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Overview of submissions to ABCC sham contracting inquiry

11 March 2011

"How it can be suggested that a labour-only form worker or a labour-only plasterer is running a business of their own account is beyond me".
--- Commissioner, Australian Building and Construction Commission (Australian Financial Review, 8 February 2011, page 60)

Since 16 February 2011, we've been following the inquiry into sham contracting being conducted by the Australian Building and Construction Commission.

17 submissions have been sent to the inquiry (8 March). You'll find them here.

We declared that we would not make a submission because the conditions for making a submission create legal risk. The conditions are quite odd and unusual! By not making a submission we are free to comment on the submissions that have been made. We have read all the submissions and categorize them as follows:
    3 submissions very much follow the 'line' and tone of the discussion paper. That is, they agree that an additional legal activist approach is needed to resolve the 'problem' of sham contracting. These submissions are primarily from academics.

    14 submissions generally argue as follows:
    • Independent contracting is a legitimate way of working and is strongly supported.
    • Sham contracting is illegal and is not supported.
    • Effective sham contracting provisions exist in the Fair Work Act and the ABCC should educate people about them and enforce them.
    • Labour hire is legal, legitimate and is not sham contracting.
    • Seeking to invent new definitions of independent contracting would create confusion.
    • 'Dependent' contracting is not a valid concept, legally or otherwise.
The following extract from the Chamber of Commerce and Industry WA probably best summarises these 14 responses to the ABCC's discussion paper:
    CCIWA submits there is no compelling evidence to suggest that problems within the industry are widespread, or that the current regulatory framework is inadequate. Independent contracting and labour hire arrangements are legitimate forms of employment. Workers and contractors in the industry are protected by the current regulatory framework, ...

    CCIWA does not support the introduction of any additional regulation.
The Housing Industry Association has put in a brilliant submission that rises to the defence of independent contractors and the right to be self-employed. HIA says:
    This Inquiry is misconceived, flawed and beyond [its] power -

    The content and language of the Discussion Paper rests on assumptions exhibiting an ideological bias against contracting ...
HIA's submission is available here. We strongly recommend reading it, and in fact we endorse their analysis and comments. For a quick read, we have extracted a range of the 'punchier' comments (below).

Some additional ICA comments

The 14 submissions (above), particularly the one from HIA, strongly reflect the views of ICA on the content of the ABCC's discussion paper. The other 3 submissions (above) run with an old academically theoretical approach to self-employment which is reflected in the ABCC discussion paper but which is out of touch with both the law and the social aspirations surrounding self-employment.

We have some additional comments.

Dependent contracting and definitions
The discussion paper raises a very old but largely discredited concept of 'dependent contracting' and draws on a 2003 International Labour Organisation document to justify raising the issue. In this respect the discussion paper misrepresents (by omission) the position of the ILO on the matter. The facts are:
  • From about 1996 the ILO was in deep debate over the legitimacy of self-employment.
  • In 2003, the ILO reached a 'Conclusion' that made reference to dependent contracting but which recognized the legitimacy of self-employment.
  • Following the 2003 Conclusion, the ILO commissioned a Committee of Experts to undertake one of the most comprehensive global surveys of how the law in national jurisdictions defined the difference between employment and self-employment.
  • In 2005, the ILO released its report from the Committee of Experts who stated that they were 'surprised at the level of convergence' of the definition used globally. That is, that the legal definition of employment and self-employment are consistent across the globe. Further, the report completely dropped all reference to 'dependent contracting'. The consistency of definition across the globe excluded any reference to a third category of 'dependent contracting'.
  • In 2006, the ILO passed a Recommendation that cemented the legitimacy of self-employment, recommended nations prevent sham contracting but made no reference to dependent contracting or the need to invent a third category of employment or to redefine employment and self-employment.
Effectively the ILO closed the debate over definitions and dependent contracting. ICA participated in the 2003 and 2006 debates at the ILO in Geneva.

The ABCC, however, has chosen to raise the dependent contractor issue again and float the idea of additional definitions. In every respect this reflects an ignorance of the progress of the debate on this issue. Again, the facts are:
  • The dependent contractor thesis was the creation of a Canadian academic, a Mr H.W. Arthurs in 1965. Arthurs had studied fishing trawlers on the east coast of Canada who supplied their fish to just one fishing plant. He argued that these self-employed fishermen were economically dependent on the single fishing plant.
  • Since then it has been common for some groups of labour academics to seek to extend this thesis to argue that there should be a third category of self-employed person who, in some way, would be jurisdictionally pulled into industrial relations laws.
  • There have been many attempts by these academics and some lawyers to leverage a change in the law by mounting the dependent contractor argument in the courts, hoping that the courts would adopt such arguments in their decisions. If such arguments were accepted by the courts, it would effectively change common law and remove the current right to be self-employed.
  • In Australia, there was activity in this respect during the 1990s, with at least five major court cases (of which ICA is aware) where this argument was put. In all cases, the courts, or courts on appeal, rejected and/or ignored the dependent contractor argument and made rulings entirely based on accepted common law.
  • The evidence that such attempts to change the law by stealth failed across the globe sits in the ILO Committee of Experts report of 2005 (referred to above).
Despite the repeated failure of some bands of academic lawyers to change the common law, they persist. In their actions they pose a persistent threat to the right of people to be self-employed, to be their own boss.

The stupidity and the 'lie' of dependent contracting can be most clearly demonstrated by contemplating its logical opposite. If there can be such a thing as a dependent contractor---that is, a person who is self-employed but looks like an employee---then there must equally be such a thing as an independent employee---that is, a person who is an employee but looks like an independent contractor. ICA agrees that in the behavioural and economic sense there is considerable blurring now between employment and self-employment. If anything, because of a vastly changed society, where class divides have broken down and individuals seek independence, huge numbers of employees now look as though they should be categorised as independent contractors. However both concepts, dependent contractor and independent employee, are legal nonsense and their adoption would create massive commercial and regulatory confusion.

Phoenix companies
If there is one problem ICA consistently sees, it is the use of phoenix companies. This is one area where we agree with the construction union, the CFMEU.

Phoenix companies present a legal dilemma. Companies are structured so that if they fail and are closed, directors and shareholders are not usually liable for the unsecured debts of the company. Equally, employees are not liable for the companies' debts. This is a legitimate part of commerce and commercial risk arrangements.

But what is legitimate becomes highly suspect and 'dodgy' when individuals intentionally run up company debts, extract money from the company for themselves, close the company leaving unsecured debtors with the debts, then reopen the business under a new company structure. There are individuals who have made themselves quite wealthy by repeating this process. It is effectively fraud, but difficult and complex to identify and catch. It is not sham contracting, but some operators may use sham contracting as part of the scam. For the most part, the individuals and organizations who suffer the debts are tax authorities, employees of the (closed) companies and self-employed/small business people who may have supplied goods and/or services.

If there is to be any good that comes from the ABCC sham contracting inquiry, it would be in this area. A full and open discussion about phoenix companies is needed, with practical suggestions about how these scams can be minimized.


HIA submission

ICA is extremely impressed with the submission from the Housing Industry Association. The submission can be downloaded from HIA here. If you don't have time to read the entire submission, we recommend reading the following extracts:
    Sham contracting is not "dependent contracting" or "labour only" subcontracting. Additionally, the fact that a contracting arrangement may be subject to a law that deems certain workers to be employees for some purposes does not make it a sham.

    HIA does not agree that sham contracting is 'rife' or 'rampant' in the construction industry.

    This Inquiry is misconceived, flawed and beyond power -
    The content and language of the Discussion Paper rests on assumptions exhibiting an ideological bias against contracting:-
    The Paper fails to identify the hallmarks of independent contracting and confuses them with the label "sham contracting" Ð

    A contractor performing work that might otherwise be done by employees is not sham contracting. A builder offering to engage contractors to do particular work rather than offering to engage employees to do that work is not sham contracting.

    Sham contracting is deliberately or recklessly misrepresenting an employment arrangement as something else.

    HIA notes that Commissioner Johns stated on 19 November 2010 that 'my functions under the BCII Act make available the option to inquire into sham arrangements and related matters.' HIA disagrees. The ABCC's remit is not as wide as has been claimed.

    HIA further notes that the Commissioner recently made the following remarks during Senate Estimates:

      "The focus on sham contracting includes instigating a national inquiry and a series of round tables, out of which I will report on actionable suggestions for an effective regulation that will support greater workplace fairness, support for the competitive advantage of decent employers, address tax inequity issues and stamp out shonky operators."

    HIA trusts that these comments do not indicate a pre-ordained outcome for the inquiry.

    HIA is disappointed that the Paper seemingly adopts this ideological bias against contracting. Little if any effort has been made to use the term 'sham contracting' in its true legal sense.

    It (the discussion paper) is a very broad ranging document, and is premised on the assumption the existing compliance and regulatory regime covering work in this industry is unsatisfactory. However, beyond citing past inquiries, there is no objective investigation or assessment of whether this is true.

    Proposals to improved workers' 'rights' should be looked at in a comprehensive and realistic rather than a narrow and theoretical light. Contrary to the approach of the Discussion Paper, work is not a fixed quantum and does not exist in the abstract.

    ... the Discussion Paper proceeds throughout to regard contracting as an illegitimate way of employers avoiding paying employment entitlements. It is not.

    That there is a bias in some quarters against contracting as a legitimate way of doing work is clear from the sources cited in the Discussion Paper embracing the concept of 'dependent contracting'. This is not an accepted legal category---either one is an employee or a contractor.

    Put simply, if a person is in businesses in his or her own account then they are offering a contract for services regardless of whether or not all of their income comes from only one source.

    In this regard, dependant contracting is a purely economic concept which has been invented by academics to identify those in what they see as so-called 'employee-like' situations which they say requires legal protection, whether the 'dependent contractor' wants it or not.

    This is a gross over-simplification---if a contractor works a whole year for a single principal, that does not make them an employee, or justify treating them as one. Economic and bargaining power in contracting relationships will vary with supply and demand, and is not necessarily always with the head contractor.

    The Discussion Paper assumes that contractors are 'missing out' on the entitlements they would and should receive if they were employees. The Discussion Paper goes on to ask how this unfairness could be rectified. No-one who has ever run their own business could ask such questions.

    The APSI (personal Service Income) rules are not statutory tests designed to identify 'genuine independent contractors'ÉThe purpose of this legislation was to ensure equitable allocation of tax burdens, not changing a taxpayer's legal status. A law which was intended to force contractors to work as employees would be a law about contractors and not about tax, and thus beyond the constitutional power of the Commonwealth Parliament to enact.

    Sham contracting is neither 'rife' nor 'rampant' in residential construction. To the contrary, the Australian housing industry has a long and honourable use of contractors.

    The conditions under which contractors work to earn a living and support a family can be arduous, and their hours long, but few would sacrifice the freedom of being their own boss to become an employee of a construction company in the commercial building industry.

    The findings of these surveys (conducted by HIA) generally confirm that subcontractors see themselves as small businesses for whom freedom and independence are essential.



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