Feds get tough on contractors

New laws give federal coverage to contractor arrangements. Any arrangements decreed a sham could be costly for SMEs. By PETER VITALE of VECCI

WorkChoices grabbed the spotlight before Christmas, but equally important changes to the law covering independent contractors went through the Parliament at the same time.

The principal effects of the changes under the Independent Contractors Act (ICA), and complementary amendments to the Workplace Relations Act (WRA) are:

• State laws that deem certain contractors to be employees, effectively bringing them under award safety net coverage, are overridden.
• Employers who enter “sham” independent contractor arrangements are penalised.
• There is a new right for contractors to have “unfair” contracts reviewed by the courts.

Behind the new laws is the Federal Government’s stated desire to “protect the freedom of independent contractors to enter into the contracts of their choice”.

The ICA applies in any case where a contractor, or the contractor’s principal, is a corporation because the Federal Government has made the laws under its constitutional power to regulate corporations.

Watch out: your new obligations

The penalties for employers seeking to engage a person as a contractor when they really should be an employee – “sham arrangements” – are steep. Employers will be exposed to a penalty of up to $33,000.

Businesses using individuals or family businesses as independent contractors are now open to claims that the contract is “unfair”. Micro businesses can claim for an unfair contract if the contractor is an individual or a company in which the work is done mainly by the directors or members of the director’s family.

The Federal Court has been given wide powers to vary or set aside terms of contracts that are considered “unfair” and, consequently, to award financial compensation for a breach of the varied terms. A question mark remains over how many businesses will benefit and how many might suffer.

The unfair contract regime opens up nationally a litigation option that has only previously been available in New South Wales and Queensland. Courts in those states could exercise wider powers than the ICA confers, and for a broader range of claimants. WorkChoices has done away with these state claims for “unfair contracts”, but previously they had been successfully used to obtain very significant awards of damages.

The alarm bells aren’t ringing yet, but there will be a close interest in what the courts make of their new powers.

The big problem with these new laws is the uncertainty about how to define an independent contractor relationship, or a contract for services.

It still remains to be determined according the common law. Past cases have used a multi- layered test to determine who is an employee and who is a contractor. And a contractor is not a contractor just because the employer calls them one. The new laws leave the question of who is a contractor and who is an employee no clearer.

The lesson for employers:

Be extra wary of engaging people as contractors and consider carefully whether they are really employees. Whatever you call the people who work for you, the law may define them as employees anyway. If so, you may be liable to a big penalty.

Peter Vitale is a solicitor, the General Manager of Workplace Relations Services at VECCI and a principal at CCI Victoria Legal.