Are you in or are you out? Is a local council a body politic or a corporation?

Under ss220 and 388 of the NSW Local Government Act 1993, local and county councils are ‘a body politic of the State’ and ‘not a body corporate (including a corporation)’.  Could not be any clearer, right?

Determining an organisation’s status, and the laws (like industrial relations laws) that apply to it, should be a relatively easy task.  As the recent decision of the High Court of Australia in Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Queensland Rail [2015] HCA 11 (8 April 2015) demonstrates, an organisation’s status is not always in the ‘statutory declaration’ of the governing legislation.

Before we look at the decision of the High Court, it is worthwhile reviewing the legal issue.

The Fair Work Act 2009

The Federal Fair Work Act 2009 (the FW Act) applies to the exclusion of State and Territory industrial laws, including the NSW Industrial Relations Act 1996: s26(2) of the FW Act.

The FW Act regulates the relationship between national system employers and employees.  The phrase ‘national system employer’ means ‘a constitutional corporation, so far as it employs, or usually employs, an individual’: s14(1)(a) of the FW Act.

A ‘constitutional corporation’ is defined in s12 as:

… a corporation to which paragraph 51(xx) of the Constitution applies

Section 51(xx) of the Constitution gives the Commonwealth the power to make laws with respect to:

foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth

Historically, organisations have asked two questions to determine if they are in or out of the FW Act: 

• are we a corporation? 

• are we a trading or financial corporation? 

The answer to the first question was usually found in the governing legislation if it was called a body corporate then it was a corporation.  Answering the second question was more complicated. 

A trading corporation is a corporation whose trading activities are a substantial or a significant part of its corporate activities.  Trading activities which are so slight or so incidental, or a peripheral activity, do not make an entity a trading corporation.  It is the activities of the entity rather than its purpose which determine whether it is a trading corporation.  ’Trading‘ is a broad concept and the High Court has said it is not to be given a narrow interpretation.  Trading includes the activity of providing goods and services for reward.  It also extends beyond buying and selling to business activities carried on with a view to earning revenue, including trade in services.

Queensland Rail

Queensland Rail Limited (QRL) operated railway services in Queensland.  QRL was a state owned corporation.  QRL, and its employees, fell within the jurisdiction of the FW Act.  They had negotiated Federal workplace agreements in 2009 and 2011.

Then in May 2013, the Queensland Parliament enacted the Queensland Rail Transit Authority Act 2013 and established the Queensland Rail Transit Authority.  The employment of the employees was transferred from QRL to the Authority.  The Authority’s role was to supply the labour of the employees back to QRL.

Subsection 6(2) of the governing legislation declared: ‘[t]he Authority is not a body corporate’.  The legislation also said that the FW Act did not apply to the Authority (but rather the Queensland Industrial Relations Act 1999 applied). 

A High Court challenge

The unions, representing the employees of the Authority, lodged a challenge in the High Court asserting that the FW Act applied to their employment because:

• the Authority was a corporation;  and

• the Authority was a trading corporation within the meaning of s51(xx) of the Constitution.

The Authority argued that it was neither a corporation nor a trading corporation.  The Authority relied on s6(2) of the governing legislation that stated, unequivocally, that it was not a body corporate.  It also said it did not trade as its only function was to provide labour, at no profit, to QRL.

The High Court decision

The High Court questioned whether the proper analysis was to first ask if the Authority was a corporation.  The issue was whether it was a ‘trading corporation’.  There was no dispute that the Authority was formed within the limits of the Commonwealth.

Nevertheless, the High Court held the Authority was a corporation without the need to state exhaustively what the defining characteristics of a corporation are.

Firstly, the High Court rejected any suggestion that a State Parliament can determine if an entity is a corporation.  The majority said:

More particularly, it would be necessary to observe that whether an entity is a corporation of a kind referred to in s 51(xx) presents an issue of substance, not mere form or label.

Gageler J, in a separate decision said:

There can equally be no doubt that the description which that legislature chooses to give to the body it so creates cannot determine the character of that body for the purpose of s 51(xx) of the Constitution.

The High Court preferred a broad interpretation of the word ‘corporation’ as used in s51(xx) of the Constitution.

Secondly, what appeared to be determinative of the issue of whether the Authority was a corporation was its independent existence as a legal person, with rights and duties.  The majority said:

… the Authority is created as a separate right and duty bearing entity. It may own, possess and deal with real or personal property.  It is an entity which is to endure regardless of changes in those natural persons who control its activities and, in that sense, has "perpetual succession".  Its constituting Act provides for mechanisms by which its assumption of rights and duties may be formally recorded and signified.  The Authority has "the full character of a corporation".

As Gageler J succinctly stated:

[The Authority] answers that description [of a corporation] because it is an entity established by law with capacity to own property, to contract and to sue.

Finally, as to whether the Authority was a trading corporation or not, the majority said it was a trading corporation:

Even if the Authority is treated as now doing nothing more than supplying labour to QRL (a related entity) for the purposes of QRL providing rail services and even if, as the Authority submitted, the Authority chooses to supply that labour at a price which yields it no profit, those features of its activities neither permit nor require the conclusion that the Authority is not a trading corporation.  Labour hire companies are now a common form of enterprise.  The engagement of personnel by one enterprise for supply of their labour to another enterprise is a trading activity.  That the parties to the particular supply arrangement are related entities does not deny that characterisation of the activity.  That the prices for supply are struck at a level which yields no profit to the supplier likewise does not deny that the supplier is engaged in a trading activity.

Implications of the decision

The decision, and its implications for local councils, will need to be assessed and analysed. 

The Attorney General for NSW in his written submissions to the High Court (when intervening in the appeal) said that adopting the broad definition of ‘corporation’ argued by the unions, would extend to capture local governments. 

It is clear that the mere statement in ss220(2) and 388(2) of the Local Government Act that local councils are not body corporates, will not act as a shield to councils being constitutional corporations and therefore, governed by the FW Act.

It appears that the High Court has adopted a broad interpretation, but it was not asked to consider or determine the status of a body politic, like local councils.  For example, the High Court majority said at [32]:

…contrary to the tenor of the Authority's submissions, [past decisions do] not support drawing a distinction between corporations of the kind or kinds referred to in s 51(xx) and other forms of artificial legal entity that are not bodies politic.

So, perhaps there is still room for ss220(1) and 388(1) of the Local Government Act to keep local councils out of the Federal sphere.

In Australian Workers Union of Employees, Queensland v Etheridge Shire Council [2008] FCA 1268, a single judge of the Federal Court held that the council was not a trading corporation.  The court suggested that it was “inconceivable” that the drafters of the Constitution intended local government, which is a body politic of a State government, would be subject to Commonwealth powers in the area of workplace relations.

In many respects, some local councils do engage in activities that might be considered to be trading in nature, such as leasing venues, managing facilities like art galleries and swimming centres, managing car parks etc.  The High Court did not need to determine whether it is the constitution or purpose of the organisation, or its activities, or a combination of both, that are to be examined to determine if an organisation is a trading corporation.  On any test, the Authority was a trading corporation.

Significant and interesting times are ahead in working out if a council is in or out. 

Author: James Mattson