• George Williams

04 September 2008A federal court decision has opened up a new front in the debate over industrial relations law, writes GEORGE WILLIAMS

JUSTICE Jeffrey Spender of the Federal Court has raised major questions about who regulates workplace relations in Australia. Recently he found that the Etheridge Shire Council in far north Queensland falls under state and not federal law. This affects both the WorkChoices law still in force and Kevin Rudd’s replacement system, to be introduced into Parliament in the second half of this year. At stake are the rights and entitlements of thousands of employers and their employees.

The Howard government won the first round in the battle with the states when the High Court upheld the WorkChoices law in 2006. The court found that the federal parliament can regulate industrial matters under the corporations power in section 51 of the Constitution. But only three types of “constitutional corporations” - foreign, trading and financial corporations - can be covered by federal law. The Rudd Government proposes to use this same power to enact a replacement for WorkChoices.

But Spender has opened up a new front in the debate, exposing an unresolved legal question of central importance to local government and hundreds of other organisations in areas such as education, health and child care. While the High Court upheld WorkChoices, it was not asked to provide further guidance on when an organisation is a constitutional corporation. The result is that, although WorkChoices was valid, we did not know how far it extends.

Earlier High Court decisions dealt with this question without setting out an easily applied test. The court said that a company is a trading corporation when it has “substantial trading activities,” that is, when its trading activities “form a sufficiently significant proportion of its overall activities as to merit its description as a trading corporation.” Most Australian businesses that make money through buying and selling goods and services clearly fall within this definition.

This is why the Howard government based WorkChoices on the corporations power and why Justice Ian Callinan in dissent in the High Court warned, “The reach of the corporations power, as validated by the majority, has the capacity to obliterate powers of the state hitherto unquestioned.” Despite this, it is unclear whether many organisations employing thousands of workers fall under federal law. These bodies are often non-profit corporations involved only incidentally in trade and commerce. Many private schools, for example, fit into this category. Even where they have education and not revenue as their primary goal, they can still be a constitutional corporation if they do enough trading, such as through collecting school fees and selling memorabilia.

The High Court’s “substantial trading activities” approach was manageable when being a constitutional corporation was only of occasional relevance, such as in regard to the coverage of federal trade practices law. It is now problematic because the outcome of the test is the decisive factor for thousands of businesses in whether they must comply with federal or state law, two very different paths of workplace regulation. The test can be notoriously difficult to apply. Judges tend to form an instinctive judgment about whether the business of a corporation is enough to make it a constitutional corporation. The High Court has not been more precise - by stating a required dollar amount or percentage of the body’s turnover, for example -nor is it clear that it could do this. The result is that it cannot be said with certainty whether bodies such as local councils are covered by federal law until this is decided by a court.

The Federal Court did this in finding that the Etheridge council is not a constitutional corporation. Even then, this might be overruled on appeal by the Full Federal Court or the High Court. This could take many months or years to resolve. The picture is further complicated because the test must be applied to each individual employer and not to an industry as a whole. This makes it likely that some large local authorities, such as the Brisbane City Council, are covered by federal law while others such as the Etheridge council are not. A particular council might even be covered in one year when it does a lot of trading, but not in a following year if its business changes. Bodies with fluctuating trading activities might drift in and out of federal coverage.

Many organisations are operating with considerable uncertainty. They face the high cost of legal advice to determine which law they should follow as well as the anxiety that follows from lawyers often being unable to give a definitive answer without the case being taken to court. If the body makes a choice of law and gets it wrong, it will end up with a legal mess.

Some lower courts have found that universities or charities such as the Red Cross or RSPCA are trading corporations and are covered by federal law. But these judgments can still be overruled by the High Court. That court might over the next few years offset its wide reading in the WorkChoices case of what can be regulated under the corporations power with a more restrictive approach as to which bodies fall under the power. It might more strictly apply its substantial trading activities test or even jettison the test entirely in favour of a new approach based on the purpose for which an organisation was formed. There were hints of this in argument before the High Court in the WorkChoices case. Justice Kenneth Hayne kept coming back to the whole question of defining a trading corporation by its activities.

When the Constitution was drawn up in the 1890s there was no suggestion that a local council or a religious, charitable or educational corporation would be classed as a trading corporation. If the High Court changes direction, universities and other bodies that believe they fall under federal law could be in for a rude shock.

The unnecessary costs of this federal-state conflict need to be avoided. There are two ways to do so. One is for the Commonwealth to unilaterally withdraw from coverage of organisations whose status as a constitutional corporation is uncertain. The other, better option is to bring about a truly national system of workplace relations. It is unlikely the states will cede their powers to the Commonwealth, meaning that a national system must be founded upon cooperation. I authored a report earlier this year for NSW on how this might be achieved, but the negotiations between governments have yet to produce results. Until they do, the uncertain position of local government bodies and many other employers will continue. •

George Williams is the Anthony Mason Professor at the University of New South Wales and a visiting fellow at the ANU College of Law. This article first appeared in the Canberra Times.

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