When this occurs, independent contractor contracts can lead to long-term success for all parties involved.
But ICA frequently notices significant problems in the drafting and implementation of contracts. These problems can come about for a number of reasons.
- There is simply a lack of understanding in a business about how to construct simple contracts that work in commercial terms.
- Contracts are often handed to lawyers for drafting. The lawyers take the approach that the contract must protect the interests of their clients and forget the need for commercial fairness to the other party.
- Sometimes a business may want to shift risk from their business to the independent contractor.
- There is a managerial desire to seek the performance benefits of working with independent contractors, but a personal desire to ‘be the boss’.
Whatever the reason, problem contracts frequently take on the features already described above:
- They allow the insertion of clauses which enable engagers to change the terms of the contract without agreement from the independent contractor.
- They are written for a fixed term to try to gain the commitment of the independent contractor, but allow the engager to cancel the contract at a moment’s notice, without payout clauses or penalty to the engager.
Further, the contracts can
- be of a standard, generalised format that has been poorly modified to meet the specific needs of the job in question. This frequently leads to misunderstanding and disputes.
- be written in complex language that confuses rather than clarifies terms, and may mask terms about which the independent contractor may have no knowledge.
In these situations two major things can result:
- The alleged commercial contract may in fact take on the appearance of an employment contract. This could trigger the sham contract provisions of the Independent Contractors legislation to come into play.
- The commercial contract may become inherently unfair and, if tested in court, the terms of the contract may be voided or changed.
In any event, either situation would be expensive in terms of time and money for any business.
ICA’s experience is that most people in business want to get on with the business of doing business. Most problems in contracts arise from poor drafting and lack of understanding. But many problems also stem from the intention to create an unfair advantage.
With the advent of the Independent Contractors legislation, businesses that engage independent contractors need to be considerably more careful. There is now considerable risk associated with poor or badly balanced commercial contracts with independent contractors. Contracts will have to be improved to demonstrate true contract integrity. This is a very good development. This will improve business in Australia.
There are two specific risks that businesses must now manage:
- Not being accused of sham contracts: An accusation of a sham contract is akin to an accusation of a form of fraud. This is a serious charge for any business. It is particularly serious for large businesses with a public profile—a sham contract accusation would be highly damaging.
- Not being accused of unfair contracts: Although the damage to reputation that flows from an accusation of an unfair contract would not be as severe as that arising from a sham contract accusation, the damage to valuable relationships with independent contractors would be considerable.
Neither risk is desirable or needed.
ICA strongly believes that all businesses should take the opportunity afforded by the new legislation to review their contracts with independent contractors. Specifically:
- Standards formats should be looked at, as well as specific contracts.
- Contracts should reflect equal rights over the control of the contract.
- Risk should not be transferred without commensurate benefits.
- Clarity and simplicity in language should prevail.
- Managerial egos should not unsettle contract integrity.
- Mutual commercial outcomes should be the target.
ICA does not naively believe that this will happen in every instance, but the new laws do introduce a fresh discipline to which good businesses will respond.
Obtaining Assistance: Independent contractors and businesses
ICA hopes that the information on this Website will assist all parties to create commercial contracts that have integrity.
Click here for
ICA is also developing some
- Simple guidelines for contract construction.
- Potential contract templates.
These will take into account the requirements of the new Independent Contractor legislation. E-mail alerts will be sent when they are available on the Website.
In addition, there are many organizations that specialize in independent contractor arrangements. These include specialized contractor management companies, independent contractor labour hire companies, legal firms that specialize in independent contractor arrangements, government agencies that provide advice, and so on.