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The ‘Dependent Contractor’ Argument: Background and why it is Discredited

Briefing 2006

Overview

The 'dependent contractor' is a notion which at law and in reality has no meaning, is illegitimate, and confuses rather than clarifies issues. It is an artificial creation for the purpose of lending credence to attempts to pull independent contractors into the sphere of industrial relations legislation.

It has been totally rejected by the International Labour Organisation when in 2006 the ILO endorsed and recognized the legitimacy of the independent contractor status by stating in its Recommendation (clause 8):
“National policy for protection of workers in an employment relationship should not interfere with true civil and commercial relationships, while at the same time ensuring that individuals in an employment relationship have the protection they are due.”
The Recommendation is also significant for what it does not say. It removed from the text all and any references to the terms “dependent contractor” and “triangular relationships”. Both these terms have long histories (going back to 1996) forming the principal, intellectual concepts upon which unions and some academics constructed attacks against independent contractors. The terminological change effectively involved the ILO formally wiping its hands of the ‘dependent contractor’ argument.

The ‘birth’ of the dependent contractor thesis

The intellectual source for the dependent contractor argument most often quoted is Canadian academic H.W. Arthurs, and his article published in The University of Toronto Law Journal in 1965 titled 'The Dependent Contractor: A study of the legal problems of countervailing power'. Arthurs described 'dependent contractors' as follows:
they are often economically vulnerable as individuals because of the dominance of a monopoly buyer or seller of their goods or services, or because of disorganised market conditions... They are dependent economically, although legally contractors... They are prisoners of the regime of competition.
In demonstrating his point, Arthurs case-studied disputes around the 1950s between newspaper vendors at odds with their newspaper suppliers, and fishermen working off the coast of Canada who, because of geographic considerations, could only sell their produce through one canning works. Arthurs reasoned that these 'prisoners of competition' deserved the legislative protection of employment law to breach competition rules and collectively collude against their sole supplier or buyer.

Australian background

In the creation of the Australian version of the dependent contractor argument, Arthurs' reasonings have been adopted and simplified to an extraordinary degree by highly respected economic statisticians and economic organizations. This simplification has led to a statistical definition of 'dependent contractor'—namely, that of a 'contractor' who works for only one client. This is simplistic and naive in the extreme. It is a definition that completely ignores the law of contract. Further, the use of the term by respected economists has added weight to those arguments that seek to pull independent contractors into the sphere of industrial relations legislation.

The dependent contractor argument was:
  • Used as the justification for Queensland's Industrial Relations Act, section 275.
  • Used as the justification for similar legislation in Victoria, New South Wales and South Australia.
  • The basis for arguing that ILO conventions extend the definition of employee in the Federal Industrial Relations Act.
  • Used, in modified form, to argue the case for bringing clothing outworkers working as independent contractors into the New South Wales Industrial Relations Act.

Why the dependent contractor thesis is flawed and wrong

The dependent contractor argument is fundamentally flawed. It ignores the economic and legal fact that an independent contractor has escaped the imprisonment of the employment contract and has found freedom in the regime of competition.

The simple fact is that the common-law definition of employment involves a process of finding the truth of economic and commercial contract relationships. If, in a common-law investigation a person is found to be economically dependent, their contract is of an employment nature. Yet some economists and lawyers choose to ignore this truth and pretend that a person can be a contractor and dependent, both at the same time.

But even if is not accepted and the dependent contractor argument is thought to have some intellectual force, then it must also follow that the reverse argument must apply—namely, that there are persons who are 'independent employees'. An independent employee would be a person who had all the desires and attitudes of independence but was forced to be an employee either through duress  or because of the lack of opportunity to become a contractor. If the logic of 'independent employee' is valid, the reach of the Trade Practices Act should be extended, for example, to include independent employees.

However both notions—'dependent contractor' and 'independent employee'—either as a contractual or legislative possibility are wrong. Both ideas deserve to remain in the realm of academic musings. Neither should be used as the basis for the development of legislation and regulation. 

 



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