Let's Start All Over Again

The Proposed Independent Contractors Act

Ken Phillips

Ladies and gentlemen

Introduction

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 worth highlighting.

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 contractors
  • 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 happier

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, but
  • Are happier with their work than employees because of their independence.

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.

They say

  • The higher job satisfaction can directly be attributed to the greater independence and autonomy independent contractors enjoy.
  • 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 cross cultural.

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 follows:

  • The outcomes provide evidence of 'latent entrepreneurship' in economies.
  • 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 of production.

Third: "Employee" will disappear

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 2005.

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 issues.

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 I mean.

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 power exists.

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 lives.

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 sector.

Change

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 thing.

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 people.

This is the movement that Phil Ruthven recognizes when he predicts that employment will disappear.

The danger

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.

Impact

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 independent contractors.
  • 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 Act.

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.

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