Recognise labour as labour
As noted above, many limbs of the law have already moved beyond the legal fiction of “independent contractor” to provide labour like rights to these group of workers on the basis that they have labour like interests. It is the core industrial relations law – the FW Act - that is behind the curve.
Rather than applying the multi-factor test to each situation where there is doubt as to a worker’s true status, we suggest it would be more efficient and would provide more certainty if the ATO’s superannuation eligibility test as contained in Ruling SGR2005/1 was built upon to form a new statutory test to be contained in the FW Act. Whether this would involve a deeming provision or, in the alternative, more substantial changes in terminology (such as to refer to “national system workers” and “national system enterprises”) should be thoroughly considered, however we state our preference for the latter given its harmony with the other changes we recommend in other chapters.
The advantages of this response to independent contracting is more efficient than the multi-factor test or the deliberative processes of the ACCC, there is greater likelihood of consistent decision making and there is much greater fairness for and between workers. To fully realize this objective, the test as stated by the ATO requires revision such that it achieves its purpose notwithstanding assertions in any contract that “the independent contractor is permitted to sub-contract”. If primacy is to be given to substance over form, the focus ought not be the words on the page of the contract but rather whether, in practice, the worker does subcontract the work to another person.
The fairness consideration should weigh greatly in favour of workers in that in many cases their labour is the only thing they have to offer an employer or principal. If they are offering up their labour they should receive the benefit of the same protections and rights as others who do so.
Any concept or structure which attempts to classify any labour as a commodity should be resoundingly rejected. This is the case even where doing so erodes what some might describe as “flexibility” in this context. Flexibility that is constituted by gaming or avoidance behavior which undermines the integrity of labour protections is not, in our view, desirable. The law must move from a conditional acceptance of this principle to an absolute one.
Do any aspects of the WR system represent a barrier to independent contractors?
If an independent contractor is a genuine business engaged to deliver a specified product or service in a manner of their own choosing and not remunerated principally for their own labour or skills, the industrial relations system does not present a barrier to their endeavor. What the system does do, insufficiently, is allow labour to take limited steps in bargaining with an individual employer to reduce the incentive for that employer to outsource their jobs to those businesses. This generally takes the form of a commitment that the relevant employer will ensure that the contractor’s labour is engaged on terms and conditions that are no less favourable than those contained in the collective agreement between the employer and its direct employees. These consensual arrangements are unobjectionable, and have the desirable side effect of encouraging would-be contractors to compete on a more innovative basis than labour costs. The discussion in chapter 14 concerning the content of bargaining discusses this matter in more detail.
The real barriers lie in the difficulties faced by genuine small business suppliers (such as newsagent shops dealing with major media outlets) and individual “contract” workers in asserting bargaining power in the labour market. We have suggested above an approach concerning the latter. We note that the barriers faced by the former were discussed in the Draft Report of the Harper Competition Policy Review and recommendations were made for some improvements (a final report is due to be delivered in March).
Were our recommendation regarding individual contract workers not accepted, it would remain necessary for the law to adopt a more co-herent policy toward this issue. This could involve the following elements:
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A secondary legislative infrastructure for the notification and authorisation of collective bargaining be housed in the FW Act, administered by the FW Commission and applicable to ABN holders who are natural persons ordinarily remunerated for their skill or labour performing work that would (but for their status as a “contractor”), be covered by an award. The legislative framework would allow workers so authorised to also withdraw their labour in pursuit of their bargaining claims, consistent with our international obligations;
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The FW Commission should be empowered to resolve the types of claims today made under the Independent Contractors Act 2006 where the contractor making the claim is one that meets the test we proposed above to be included and applied in the FW Act more broadly. The FW Commission offers reduced costs, flexible formats for dispute resolution and expedited determinations. Further, it is well placed and informed to assess the broad issues of fairness that such analysis requires and is the ideal authority to make comparisons between contracts and the instruments that it makes and approves under the FW Act. We recognise that the role of the FW Commission would, for technical reasons, potentially need to be framed as having a discretion to make an Award or Order to resolve disputes between contracting parties having regard to the criteria referenced in the Independent Contractors Act.
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A substantial revision of the present prohibitions on “sham contracting” and to relevant tax law. These matters are considered below.
Are the current provisions in the FW Act sufficient to discourage sham contracting?
Sham contracting is dealt with in Division 6 of Part 3-1 General Protections.
Currently where the multi-indicia test indicates that a worker is actually an employee, while they may have been engaged as an independent contractor, it is necessary to consider whether the sham contracting provisions apply.
Broadly speaking, the sham contracting provisions are concerned with to intentionally or recklessly disguising an employment relationship as an independent contracting arrangement. As set out above, an employer will usually do this to avoid responsibility for employee entitlements such as minimum wages, award provisions and NES entitlements. This relationships to which the provisions are directed can present in different ways, for example:
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It is commonly found that employers will pay ‘all-in’ hourly rates. Under this system the employer simply ignores the various entitlements arising under industrial awards and agreements and pays a loaded all-inclusive or ‘all-up’ hourly rate in lieu of wages and other benefits such as annual leave, public holidays, sick leave, penalty rates and so on. Employers often seek to rely on the use of ‘all-in’ payments as self-serving evidence of the existence of a bona fide contract for services.
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Occasionally there are variations on the theme which can include the payment of some conditions of employment such as superannuation or workers compensation, as well as the hourly rate.
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In other instances the employer may have some of his/her workforce on all-in payments and others as employees receiving wages, conditions and statutory benefits .
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In other instances, there may be multiple complex factors that make a sham contracting arrangement attractive to both parties. For example, some other industries where sham contracting is prevalent are also industries with a relatively high prevalence of undocumented workers.157
Under the sham contracting provisions of the FW Act158 an employer cannot:
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represent a current employment relationship or a proposed employment relationship as an independent contracting arrangement;
(a)dismiss or threaten to dismiss an employee for the purpose of re-engaging them as an independent contractor; or
(b)make a knowingly false statement to persuade or influence an employee to become an independent contractor.
A person who has made a representation under section 357 that an employment relationship is a contract for services may be able to rely on subsection 357(2) if he or she can prove that either her or she did not know, or was not reckless as to whether, the relationship was an employment one rather than one of independent contracting. Notably, the provisions do not actually prohibit employers from engaging employees on sham contract arrangements.
We submit that the current provisions in the FW Act are not sufficient to discourage sham contracting, and that solutions must lie not only in the FW Act, but also elsewhere.
Whilst sham contracting has its own unique causes and effects, it needs to be characterised as a subset, or particular manifestation, of the broader long-run shift to more precarious, non-standard forms of work and especially the growing intensity and vertical and horizontal scope of subcontracting that has occurred within the broader economy, but with particular severity in the construction industry. The forces driving sham contracting are often not simply from firms looking to evade workplace employment provisions or dodge tax and superannuation laws. The competitive pressures driving sham contracting are occurring across the economy, and often right from the top of production value chains. However, economic and social regulation should not occur in ways that have the effect of undercutting employment rights and safety, nor should the cost pressures be allowed to justify tax avoidance and evasion.
“Towards more Productive and Equitable Workplaces” suggest that there is a lack of information about the scale of sham contracting. Despite citing Stewart and Roles observations that ‘converting’ employment relationships into contractor-type arrangements is now standard practice at labour law firms, the report uses this supposed information gap to essentially only slightly tighten the existing provisions in the FW Act.
A range of studies demonstrate that while currently sham contracting is not evenly distributed across industries, in some industries such as the construction industry it is significant and problematic. Indeed, the problem of sham contracting has been an issue in the construction industry for many years, and a range of reports have made estimates about its scale and implications. For this reason, we focus our analysis of sham contracting in the construction industry, and provide a detailed case study of that industry at Appendix 3, drawing on existing empirical research to establish that the scale of sham contracting is a serious problem, it permits cost and risk shifting to those who cannot manage those risks, it encourages low road construction governance, it discourages the development of innovation and human capital, it accentuates health and safety problems in the industry and it permits damaging fiscally tax minimisation and evasion.
The case study on sham contracting does three important things:
- it examines the scope of dependant or ‘sham’ contracting in the Australian construction industry,
- it examines the causes of the growth of this form of employment, and
- it analyses the effects of sham contracting.
Understanding the scope, causes and adverse effects of sham contracting within the context of the construction industry is useful and relevant given that in 2014 the Australian construction industry directly employed 9 per cent of all workers (ABS 2014a: Table 4) and accounted for 8 per cent of GDP (ABS 2014b: Table 5). Construction also remains the most significant area for use of independent contractors as measured by ABS surveys159.
The case study concludes that the current regulatory framework for dealing with the problem is inadequate, and therefore action is required, including:
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changes to the FW Act to make employers in the broadest sense liable for knowingly or unknowingly setting up sham contracting arrangements, as well as those covering mis-representations, inducements, and dismissal and re-engagement, associated with sham arrangements.
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changes to the Income Tax Assessment Act to ensure that artificial business structures and sham contracting arrangements are not being encouraged explicitly or by omission. Tax laws should not be easily used to arbitrage between employment categories to undermine the tax base. Instead they should be based on the simple efficient and equitable principle that if two workers are doing the same job under the same conditions, they should be paying the same tax.
The apparent preference for permitting a “sham contracting defence” of misrepresenting a contract of employment only when the firm did not know is insufficient. As the case study bears out, in contracting industries, with a hierarchical system of sub-contracting, the downward pressure from head contractors can be seen to be a direct cause of further levels of sub-contracting, including the need by mid-tier sub-contractors to effectively pass on the risks and costs that the head contractor has shifted, by tendering and re-tendering. A more process and value chain concept of liability needs to be considered to deal with the new realities of employment in production chains and networks, and the ability of those networks to de-link costs/risks and economic returns, in part by unbundling attributes and functions of the employment relation.
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