All commercial contract negotiations (both public and private) must carefully consider the impact of industrial laws if the contract involves a labour supply.
The extent to which a government can pursue industrial relations objectives through procurement has come into question following two recent judgments of the Federal Court: Construction, Forestry, Mining and Energy Union (CFMEU) v Victoria  and Construction, Forestry, Mining and Energy Union (CFMEU) v McCorkell Constructions Pty Ltd (No 2).
In both cases, Bromberg J found that the State of Victoria contravened the general protections provisions of the Fair Work Act 2009 (Cth) (FW Act) when it attempted to enforce its industrial relations policy with respect to its own procurement, contained in the Implementation Guidelines to the Victorian Code of Practice for the Building and Construction Industry.
The decisions not only impair a government’s capacity to influence enterprise bargaining through its commercial leverage, they also confirm the expansive operation of the FW Act’s general protections provisions.
Industrial regulation through government procurement: a brief background
The notion that governments can pursue industrial relations objectives when contracting is not a new or surprising phenomenon. Governments are significant purchasers of labour, and their purchasing power places them in a position to “set an example by acting as model employers”. In Australia, this opportunity has been particularly explored in building and construction procurement, first commencing in 1992 when the NSW Government’s Code of Practice for the Construction Industry was introduced on the recommendation of the Gyles Royal Commission.
Since then, separate procurement policies for the building and construction industry have been developed by all Australian States and Territories (except the ACT). In general terms, the majority of the jurisdictions have a “code” containing motherhood statements that express the intended design of industrial relationships on publicly funded building and construction work. These codes are given content through “guidelines” promulgated by the relevant government departments. A national federal code (originally negotiated by the Commonwealth and all States and Territories) sits at the apex, and most State and Territory codes and guidelines are expressed to be in conformity with the national federal code.
The “model employer” that governments have sought to uphold through these codes and guidelines has waxed and waned according to government policy of the day.
The Victorian Code and Guidelines
In July 2012, the recently elected Victorian Government introduced a new iteration of the guidelines to sit under the Victorian Code of Practice for the Building and Construction Industry (Code).
The revised Victorian guidelines require those submitting a tender or expression of interest (EOI) for publicly funded building and construction work in Victoria to provide documentation evidencing their compliance with the terms of the guidelines. Compliance is not just required for the work subject to the tender or EOI, but must also be demonstrated with respect to their business more generally (including their privately funded work). Importantly, bidders are required to ensure that their subcontractors and related entities are also Code-compliant.
Content of enterprise agreements, Construction Code Compliance Unit and its powers
Among other things, the July revisions to the Victorian guidelines:
- sought to regulate the content of enterprise agreements by identifying certain types of clauses to be considered noncompliant;
- established the Construction Code Compliance Unit (CCCU) to review the content of enterprise agreements and investigate compliance with the Code more generally; and
- commissioned the CCCU with a number of sanction powers, including the power to exclude noncompliant entities from bidding for Victorian Government projects for a specified time.
Enterprise agreements entered into prior to 1 July 2012 were deemed compliant by the CCCU, irrespective of their content. However, enterprise agreements entered into by bidders, their related entities, and subcontractors after 1 July 2012 were liable to inquiry.
The Guidelines in practice: the Bendigo Hospital and Circus Oz projects
In late 2012, the CCCU was asked to scrutinise enterprise agreements relevant to the Victorian Government’s Bendigo Hospital and Circus Oz projects. The following occurred in relation to the Bendigo Hospital project:
- The Victorian Government initiated a tender process for the construction, facility management and maintenance of the Bendigo Hospital. It had shortlisted two consortia for the project. Lend Lease was a member of the consortium that was later earmarked as the preferred bidder.
- In the concluding stages of the tender process, Lend Lease negotiated an enterprise agreement with its employees and the Construction, Forestry, Mining and Energy Union (CFMEU), which was approved by (then) Fair Work Australia to commence on 20 September 2012. This agreement was brought to the attention of the CCCU as part of the evaluation phase of each consortium.
The following occurred in relation to the Circus Oz project:
- The Victorian Government concluded a tender process and appointed McCorkell Constructions to build and refurbish a premises to be the permanent site of a circus. McCorkell then initiated its own tender process for the demolition works to be undertaken on the site. Eco Recycling (Eco) responded to McCorkell’s request for tender. During McCorkell’s tender process, Eco concluded an enterprise agreement that commenced on 2 November 2012.
- McCorkell advised Eco of the requirement that subcontractors for the project must demonstrate Code compliance, and that this meant that Eco’s recently concluded agreement had to meet certain requirements. As Eco did not understand what this meant, McCorkell referred it to the CCCU.
In both instances, the CCCU judged the enterprise agreements to be noncompliant with the Code. The CCCU advised both Lend Lease and Eco that variation of their enterprise agreements was necessary to achieve Code compliance. In Lend Lease’s case, attempts were made to negotiate with the CCCU, in the course of which Lend Lease offered to provide a number of undertakings to the Victorian Government about the operation of the enterprise agreement. Eco was advised by McCorkell that it could no longer tender, which resulted in Eco taking steps to vary its enterprise agreement to remove the offending provisions.
Matters came to a head when the CFMEU (the union covered by each enterprise agreement) commenced proceedings against the State and McCorkell pursuant to the FW Act’s general protections provisions.
The CFMEU’s case was that the State, through the conduct of the CCCU, took adverse action by declaring Lend Lease’s and Eco’s enterprise agreements to be noncompliant with the Code.
Arguments of the CFMEU
Specifically, the CFMEU argued as follows:
- Lend Lease and Eco were “independent contractors” within the meaning of section 342(1) item 4 of the FW Act.
- Lend Lease’s and Eco’s employees had a “workplace right”, as they were “entitled to the benefit” of a “workplace instrument” (their newly concluded enterprise agreements) within the meaning of section 341(1).
- In the case of Lend Lease, the State was “proposing to enter into a contract for services”, but had threatened to refuse “to make use of, or agree to make use of, services offered” by Lend Lease because of its employees’ “workplace right” in contravention of sections 340(1), 342(1) item 4, and 342(2). A similar allegation was also made against McCorkell.
- In the case of Eco, the State acted “with intent to coerce” Eco to vary its enterprise agreement to make it Code-compliant, in contravention of section 343(1). McCorkell was also alleged to have committed the same contravention.
CFMEU was initially granted injunctive relief. Much of the contest at substantive hearing centred around the precise legal meaning to be given to many of the terms quoted above.
Meaning of “independent contractor”
Much of the CFMEU’s case was predicated on a finding that Lend Lease and Eco Recyclers were “independent contractors” — a finding to the contrary would have taken the State’s conduct outside the scope of section 342(1) item 4.
The State’s argument
The State submitted that “independent contractor” referred to the type of (usually individual) worker that is not an employee, and that the legal meaning to be given to the phrase should accord with the meaning that is commonly invoked by the employee/independent contractor dichotomy.
The CFMEU’s argument
The CFMEU argued that the meaning was not limited by this notion and extended to any legal entity carrying on the business of a contractor that provides services that include labour services, irrespective of scale.
Ruling of Bromberg J: Lend Lease and Eco Recyclers are independent contractors
Justice Bromberg adopted a beneficial approach to construction. In doing so, his Honour:
- looked to context, and noted that other parts of section 342(1) referred to an “independent contractor” employing employees and engaging other independent contractors — this did not sit well with the State’s assertion that the term was limited to the notion invoked by the employee/independent contractor dichotomy; 
- looked to the phrase’s ordinary meaning, which his Honour said “connotes an entity that furnishes supplies or performs work under a contract that does not create a relationship of principal and agent as between the contractor and the person who contracts for the benefit of the services supplied' and
- traced the legislative history, and found support for the meaning advanced by the CFMEU in prior iterations of federal industrial law, most notably within the freedom of association and provisions introduced by the Workplace Relations and Other Legislation Amendment Act 1996 (Cth).
All of this inextricably led to the conclusion that Lend Lease and Eco Recyclers were “independent contractors” for the purposes of the FW Act’s general protections provisions.
As a consequence, it followed that the allegations of adverse action extended to Lend Lease’s and Eco Recycler’s employees, as the protection in section 342(1) item 4 extends to “persons employed or engaged by the independent contractor”.
Meaning of “proposing to enter into a contract for services”
The CFMEU’s case also relied upon the finding that the State and McCorkell were “proposing to enter into a contract for services” when committing the impugned adverse action.
In Lend Lease’s case
In Lend Lease’s case, the State contended that there was no “proposal” to contract with Lend Lease. The tender process was still in progress, and section 324(1) item 4 required some certainty as to counterparty.
This was rejected, with his Honour noting that the State had effectively equated the meaning of “proposing” to connote “intending”. This interpretation could not be sustained because other parts of section 342(1) prohibited adverse action against “prospective employees”. The protection for “prospective employees” went beyond circumstances where there is an intention to employ them, and it would be anomalous to confine the protection afforded to prospective contractors vis-à-vis prospective employees. His Honour concluded that the phrase speaks to a potential contractor whose engagement is merely “under consideration or in prospect”.
Contract for services
The State also argued that a “contract for services” with Lend Lease was not under consideration or in prospect. The State pointed to the substance of the tender documentation, being a contract for the construction, facility management and maintenance of a hospital. It was not a contract for labour services in itself, which is the type of contract to which section 342(1) item 4 is directed.
His Honour accepted this at one level, but ultimately found the tender documentation to envisage a contract with Lend Lease to build a hospital, and a contract of that kind “will inevitably require the provision of labour services to a material degree”.
No proposal to contract
The State also pointed to fact that neither the State nor Lend Lease was party to core contractual documentation under negotiation. A separate project company and one of the shortlisted consortia were in fact the proposed parties to the contract, and it followed that neither the State nor Lend Lease was proposing to contract.
However, a deed between the State and the builder had been drafted, which, his Honour found, contained obligations that would be enforceable by the State against the project builder from the inception of the proposed contract. This was enough for his Honour to find that a “contract for services” was in consideration between the State and Lend Lease, because the deed:
"… must be read and understood as part of a contractual scheme in which each of the [contract documents] are intended to be linked and in which each will contribute to ensuring the State obtains the works and services including those to be provided by the appointed builder."
In McCorkell’s case
The case against McCorkell was much less involved, owing to the simplicity of the negotiations with Eco. In conformity with his findings of law with respect to Lend Lease’s case, his Honour found that:
- a contract for services was “under consideration or in prospect” at the time Eco forwarded its quote to McCorkell;
- the fact that McCorkell later “narrowed in” on other tenderers on the basis of price did not derogate from the fact that, at a certain point, McCorkell was contemplating contracting with Eco, but excluded Eco for reasons that included its noncompliance; and
- notwithstanding that Eco would have obtained property in salvageable items following demolition, it was still predominantly a contract for labour services.
The consequence of finding that Lend Lease and Eco were “independent contractors” that were “proposing to enter into a contract for services” flowed as a matter of course. His Honour accepted that both the State and McCorkell “threatened” to take adverse action against Lend Lease and Eco within the settled meaning of that term. This was “because” of the rights conferred upon Lend Lease and Eco employees under the respective enterprise agreements, and noncompliance with the Code by both contractors was one motivating factor for taking the adverse action.
As the State and McCorkell did not discharge the reverse onus of proof required to defeat an allegation of adverse action, the cases against them were upheld.
The State’s coercion against Eco
Coercion and the State’s attempt to discharge the reverse onus of proof
The CFMEU separately alleged that that the State coerced Eco. This was said to occur when the CCCU communicated to Eco (at least implicitly) that it needed to vary its enterprise agreement if it wanted to tender for government work. Noting that “intent to coerce” within section 343(1) has the accepted meaning of “intent to negate choice”, his Honour characterised the State’s task of overcoming the reverse onus of proof as follows:
"On the facts and allegations made in this case, it seems to me that section 361 imposed on the State an obligation to negate that a substantial and operative reason for the action it took was a desire to have Eco and its employees take steps to vary the Eco Agreement and that any such motivation was not pursued with an intent to negate the choice of Eco and its employees not to take those steps … the State will need to establish that if it did negate choice, the exertion of the pressure involved was not unlawful, illegitimate or unconscionable."
The State sought to meet this by calling the relevant CCCU official who met with Eco. Her evidence was that:
- her intention when communicating with Eco was to provide it with information about its compliance, and to respond to its queries as best she could within the scope of the CCCU’s role; and
- she did not act with an intention to coerce Eco into varying the enterprise agreement.
Justice Bromberg held that this evidence was not capable of satisfying the State’s onus of disproving the coercion, for the following reasons:
- It was not evidence establishing whether or not the CCCU was motivated to negate the choice of Eco. Rather, it was evidence of an intention to provide information. It should have been directly put to the witnesses whether or not she was motivated to coerce Eco into varying its enterprise agreement.
- The official’s intention, in her own words, was to respond to Eco “within the scope of the role” of the CCCU. As it was CCCU’s role to procure Code compliance, it naturally followed that the CCCU would desire that enterprise agreements be compliant, and that parties should take steps to vary noncompliant agreements.
Was the State’s conduct unlawful, illegitimate or unconscionable?
What was then left to decide was whether or not the State’s conduct involved pressure that was “unlawful, illegitimate or unconscionable”. Justice Bromberg found that issuing the guidelines was in itself such conduct:
"The guidelines impose parameters for the allowable content of enterprise agreements different to those provided for by the FW Act. In many respects the differences are stark. The exertion of economic pressure upon industrial parties for the purpose of limiting or restricting their freedom to bargain within the parameters established by the FW Act is, in my view, illegitimate because it serves to defeat the scheme for agreement making prescribed by FW Act.
The impugned conduct of the State in this case involved the application of economic pressure on parties to an enterprise agreement and was driven by parameters for bargaining and agreement making contained in the Guidelines. It therefore involved a purpose and effect which served to undermine the scheme of the FW Act. For that reason, it seems to me that the conduct was illegitimate conduct and that the second element required to prove an “intent to coerce” is established."
The CFMEU’s allegation that McCorkell also coerced Eco failed. His Honour accepted evidence establishing that McCorkell held no intention to exert any pressure on Eco to vary its agreement.
Leave to appeal sought and revised version of guidelines
The Victorian Government has sought leave to appeal both decisions, which a Full Court is due to hear in November. Unless overturned, Bromberg J’s findings largely spell the end to a government’s ability to dictate the content of enterprise agreements through its own commercial leverage. This has consequences for the whole eastern seaboard, as New South Wales and Queensland recently introduced revised guidelines primarily based upon Victoria’s version.
Shortly after the ruling, the Victorian Government reissued a revised version of the guidelines to clarify that they do not “require, encourage or promote conduct that would constitute a contravention of the FW Act” and issued a practice direction that effectively suspends any monitoring of enterprise agreement content. New South Wales and Queensland have taken similar measures.
Implications: breadth and potential of general protections
Government procurement aside, the rulings demonstrate the breadth and potential application of the FW Act’s general protection provisions. By reason of the expansive meaning given to both “independent contractor” and “proposing to enter into a contract for services”, it is abundantly clear that all commercial contract negotiations (both public and private) must carefully consider the impact of industrial laws if the contract involves a labour supply.