New laws about independent contractors - more certainty for employers

On 1 March 2007 the new Federal Independent Contractors Act came into operation, continuing the Federal Government's clean sweep of workplace relations.

Independent contractors are now more dependent on the terms of their contracts. The unfair contracts jurisdiction of the NSW Industrial Relations Commission has been replaced with limited protections through the Federal Court or the Federal Magistrate's Court. It is more important than ever to be clear about the terms of the contract.

So who is an independent contractor?

Most in business would think of an independent contractor as somebody providing services, who is a step away from an employee, but not quite a stand alone service provider. Legally an independent contractor is somebody who contracts to provide their own services but other than as an employee.

The legislation leaves the line between employees and independent contractors to be determined by the existing common law principles, that is, the true nature of the relationship rather than the words on the piece of paper. A good question to ask is whether the person is working in the business of the company or is running their own business.

Being on the edge of the employment relationship the independent contractor was always about to be roped into the employee category or dealt with by various courts and tribunals as if they were employees.

There are laws that treat independent contractors as employees for certain purposes such as payroll tax and workers compensation. In a similar way, superannuation legislation treats payments to labour only contractors as "salary and wages" for calculating the 9% levy.

The new Federal legislation leaves all these revenue deeming provisions as they are but then draws a line around independent contractors, so that they are not to be treated as if they were employees for industrial purposes. This approach means that corporations can more confidently deal with independent contractors according to the terms of the contract without too much regard to whether there is any "unfairness" in the relationship.

Who is covered by the new legislation?

So far as the new legislation is concerned it does not matter whether the independent contractor is an individual or a corporation. But if the contractor is a corporation, the legislation only applies if the work to be done is to be wholly or mainly performed by a director or a member of the family of the director.

The new law does not necessarily apply to existing contracts unless the parties agree to opt into the Federal jurisdiction. Also excluded from the legislation are independent contracts for the private and domestic purposes of the other party to the contract.

To independently contract or not?

Given that the revenue statutes are left as they are, the question of whether to use independent contractors still has the same sorts of considerations as before, but perhaps with greater clarity about the relationship. In the past, the relationship with independent contractors was sometimes difficult to manage with certainty because the contractors had access to the unfair contract jurisdiction of the NSW Industrial Relations Commission which could vary the terms of the contract or award compensation if there was some general "unfairness".

Under the new regime the Federal Court and the Federal Magistrate's Court have a much more limited jurisdiction to look at the particular terms of the contract to see if the terms themselves are fair; a much narrower task than looking at the unfairness of the relationship. There is some power to award compensation but not as broad as existed in the past.

Whilst the new Act limits those "unfairness" types of claims, the greater publicity given to the legislation may mean that independent contractors will pay more attention to their terms of engagement to secure the protection they seek.

The lesson for business is to make sure that the contract terms are clear, but not too tough, because it is the tough terms that can be varied if found to be unfair.

As always,

  • Pay attention to the words of your contracts.

  • Review terms regularly.

  • Draft for the particular circumstances.

  • Standard terms rarely do the job.

The Independent Contractors Act now makes it easier for corporations to deal with independent contractors with certainty, but at the cost of independent contractors losing some protections against unfairness.

Author: Mark Paul