Where have you been? The return of the Independent Contractors Act.

6 March 2013

The Independent Contractors Act ('the Act'), introduced in 2006 and enacted in 2007, was a national law implemented by the Howard Government to 'protect the freedom of independent contractors'. With its introduction, and in contradiction to the freedom that it was supposed to be protecting, the Act overrode the highly effective state-based laws which allowed contractors to challenge the fairness of their contracting arrangements in favour of the codified, and weaker, protections contained in the Act. As a consequence, the Act has been little used.

 The decision of Justice Perram of the Federal Court in Informax International Pty Limited v Clarius Group Limited [2011] FCA 934 had the effect of consigning the already limited Act to the dustbin of history in terms of effectiveness. However, the decision of Perram Justice has been appealed, and the recent Full Court decision in Informax International Pty Limited v Clarius Group Limited [2012] FCAFC 165 has performed CPR on the Act and brought it back to life.

 We look at the decision and its potential implications below. 

Background

Isabel Menaro-Pires was an experienced IT consultant. She provided her services through a company called Informax Pty Ltd ('Informax').

Clarius Group Pty Ltd ('Candle') was a large recruitment specialist providing direct recruitment services and labour hire arrangements with a focus on the IT industry.

Candle had a contract with Woolworths to provide IT related services.

Candle and Informax entered into a contract to provide the services of Ms Menano-Pires to its client Woolworths.

As is common in the labour hire industry, the contract between Candle and Informax contained a term purporting to restrain Informax and Ms Menano-Pires from working directly with Woolworths for a period of six months following the termination of the contract between Informax and Candle.

The contract between Woolworths and Candle contained a term restraining Woolworths from hiring Informax or Ms Menano-Pires for a period of 12 months.

In July 2008, Ms Menano-Pires started working for Woolworths directly. Candle objected and Woolworths immediately terminated its contract with Informax and did not engage it again.

Informax complained about the termination and said that the contract between Informax and Candle was unfair within the meaning of Section 12 of the Act.

The decision of Justice Perram at first instance

Justice Perram was tasked with 'forming an opinion' as to whether the contract between Informax and Candle was unfair. The central attack on the contract made by Informax was the existence of the restraint clause between it and Candle. It also complained about the restraint clause which existed between Woolworths and Candle and the fact that Informax was not told that it contained a restraint for a period of 12 months.

A restraint clause will usually be enforced in circumstances where it protects a legitimate business interest. Candle argued that the restraint was necessary to protect its relationship with its customers and to ensure that as the 'middleman' it was not unnecessarily cut out of the bargain that it had helped establish.

Justice Perram rejected both arguments and held that the contract was unfair between Informax and Candle. He found that Candle had received sufficient revenue from its contract with Woolworths to recover its costs and profit, and in those circumstances, it no longer had a protectable interest that could justify a six month restraint. He also held that the restraint in the Candle-Woolworths contract was an unfair restraint on Informax and proposed orders to restrain Candle from enforcing that term against Informax (he could not vary the contract between Candle and Woolworths).

Here is the unfairness - what do I do about it?

Once an opinion is recorded stating that a contract is unfair, the Act allows the court to make an order varying it. However, Section 16(4) provides that any order made 'takes effect on the date of the order or a later date specified in the order'.

Given that the contract between Informax and Candle had been terminated, any order varying the contract had to have a retrospective effect. This troubled Justice Perram  greatly. After analysing the various sections of the Act, Justice Perram found that they operated to "prevent an examination of the matters which would need to be examined in order to undertake an assessment of the appropriate compensation". He held that the Act was only concerned with "prospective remediation of unfair or harsh contracts", thus ruling out remedies which could be applied to a contract that had already been terminated.

Given that the majority of contracts coming before the court would have already been terminated, the decision effectively rendered meaningless what was supposed to the remedial nature of the Act.

The Full Court steps in to administer CPR

The Full Court tackled the question of what order could be made head on. They held "to construe the scheme as being confined to only addressing the potential for future unfairness in the period which post-dates the order of the court would render the scheme almost entirely inapplicable to contracts which have been terminated".

They held that the fact that an order must be prospective in operation does not mean that such orders "may not have a remedial effect on events or transactions which predate the date upon which an order is made".

The Full Court also dealt with the issue of the original restraint. It found that although Candle had a legitimate interest to protect, the six month restraint it imposed was unreasonable in the circumstances and a more appropriate restraint would have been four weeks.

The Full Court pointed out that a labour hire contractor should ordinarily be subject to a shorter period of restraint than a direct employee. They held "the short-term nature of the engagements organised by labour hire firms and the diminished nature of the exposure to risk compared to that generally faced by an employer from the solicitation of customers by a former long-term employee," suggests that, ordinarily, adequate protection would be afforded to a labour hire firm by a shorter period of restraint than that which would be required by a former employer.

Lessons from the cases?

There has been little litigation concerning the Act and the Informax line of cases perhaps demonstrates why. There is an urgent need for clear and cogent reform in the area of unfair contracts as direct employment continues to decline.

It is common in labour hire situations for people to be prevented from working for their host employer for a 'restraint period'. What the Informax case demonstrates is that these restraints may be unreasonable. Given that they are often used to stop employees from converting to full time direct employment, the Informax case may present as an opportunity for contractors to challenge the existence and the period of the restraints.

Fair Work Amendment Bill passes the Senate

The Federal Government has successfully steered the passage of the Fair Work Amendment Bill through the House of Representatives and the Senate. Some highlights of the new Act include:

  • Fair Work Australia is now called the Fair Work Commission 
  • Two new Vice President positions will be created at the Fair Work Commission 
  • Unfair dismissal claims must be lodged within 21 days (up from 14 days) of termination
  • General Protections claims involving termination must be lodged within 21 days (down from 60 days)
  • Prohibiting opt out clauses in enterprise agreements, and
  • Prohibiting an individual union official from being a bargaining representative of an employee where the Union does not have coverage of that employee.

 

 

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