A recent decision by the Federal Court in Australian Workers’ Union of Employees, Queensland v Etheridge Shire Council [2008] FCA 1268 (Etheridge Case) found that Etheridge Shire Council in Queensland was not a constitutional corporation, and therefore, not covered by the Federal Government’s WorkChoices laws.

The decision is likely to have far-reaching ramifications and signals an attempt by the courts to wind back the reach of the Federal Government’s power.

The Federal Government is only able to make laws to the extent permitted by the Australian Constitution. The challenge mounted by the states to the WorkChoices legislation in 2006 represented an attempt by the states to try to limit the power of the Commonwealth, by arguing that the Commonwealth’s power to make laws with respect of constitutional corporations did not extend to regulating industrial relations.

Unfortunately for the states, the High Court found that the corporations’ power in the Constitution did indeed extend to making laws that regulated the employer-employee relationship. However, in its decision, the majority of the High Court indicated that the court may in future be likely to reassess what constituted a constitutional corporation.

The legal test prior to the Etheridge Case focused on whether or not an entity undertook substantial trading activities to determine whether the entity was a constitutional corporation. By this definition, a range of organisations -” including charitable organisations and local councils -” were found to be constitutional corporations and subject to federal regulation. However, in the Etheridge Case, the Federal Court found that historical evidence about the functions of the organisation were also relevant.

In Etheridge Shire Council’s case, the Federal Court stated that the legislative and administrative responsibility of a local council did not permit the conclusion that a local council was a trading constitutional corporation.

Although the High Court seemed to endorse such an approach in 2006, it has not conclusively ruled on this issue in recent times. The precise boundary between Federal and State law is likely to be tested by various parties in the coming years because this decision has reopened the possibility that a broader range of organisations may be exempt from Federal law.

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