Let's Start All Over Again
The Proposed Independent Contractors Act
Ladies and gentlemen
At the 2004 HRN conference I gave a talk in which I stated
that the employment contract is a contract of control. That statement
caused some lively reaction and debate from some attendees and
intrigue from others. I suppose it was a statement that was not
expected from a long time HRN member. I was also at the time
writing a book on the issue which has now been published on line.
It's timely for me to follow up my 2004 presentation within
the context of the proposed federal Independent Contractors legislation
due sometime in the first half of 2004.
But first it's worthwhile putting the independent contractor
issue within the context of three developments since 2004 I think
First: International Labour Organisation
At HRN we have long observed the efforts at the ILO to outlaw
independent contractors. Again the ILO is debating the future
of independent contractors, this time in June 2006 where the
issue will come to a head and probably some finality. The ILO
intends to create an 'international instrument' which will set
the parameters of the issue. This debate has been ongoing for
a decade at the ILO and is the longest and most difficult debate
handled by the ILO.
But not all at the ILO is now negative toward independent
contractors. The ILO has made some important advances since 2004
in recognizing the status of independent contractors.
The ILO released a research paper in 2005 that found that
the definitions of employee/independent contractor are consistent
across the globe. The ILO paper states
- "What is surprising is the amount of convergence between
the legal systems of different countries in the way they deal
with this and other aspects of the employment relationship, even
between countries with different legal traditions or those in
different parts of the world."
The paper identified key common terms identifying employment.
Those terms are; dependency, subordination, direction, authority,
control, orders, instructions and employer's account.
Further there is an acceptance that courts decide on status
based on the facts of any given situation
- "...the determination of the existence of an employment
relationship should be guided by the facts of what was
actually agreed and performed by the parties, and not on how
either or both of the parties describe the relationship."
"In general, the judge must decide on the basis of facts."
Most importantly the ILO has dropped the term "dependent
contractor" and now states that
- A Worker is a generic term covering employees and independent
- An Employee is a particular form of legal relationship.
- A dependent worker is an employee
- An independent worker is an independent contractor.
This development is important. Until recently the ILO supported
the proposition that the definition of employee/independent contractor
was confusing and that the alleged existence of "dependent
contractors" created justification for pulling some independent
contractors into employment regulations. This was the basis of
the attack against independent contractors.
Following the research by the ILO these prior positions have
now been dropped and replaced with positions more correctly aligned
with legal facts.
Second: Independent contractors are
Research by two economists at the University of Zurich, Switzerland
and published for the Stockholm Conference on Self-Employment
2004 has concluded that:
- Independent contractors usually earn less than employees,
- Are happier with their work than employees because of their
The research can be sourced through www.contractworld.com.au
and discusses the implications of this independent contractor
happiness on economic theory and policy.
The findings are important in understanding why independent
contracting is undergoing such substantial growth. The researchers
state that it is a fact well established in the economics literature
that self-employed people are considerably more satisfied with
their work than employed people in organizations.
- The higher job satisfaction can directly be attributed to
the greater independence and autonomy independent contractors
- Autonomy is valued beyond outcomes.
- The opportunity to 'be your own boss' is an important source
of happiness at work.
- The average employee values work characteristics that are
closely associated with self-employment.
- The increased happiness associated with self-employment is
The researchers look at the implications for economic theory
asserting evidence for a novel economic concept called 'procedural
utility'. They say,
- 'Procedural utility' means that people do not only care about
instrumental outcomes, but also value the processes and conditions
leading to outcomes. Procedural utility thus represents a completely
different approach to human well-being than the standard approach
applied in economics.
- The price system (the market), democracy, hierarchy, and
bargaining are generally seen as the most important formal systems
for reaching decisions.
- Procedural utility submits that institutions are not only
important because they shape outcomes, but also because individuals
value institutions as such. Previous research has shown this,
for example, for the institution of democracy.
- Self-employment is an important application of the procedural
utility concept to the economic realm: it reflects the difference
between the two fundamental decision-making procedures of the
economy. Whereas the self-employed are their own bosses and act
as independent contractors on the market, employed persons
are subject to the institution of hierarchy.
They state that the implications for economic policy are as
- The outcomes provide evidence of 'latent entrepreneurship'
- The share of people preferring self-employment to dependent
employment is in every country considerably higher than the actual
rate of self-employment in the economy.
- Thus, it can be hypothesized that self-employment will increase
in the future as a result of changes in technology and the organization
Third: "Employee" will
The Zurich University research becomes even more interesting
given the very recent comments by the noted Australian futurist
Phil Ruthven of Ibis Research who has claimed that within 25
to 30 years the term "employee" will not be in use.
He says it will almost be an insult to call a person an employee,
much like the word slave.
Independence and the Death of Employment
These three developments are consistent with the issues I
have covered in my online published book Independence and
the Death of Employment (www.contractworld.com.au) and released mid
But in my book the core feature I emphasize is the understanding
of what the employment contract is and its opposite, the commercial
contract. Without understanding these two contracts, independent
contracting cannot be understood and I maintain a full understanding
of free markets, firms and important changes occurring in economies
and societies is not possible.
This is where the proposed Independent Contractor Act is significant.
Have no doubt it is probably a world first. The Independent Contractor
Act puts Australia at the international cutting edge of these
Two Contract forms
The starting point for understanding, is that employment is
a legal contract of control. It is a contract which at law delivers
to the employer a right to control the contract.
I talked about this in 2004 but let me explain again what
When courts investigate whether a contract is employment or
not, they apply a selection of subtests from about 24 available
subtests. Each of the subtests looks for an aspect of control.
A court will question the parties to the contract to see what
the actual behaviors were. The courts apply what at Independent
Contractors of Australia we have called the swinging pendulum
test. Ordinarily some subtests will indicate control and others
will not. A court bundles all the findings together and on the
balance of evidence makes a decision. This procedure in Australia
and in other common law countries is consistent with the ILO
findings mentioned earlier.
But sometimes the line between employment and not being employment
is fine. Such cases result in controversy and assertions that
definitions are unclear. However such controversy does not alter
the essential fact of what is being investigated and looked for.
The definitions are clear.
The control we are talking of is the concept of the employer
controlling the employee. The easiest way of thinking of this
is that the employer has the right to control the terms of the
contract and hence controls the employee. This is where the ILO
has correctly identified the terms dependency, subordination
and so on as being the consistent internationally used identification
points of employment. And these different terms are all variations
on the central theme of control.
Further, it is this legal fact of control that causes unions
and labour academics to say that there is a power imbalance.
And within the strict legal construct of the employment contract
they are correct.
But the legal fact of the employment contract should not be
confused with the much broader and non-legal idea of employment
being a work for pay engagement situation. Economists say that
when people work together that power is a two way process. The
employee truly exercises power over the employer say economists.
And they are also correct. The human interplay of work is much
more complex than one in which a simple presumption of one way
But what can be missed when thinking in this broader context
is that regulations are about the law. Legislation covering employment
uses the word employ in its very specific legal control sense.
So if we want to make sense of and push for reform of the labour
regulatory environment we must construct our reasoning, rationales
and arguments around legal facts.
As important as it is to understand the legal fact of employment
it is equally vital to understand the legal fact of the commercial
contract for it is enormously different to the employment contract.
The commercial contract is a contract of joint control. Each
party to the contract exercises equal legal rights to control
the terms of the contract. It is in fact a contract of equality.
It is the contract that is the bed rock of economic freedoms
and free markets. It underpins much of freedom in our everyday
Many in the labour regulation business however generally reject
this truth. Within the labour regulation community, the idea
of the commercial contract being a contract of equality is usually
considered a scam, a con and an employer conspiracy to mask the
capitalist desire for control.
But the fact of the commercial contract being a contract of
equality is legal reality.
We can see these two contracts in a diagram.
What's important also to understand is that the two contract
forms are subject to substantially different types of regulation.
Under the commercial contract, price fixing is prohibited,
collusion to achieve price fixing is illegal and monopolies are
discouraged. This occurs under common law but legislation such
as the Trade Practices Act and fair trading acts of the states
operate also to this purpose.
Under the employment contract, price fixing of labour is sanctified
and actually organized through and by the state. Collusion between
employees to achieve price fixing is sanctified which is the
role unions play. What is often not recognized however is that
legal collusion under employment is frequently used by businesses
to achieve levels of collusion banned under commercial contract.
In Australia this has been significant in the commercial construction
One of the most significant economic and behavioral changes
of the last two decades has been the shift of workers from using
the employment contract to utilizing the commercial contract
to earn their living. I am one such person. It is a very personal
This is the great developing wave of self-employment also
called independent contracting. In Australia this wave now constitutes
28% of the private sector workforce and totals some 1.9 million
This is the movement that Phil Ruthven recognizes when he
predicts that employment will disappear.
This is also the movement that unions call a sham and employer
con. Unions and many labour academics allege that independent
contracting is a ploy by employers to avoid labour regulation
and assert employer control. This in turn is the justification
used by unions and some labour academics to argue that independent
contractors must be pulled inside labour regulation regimes.
This is dangerous.
If independent contractors are dragged into labour regulation,
the only way this can occur is to legally pull the commercial
contract into labour regulation arrangements.
The outcome of such a process is clear. Such arrangements
cause price fixing and collusion to be made legal under commercial
contracts. This results in a process of deconstruction of free
markets. No one should be foolish enough to think that this is
not the outcome. There is no way to limit or control such an
outcome. Once the dividing line between the commercial contract
and employment contract is crossed by regulators, free markets
are attacked. The result will always be economic harm. This is
the importance of the proposed Independent Contractor legislation.
Independent Contractors Act
The 2004 coalition election policy makes it clear that the
Independent Contractor Act will protect independent contractors
from industrial relations legislation. To do this its central
design feature must be that of making the line between the commercial
contract and the employment contract quite clear. My view is
that the definitional divide will be that provided by the tried
and tested common law process in Australia. In this respect the
Act is likely to be surprisingly short. It should be. It doesn't
need to be long. But the impact is likely to be substantial in
both the immediate and long term.
Specifically the Independent Contractors Act will ensure that
the following state legislation will be voided in relation to
independent contractors and the commercial contract.
- Section 275 and related provisions of the Queensland industrial
relations act which enables the selective declaration of commercial
contracts to be employment contracts.
- The outworker provisions of the South Australian industrial
relations act which declares that any person who runs a home
based business is an employee. Who the employer is of a self
employed person under the Act is a mystery!
- The Victorian clothing outworker provisions in relation to
- The Victorian owner-driver legislation that provides for
price fixing of commercial contracts by a government instrumentality.
- The NSW unfair contracts provisions which enable the industrial
relations commission of NSW to rewrite commercial contracts including
franchising contracts and leases.
- Chapter 6 of the NSW industrial relations act which treats
self employed drivers as employees and creates price fixing awards
over their commercial contracts.
- The NSW Contract Carriage Tribunal which enables an industrial
tribunal to control goodwill of small business owner drivers.
Further, the Federal IR unfair contract provisions will be
repealed with the introduction of the Independent Contractors
What is perhaps surprising when this preliminary list is constructed,
is just how far the selective deconstruction of free markets
has been allowed to develop in Australia under the guise of 'protection.'
The Independent Contractors Act will restore the legal requirement
for free markets under commercial contracts in these areas.
Protecting freedom, free markets
and economic development
A society rarely looses its freedoms via a big bang. Usually
freedom destruction is by stealth. Over the last decade or more
the removal of economic freedoms has occurred in Australia through
the attacking the rights of independent contractors. It has developed
stealth-like across Australia. In unseen, unrecorded and un-quantified
ways, this has restricted economic activity and growth, distorted
economic behaviour and made our nation poorer.
The Independent Contractors Act promises to stop this illicit
legal process and restore freedoms under commercial contract.
This will create new incentives for economic growth and advancement.
It will do, as the researchers from Zurich University claim and
assist in the releasing of latent entrepreneurship.
For these reasons the Independent Contractors Act is arguably
more significant and far reaching in its implications than the
labour regulation reforms under WorkChoices. Whereas WorkChoices
is a re-jigging of the employer-employee relationship, the Independent
Contractors Act cuts entirely away from that paradigm. It walks
away from the idea contained within employment law that economic
activity involving labour is one of systemic and inevitable conflict.
The Independent Contractor Act will prove important because
it contains the idea that every Australian has the right to be
their won boss, to set their own economic direction and to control
their own economic destiny.