If a Parliament were to pass a law stating that orange was an egg and that health regulations required that oranges had to be packed, stored, sold and cooked just like eggs, it would be reasonable to suggest that common sense had deserted our legislators. Yet this very leap into illogicality is being witnessed in the important area of contract law, in a way that undermines the harmonious and equitable structure of society.
The simple legislative statement that "a class of persons working under contracts for services can be declared employees" is now in force in Australia. It has vast economic, social and commercial ramifications. A reminder of some basic legal principles reveals the truth behind the simple statement.
At its core, the task of the law is to balance the competing interests of all individuals, thus assisting us to live in harmonious and productive communities. It does this by treating all people as equal in the eyes of the law, even though they may be unequal physically, socially, politically or economically. Without this presumption of equality, the law becomes an instrument of the powerful.
Yet in the area of employment, the law achieves the reverse. Employment is a legal status in which the parties are held to be unequal. The employer has the legal "right to control" the employee under a "contract of service" where control is exercised over the employee. The employee is taken not to have self-control, to be incapable of making judgements and so must have others make judgements on his or her behalf.
Such is the moral and legal basis upon which employment law, institutions and regulations rest. Industrial relations institutions are given the power to control the terms of employment contracts because the employee is taken to lack autonomy.
In stark contrast, commercial contract law treats the parties entering a contract as equals. Neither party controls the other. Each party has an equal right to control the terms of the contract. The courts will not interfere in the contract unless requested to by either of the parties. Important legal protections exist in that the law will not enforce commercial contracts that involve misrepresentation, duress, abrogation of rights or undertakings to commit illegal acts.
The commercial contract, known as the "contract for services", places even all-powerful government on a legally equal level with the weakest citizens when commercial contracts apply.
Yet some governments apparently don't like the idea of the commercial contract of equality. Laws have been passed, and more are proposed, that destroy commercial contracts of equality by treating them exactly as if they were employment contracts of inequality. In Queensland and New South Wales, such laws are in force or on the agenda. [1] Victoria and Tasmania are investigating identical legislation. The legislation in question allows that some persons working under contracts for services can be declared employees. The intent and the outcome of this is that a "class of persons" working under a commercial contract can have their right to control the terms of the contract taken away. The reach of the legislation is unlimited in that by virtue anyone can be declared to belong to this "class of persons".
For example, franchise agreements are commercial contracts for services and so fall within the reach of this legislation. Unions, who have the right to make an application, can readily seek to have the shareholders of a corporation declared a "class of persons". Thus, a franchise agreement can be declared an employment contract, so enabling unions to dictate the terms of a franchise. Not possible? Think again! The Webster's Dictionary defines class as "A set, group, collection or configuration containing members having or believed to have at least one attribute in common". Given this definition, and that the legislation is unrestrained, the shareholders of a corporation could be declared to be a class for the purposes of the legislation. And once one aspect of a corporation's commercial contracts becomes subject to IRC control, anything is possible. Conceivably this could extend to shareholder dividends.
Surely this is not the intent of this "employee declaration" legislation? Certainly it is not the intent stated by the proposers. The public relations justification for the legislation is that some independent contractors operate under sham contracts, are really employees, and are therefore actually dependent and in need of protection.
If there is justification for this argument, the alleged remedy is vastly more sweeping than what is necessary to catch and correct sham contracts. If a contract is a sham or a contractor is dependent, the courts are already active and well equipped to investigate and find accordingly.
When courts are called on to investigate, which happens regularly, parties are cross-examined with a view to determining the nature of their real-life behaviour. Any written form of the contract is only part of the evidence. Typically, some behaviour conforms to commercial contract and some to employment. The courts have to decide on the balance of the evidence before them.
The idea of the "dependent contractor" ignores existing and active legal process, applies subjective assessments of power and ignores the basic legal fact that an employee is dependent and that a contractor is independent.
Advocates of the idea of the dependent contractor [2] claim that employment status and law give people the legal right to collude to fix prices and to orchestrate markets to their benefit. Employment regulation is a process of legal market manipulation to ensure monopoly. This is the legitimate role, so they say, of employment regulation. Further, people who work under commercial contracts are denied the right to manipulate markets and prices. These "dependent" contractors are denied legal rights to evade competition policy, something they say is inherently unjust.
Additionally, the "dependent contractor" proponents claim that contractors who work for one client are dependent because they don't have equality of bargaining power with the single client. The alleged answer is to force contractors into master and servant regulation, thus taking away from contractors any bargaining power they may have by giving all power to the regulators.
The dependent contractor argument then is really an attempt to justify the delivery of increased power to employment regulators and their privileged right to control the terms of contractual arrangements between all entities in an economy. It is a back-door method of regulating all commercial activity on a scale perhaps not before witnessed. This is the only explanation for the choice of legislative form, that is, the destruction of commercial contracts by declaring them to be employment contracts.
Ultimately, the illogicality of the dependent contractor thesis is understood when considering attempts at practical application.
How would one determine whether such a thing as a "dependent contractor" existed? What period of time is involved? If a contractor had a single client one day but a new client the next day, would this amount to dependency? If a contractor chose to have a single client even when several were available, would this make the contractor dependent or would the free choice to have a single client make the person independent?
What if the contractor had skills that were desperately needed by a client who was prepared to better any other bid for the contractor's services? Would this make the contractor dependent on the client or the client dependent on the contractor? This scenario is played out every day in the computer software development industry, which is one of the industries targeted by advocates of the "dependent contractor" thesis.
Where very large fees are involved, should regulators have the power to rectify an alleged imbalance between the "dependent" contractor and the client by reducing the agreed fees? Should regulators have the power to force the contractor to work for the client so as to ensure that the contractor was clearly economically dependent?
What if an independent contractor's only client were another independent contractor? Could dependency arise in such a case? What if the sole client of the independent contractor had less wealth than the contractor? Who would be economically dependent on whom?
This list of questions continues to grow the deeper one goes into the dependent contractor thesis. It demonstrates why it is difficult and dangerous for the law to consider contracts from the singular perspective of economic outcomes as opposed to the totality of actual and varied human behaviour found on evidence.
The simple truth is that if a contractor is in fact dependent, the person is an employee and subject to employment regulation. For the law to attempt more than to make such distinctions is to damage social cohesion and the integrity of contracts and to force people into a state of dependency.
At the start of the new century, market-based societies with English law traditions stand at an interesting threshold. In organising and orchestrating work environments, these societies have two distinct paths down which they can travel.
In one direction, the law holds that work situations are dominated by class structures in which one class has legal dominance, control and advantage over the other class. In the other direction, the work environment is legally classless; all parties at work are held to be equal before the law and the relationships between people are held to be between equals.
Under the first model, a third class may evolve that regulates the class war at the workplace, by exercising some special brand of wisdom over contract terms. In practice, the model becomes highly complex and inefficient because of the huge costs and difficulties involved in judging, ruling and trying to predetermine each and every human work interaction even as those interactions rapidly evolve.
The second model views the law and its instruments as having a more precise role but one that is therefore more effective. Essentially this more defined role proceeds from the assumption that individuals must be treated before the law as equals and that the law will assist rather than hinder equality.
These two models of legal work environments, one based on inequality and the other on equality, are quietly competing to become the dominant model of the 21st century. On most occasions the law does not seek to force people into one model or the other. Rightly so, since attempts to force people into one model or the other threatens the continued development of an equal and just society.
The new and aggressive path that is being taken, however, in Queensland and now New South Wales effectively creates the power to destroy commercial contracts by stealth. The problem that both governments claim they are addressing, namely sham contracts and dependency, have readily available legal remedies that simply need to be invoked to address the issue. If the problem is real, why aren't these governments using the existing court processes?
Instead, a legislative Trojan horse has been invented that will enable guerilla-like raids to be launched on commercial activity with pinpoint accuracy. This has already begun in Queensland. Ultimately, it will damage equality, justice and social harmony.
References:
- Queensland Industrial Relations Act 1999. Section 275; New South Wales Industrial Relations Amendment Bill 2000. Section Part 9A
- "The Dependent Contractor: A Study of the Legal Problems of Countervailing Power" by Prof HW Arthurs. 1965. Pub University of Toronto Law Journal 89.
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