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Destroying Contracts

The processes used by Australian State governments to nullify common law contracts which are the foundation of commercial life for small business proprietors and independent contractors

May 2005

This paper

Provides an analysis of how regulators in Australian States have, over about the last five years, been attempting to make unlawful the contracts which are at the heart of small business activity, and which provide independent contractors with the means to earn their living in the commercial market place.

[Note: This paper only considers commercial public policy issues. Other issues, such as occupational health and safety, workers' compensation, payroll tax and equal opportunity and anti-discrimination are not included because they need to be considered in a separate context.]

Contents

a) Public Policy Assumptions.
b) Tension with labour market regulation concepts.
c) Small business proprietors and independent contractors.
d) Economic Policy at a cross-roads.
e) How the States have sought to destroy independent contractors and free markets.
f) The political process the States use to create anti-independent contractor legislation.
g) The legislative instruments so far witnessed.
h) The legislative structures.

Recent Case Study
i) Victorian Owner Drivers and Forestry Contractors Act 2005.
j) Things which are positive in the Act.
k) Things that could be positive but are probably negative.
l) Things that are negative with the Act.
m) Summary of effects of the Act on the transport industry.


1. Public Policy Assumptions
Since the economic reforms of the 1980s and on, Australia has enjoyed unprecedented economic growth. The basis for the reform programme was a commitment to markets rather than political controls as a method for making commercial decisions throughout the whole economy. Both major political parties still support this paradigm.

The commercial common-law contract is the primary legal foundation of a market economy because it is a contract
a) Into which parties freely enter, and do so because both parties expect to gain from the fulfilment of the contract.
b) The terms of which are decided by the parties without interference by government, and because the parties know better than anyone else where their best interests lie, and how the gains from the contract are to be maximized.
c) Which the courts will uphold according to law rather than according to vague notions of equity. This gives the parties confidence in entering into such contracts.

Australian parliaments have further sought to protect the operation of a successful market economy through the Trade Practices Act (TPA). The TPA
a) Outlaws price-fixing or price manipulation. Heavy fines under the Trade Practices Act apply to businesses and individuals who collude to fix or manipulate prices. Third-line forcing is also illegal.
b) Will refuse to allow mergers if the result will be a significant lessening of competition within the domestic market.

2. Tension with labour market regulation concepts
Historically, the primary concept of labour market regulation has been that employees were disadvantaged in negotiating contracts of employment with employers. On this basis, and for over 100 years, Australian governments established tribunals which
a) Had the powers to determine wages and other elements of compensation within the employment contract.
b) Encouraged the formation of legally privileged trade unions which had immunity from common-law prosecution for anti-competitive collusion and intimidation.

If these exclusions from legal responsibility were applied to commercial contracts, it would make commercial life within a market economy impossible. When constrained to employment contracts, however, such activity has been considered to operate in 'the public good'.

Public policy has, until recently, been careful to ensure that labour regulation concepts of price-fixing and market collusion have not been applied to commercial contracts. Over the last five years or so this has changed, as State governments have actively sought and succeeded in applying labour market regulation concepts to commercial contracts in selected areas. The effect has been significant damage to economic life in the targeted sectors.

3. Small business proprietors and independent contractors
The attack against the commercial contract and the market economy, by most States, has been targeted primarily against the small business proprietor and the independent contractor.

For public policy purposes, the defining point of an independent contractor or small business proprietor is that he or she earns a living and conducts his or her activities by using commercial contracts. Some 28 per cent of the Australian private-sector workforce now earns their living this way.

It now seems that most Australian State governments a) believe that people are so passionately attached to employment contracts, with all the regulations surrounding them, that they will only earn their living through the use of commercial contracts as an act of extreme desperation.
b) assume that if an individual earns their living through commercial contracts, the individual is necessarily, if unwittingly, exploited.
c) believe that State governments must step in to impose price-fixing by outside regulators, and make collusion lawful to achieve these ends.

It also seems that, wherever States have followed this policy, they have created processes that give traditional employee trade unions powers over the commercial contracts of independent contractors. There is a real sense that in destroying independent contractors' rights, the States are in part motivated by a desire to prop up employee unions and employee regulation institutions.

But in taking this approach, State governments have been pursuing policy agendas that
a) Take away the right of individuals to be independent contractors, to operate as a small business, to benefit from the opportunities which a market economy provides, and to control their own economic destiny.
b) Damage and even destroy market-based commercial activity in the sectors where these policies have been imposed and thus restrict national and State economic growth.
c) Are in direct conflict with the national bipartisan support for the market economy, as opposed to the command-and-control economy, as the surest road to economic success.

4. Economic Policy at a cross-roads
Australia is at a cross-roads on this issue. State governments have demonstrated a determination to destroy the commercial contract and destroy the market economy by destroying independent contractors and small businesses wherever the States find themselves in a position to do so.

In many respects the emergence of independent contractors has brought into sharp relief public policy issues concerning the protection of the market economy and economic growth in Australia. Decisions need to be made either to
a) a) Accept this erosion of the market economy by the States
or
b) b) Draw a line in the sand to defend the market economy, independent contractors and small business proprietors.

5. How the States have sought to destroy independent contractors and free markets
The methods used to subvert independent contractors and free markets fit within identifiable patterns and can be tracked. The States are, however, constantly inventing new models built around similar themes. The processes need to be monitored, studied, understood and stopped.

6. The political process the States use to create anti-independent contractor legislation
Wherever these policies have been attempted or succeeded by a State government, an identifiable political process has usually been followed:
a) Supporters/promoters of the anti-independent contractor policy conduct extensive, well-coordinated, well-funded public campaigns designed to generate a 'community' perception that a 'problem' exists. Extensive use of media campaigning occurs.
b) Academics are funded to conduct 'research' to identify an alleged 'problem'.
c) The State government commissions a report to identify a 'problem'.
d) Businesses and/or industry associations are courted with a view to seeking support for the 'problem' identification and the 'solution'.
e) The State government introduces legislation, normally with a 'good news' title that masks the market-destruction nature of the legislation.
f) The legislation will generically target the entire economy or target a specific industry sector. Where specific industry sectors are targeted, the sector is typically politically disorganized or vulnerable. These market-destructive models create beachheads for application at later times to other sectors.
g) The State government passes the legislation if they can do so.
h) Substantial financial and institutional resources of the State government are allocated to the exercise. These holistic approaches operate on long time-frames.

7. The legislative instruments so far witnessed
Examples of some attempts that have been made into law include:
a) 1996. NSW Industrial Relations Act: (a) Jurisdiction extends beyond the employer-employee relations to 'matters to do with work'. (b) Creates 'unfair contracts' jurisdiction that has power to cover commercial contracts including franchising agreements, leasing and so on.
b) 1996. NSW Industrial Relations Act. Chapter 6: Declares that all self-employed owner drivers are employees for the purpose of the Act.
c) 2000. Queensland: Amendments to the Queensland Industrial Relations Act 1999. Introduction of section 275 (power to declare persons to be employees) and section 276 (power to amend or void contracts).
d) 2001. NSW: Industrial Relations (Ethical Clothing Trades) Act 2001 controlling 'cascading' contracts in the clothing industry.
e) 2002. Victoria: Outworkers (Improved Protection) Act 2002 controlling 'cascading' contracts in the clothing industry.
f) 2005. Queensland: Industrial Relations and Other Acts Amendment Bill controlling 'cascading' contracts in the clothing industry.
g) Some trader-to-trader laws under State Fair Trading acts.

Examples of some that have been attempted but defeated in State parliaments:
a) 2000. Victoria: Fair Employment Bill.
b) 2000. NSW: Industrial Relations Amendment (Independent Contractors) Bill.
c) 2004. SA: Industrial Relations (Fair Work) Bill.

Examples of some that are currently proposed:

a) 2004. ACT: Fair Work Contracts Bill. (Wide powers to retrospectively interfere in commercial contracts.)
b) 2005. Victoria: Owner Drivers and Forestry Contractors Act 2005. (To become law some time before 1 December 2006. This analysis deals with it extensively below.)

Tasmania produced a discussion paper in 2004 inviting input on the idea of a Queensland-style Section 275, but has not so far proceeded with it.

8. The legislative structures
For the most part, the processes to date have involved amendments to industrial relations legislation. The legislation in these areas has been well studied.

More recently, however, the States have started using their commercial law powers to introduce industrial relations type provisions into commercial law. Such measures are destructive of the law of contract as it applies through the entire world of commerce and industry.

Whatever the different legislative models used, one or several of the following outcomes is targeted.

a) 'Deeming' This involves legislatively declaring persons to be employees even when at common law they are independent contractors. The legislation will
  • Give industrial relations commission the power to declare that persons who are independent contractors (that is, working under commercial contracts) are employees for the purposes of industrial relations legislation. This includes the power to declare corporations to be employees.
  • Create wording in legislation which declares that certain persons or classes of persons are employees.


  • In effect this makes the independent contractors and corporations subject to industrial relations and commercial and competition law all at the same time. It creates legal and policy nonsense.

    b) 'Unfair' contract provisions: This involves giving tribunals the power to study commercial contracts and to rewrite contracts, ex-post, with new terms that are to apply retrospectively to the contract. This destroys the value of the commercial contract by making the State the determiner of prices and contract terms. It is a price-fixing process which would ordinarily breach trade practice and competition laws.

    c) Legislatively extending the jurisdiction of a State's industrial relations laws. This involves the States giving their industrial tribunals jurisdiction beyond the employer--employee contract to embrace commercial contracts.

    d) Cascading contract capture: Market economies operate on the basis of 'cascading' contracts. Supply chains in an industry are, in effect, a series of related commercial contracts which, when linked together, enables products and services to be created and delivered to consumers. The success of this free market system is dependent on the parties at each stage in the contract chain being free to settle on prices and arrangements between each other. The fact that parties only have commercial responsibility to the parties with whom they have a direct contractual relationship is critical to the success of whole system. Commercial responsibilities do not exist where no contract exists. The States have been creating legislation which destroys contract chain integrity by (a) applying price controls through the contract chain (b) creating commercial liabilities between parties who do not have contracts with one another. This destroys the ability of supply chains to operate. This has a severely detrimental impact on small businesses in particular, but in the end makes commercial life impossible, except within a command-and-control system. In the manufacturing sector, this induces domestic producers to shift to importing inputs rather than sourcing them domestically.

    e) Trade Practices Act removal: Each of these mechanisms relies heavily on the legislative provisions being excised from the authority of the Trade Practices Act. If TPA exemption did not occur, the legislative provisions would be illegal under the TPA and national competition policy. The power of the States to exempt such legislation from the reach of the TPA appears to be wide and unrestrained. It has to be asked to what extent the ACCC has co-operated in these developments.

    f) Extending the reach of the word "unconscionable": A key protection for independent contractors and all parties to commercial contracts is the common-law prevention of unconscionable contracts. Within the common law the word 'unconscionable' has a long history and is well understood. The States have been using the term 'unconscionable' and changing the meaning of the word through statute (mainly Fair Trading Acts). They do this mainly through the trader-to-trader dispute sections of their Acts. The consumer to trader laws generally comply with contract integrity. But the trader-to-trader disputes provisions are being manipulated.

    g) Applying decisions about one contract to a class of contracts: The essence of the law of contract within a market economy is that the parties to the contract write their own contract. In this way, they obtain the best possible result for themselves. Free markets depend on commercial contracts being written by the parties, for the parties and for no-one else. The States, contrariwise, have passed laws which apply prices and terms to entire classes of contracts. This creates legislated price-fixing and destruction of the market economy across entire industry sectors.

    h) Enabling a tribunal or other body to determine the price to be paid under contract: The States have been using their commercial law-making power to effectively dictate the prices to be paid by contracting parties. This process is becoming widespread. Retrospective, price-determining powers, exercised by arbitral tribunals, have been created. Where this has occurred, no party in the affected sector can be sure of the integrity of any contracts into which they enter.

    i) Determines the length of a contract: The States are taking upon themselves the power to declare the length of a contract even retrospectively, and after a contract has expired. This strips contracts of certainty, restricts free commercial activity and denies parties to contracts their rights to control the terms of their contracts.

    Recent Case Study

    9. Victorian Owner Drivers and Forestry Contractors Act 2005
    This Bill was introduced into the Victorian Parliament in April 2005 following an inquiry and report, but with no public consultation on its contents.

    Key features of the legislation include:
    a) Commences before 1 December 2006.

    b) Regulates "the relationship between persons who contract to transport goods in a vehicle ... and persons who hire them."

    c) Amends the Victorian Civil and Administrative Tribunal Act 1998.

    d) Regulations may specify class of contractors to be in/not in the Act.

    e) Information Booklet. A hirer must provide a contractor with an information booklet before engagement.

    f) Pricing: "The Minister, in consultation with the industry, must (a) develop rates and costs schedules for contractors" [14(1)] and contain
  • Typical fixed and variable overhead costs.
  • Vehicle running costs.
  • Administration and insurance
  • Superannuation
  • Finance
  • Costs of complying with applicable laws
  • Costs of engaging relief staff
  • Vehicle and other depreciation
  • Base hourly rates and casual rates that would apply to an employee.
  • The schedules must be published by the Minister.

    g) A hirer must give a copy of the schedule to a contractor.

    h) A hirer must not accept a tender unless the contractor has received a copy of the costs schedule.

    i) "A contractors engagement is to be considered ongoing" [19(2)]

    j) A contract must [20]
  • be in writing;
  • state the minimum number of hours or income level;
  • set out rates to be paid; and
  • set out the termination period.

  • k) Minimum notice of termination is 3 months (forestry & heavy) and 1 month (other) [21]
  • Unless the Small Business Commissioner provides a contrary certificate.[22]
  • Payment in lieu of notice may be given.

  • l) Hirers must not deduct amounts for insurance unless a policy is in place and a policy copy given to the contractor. [23]

    m) A hirer must not deduct other amounts from the contractor unless amounts are agreed and reflect actual cost of service or equipment. [24]

    n) A group of contractors and a hirer may appoint a negotiating agent. [25 & 26]

    o) A code of practice may be created to which hirers must comply. Applies to a class of contractors and a class of hirers.[27&28]

    p) Unconscionable conduct by hirers and contractors prohibited [31 & 32]
  • Factors include comparison to the amount an employee would have received for similar services. [31(e)]

  • q) Dispute is a dispute between one or more hirers and one or more contractors. [33]

    r) Small Business Commissioner may supply an "alternative dispute resolution" procedure. Union can represent contractor/s. Association can represent hirer/s.

    s) The Victorian Civil and Administrative Tribunal (VCAT) has jurisdiction to hear and determine disputes relating to [40]
  • Allegation of unlawful termination.[42]. Up to 12 months to make a claim.
  • Any other issue up to 6 years to make a claim
  • VCAT must consider whether term of the contract was "unconscionable, harsh or oppressive" [44(2)(m)]
  • VCAT may make order on rates if the contractor was not given an information booklet. VCAT must have regard to pay rates if the contractor were an employee.

  • t) VCAT may make orders extending the terms of one contract to a specified class of contracts. [48]
  • "An order extending a contract variation order has the effect of binding all hirers and contractors who enter, or have entered, into regulated contracts of the specified class" [48 (2)]
  • "An application for an order extending a contract variation order may be made by (a) an association, including a trade union, that represents contractors or a class of contractors or (b) an association that represents hirers or a class of hirers." [49]

  • u) The Small Business Commissioner has the function of arranging mediation of disputes by "persons who are experienced in the field of regulated contracts" [54]
  • "The Commissioner is not subject to the Minister's control or direction in exercising his or her functions..." [54]
  • A Transport Industry Council of Victoria is to be established to create and make recommendations to the Minister for the code of practice and the information booklet. [55]
  • The Council is to consist of Chairperson, Nominee of Roads Corporation, 1 VECCI, 1 AIG, 2 VTA, 2 VTHC, 2 TWU.

  • v) A Forestry Industry Council is to be established.
  • The Council is to consist of Chairperson, Nominee of Department of Primary Industry, 1 Forestry Association, 1 Australian Plantation Council, 2 CFEU, 2 Victorian Harvesting Council, 2 Victorian Forests.

  • w) Prevents discrimination on grounds of HOS etc complaints [61]

    x) "For the purposes of the Trade Practices Act 1974 of the Commonwealth and the Competition Code the following things are authorized." [64] Effectively ensures that all processes for collective/collusive activity to set prices and terms of contracts are not subject to the competition and consumer protection rules of the TPA and Competition Code.

    10. Things which are positive in the Act
    a) the requirement for collection and distribution of information concerning the costs of running a business by a contractor. This helps educate contractors about the likely costs of running their business and helps to ensure that they enter contracts with full knowledge of what may be a commercially viable contract;
    b) the requirement for written contracts and all terms clearly stated in contracts. This will ensure that all parties to a contract are clear about the terms of the contract;
    c) the prevention of deductions for insurance and other services unless the contractor agrees and the services/insurances are actually provided. This protects against what is, in effect, theft from the contractor.

    11. Things that could be positive but are probably negative
    a) The ability of a group of contractors to negotiate contracts with a hirer or hirers. Other sections of the Act, however, create the impression that the collective negotiations may negate true freedom of contract. There is uncertainty here.

    12. Things that are negative with the Act
    a) The legislative creation of permanency under transport contracts. This, in particular, disadvantages small business proprietors and creates barriers to entry to the industry. It advantages large transport firms who have permanent workforces and can afford to pass on the cost of 'dead' time when a contractor is not working. Small transport companies will have profit margins squeezed and be forced out of business or be swallowed up by large firms. This will increase the cost of transport in Victoria.

    b) Minimum notice of termination prescribed. This will prevent parties inserting into their contracts shorter terms of termination to which both parties may agree. Allowing the Small Business Commissioner to vary the prescribed contract terms on a case-by-case basis simply creates unproductive bureaucracy.

    c) The creation of a compulsory code of conduct. A code should be voluntary, but could be a factor in consideration of unconscionable conduct.

    d) Protection against unconscionable conduct is normally something to be supported. Unconscionable conduct, however, does not normally relate to matters of price in a contract. This Act has inserted price as a key consideration in unconscionable conduct, effectively making the schedule of rates that is to be set by the Minister a de facto compulsory and enforced set of rates to be paid. It effectively creates State-controlled industry price-fixing.

    e) The ability of VCAT to hear a dispute over rates or other terms in a contract, to decide that dispute and to apply the decision to an entire class of contracts is a negative. This is a backdoor creation of an industrial relations court, through the corruption of commercial law, in which VCAT effectively creates "Awards" governing commercial rates through the industry. This mechanism effectively destroys the operation of a free market in the industry. Further, the ability of a union or industry association to apply for an order cements the Act as an industrial relations act by stealth, taking control of contracts in the industry away from the parties and giving the control to a process which is based around political deal-making between unions and industry associations. It destroys the commerciality of the contract process in the industry and destroys free competition. This will lead to higher transport prices, less competition and favour the large, monopolistic transport operators.

    f) The use of the Small Business Commissioner effectively turns the Commissioner into an industrial relations-style conciliation service with all the industrial relations and political deal-making that goes with it.

    g) The entire structure is held together by removing all and any behaviour carried out in the name of the Acts from the reach of the Trade Practices Act. This ensures that the players in the industry will be legally able to act in collusive and anti-competitive ways. The Act creates a process which, in the Victorian transport industry, could facilitate all the worst, commercially corrupt behaviours witnessed in the Victorian construction industry.

    13. Summary of effects of the Act on the transport industry
    The Act will result in:
    a)price-fixing in the industry;
    b) collusive activity which will damage the operations of small hirers;
    c) the prevention of individual contractors expanding their businesses with a view to becoming a hirer;
    d) State-controlled prices decided by political deals between unions and industry associations with the potential for masked, collusive behaviour between large transport businesses;
    e) The disappearance of significant numbers of small transport operators in the industry and the favouring of large monopolistic transport companies; and
    f) contractors effectively being forced into being employees, taking away their commercial options as individuals to start their own business in the courier/transport sector.

    The Act could be positive if all the elements which destroy
  • independent contractors' rights;
  • commercial contract integrity;
  • free market activity; and
  • trade practices and competition law

  • were removed.


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