Warning: ABCC inquiry and shams

16 February 2011

The Australian Building and Construction Commission (ABCC) is a powerful construction industry watchdog. It is holding an inquiry into sham contracting. We are warning people about being formally involved in this. The processes of the inquiry are strange and odd. There is considerable risk in being involved. Independent Contractors Australia will not be making formal submissions to the inquiry because of those risks. But ICA will be monitoring the activities of the inquiry and making public comment.

The assessment that follows is focused on the processes of the inquiry and why there are significant risks for participants. We will, at a later stage, make comment on the substance of the issue that the inquiry is investigating---namely, sham contracting.

Update 28 February 2011: Letter from ABCC Commissioner

We have received a letter from the ABCC Commissioner, Leigh Johns, saying that our concerns are false. We have studied the letter and do not believe it addresses the specific concerns we detailed about the inquiry process. Commissioner Johns invited us to publish his letter. You can judge whether our concerns are valid or not. Here's Commissioner John's letter.

Update 5 March 2011: Senate questions and your comments

ABCC Commissioner Leigh Johns was questioned in the Senate about our criticisms of the inquiry process.

Here are your comments and those of the Master Builders Association.

Update 11 March 2011: Submissions to the inquiry

17 submissions have been sent to the inquiry. The Housing Industry Association says:

We've taken extracts from the HIA submission (they're a good read!) and provide an overview of the submissions and links. We've also commented on 'dependent' contracting and the real problem of phoenix companies.

Background: What is the ABCC?

The Australian Building and Construction Commission is a powerful construction industry watchdog, policing the activities of unions and construction firms to ensure compliance with industrial relations and competition laws. It acts to stop and prosecute illegal strikes, harassment, bullying, and collusive behaviour between unions and construction firms (where this occurs) to control and/or manipulate the construction market so as to lessen competition.

ICA is highly supportive of the ABCC. It came into operation in 2005 following the recommendations of the Cole Royal Commission in 2003 that exposed systemic malpractice and illegality in the construction industry. Huge numbers of self-employed people work in the construction sector. They have been subjected to harassment for decades. The ABCC has considerably cleaned up the industry, making it a safer place to work in many ways. ICA watches and monitors the industry and has seen many instances where the ABCC has been hugely effective. Addressing the problem of violence on the Westgate Bridge project in Melbourne in 2010 and prosecuting those responsible is just one example where the ABCC has been effective.

The ABCC and sham contracting

One of the powers of the ABCC is to investigate and prosecute sham contracting in the Australian construction sector. ICA supports this and encourages the ABCC to stop sham contracting where it can.

In November 2010, the ABCC announced that it would hold an inquiry into sham contracting in the construction sector. ICA is concerned that the structure, processes and assumptions underpinning the approach of the inquiry are deeply flawed and that they create significant risks for individuals and/or organizations that formally participate.

The ABCC inquiry into sham contracting: A process with high risk for participants

There are the three areas where anyone who makes a submission is likely to face the risk of litigation. They are:

No protection from litigation of participants
Normally, when an official inquiry investigates possible illegal conduct, those who make submissions are usually afforded some legal protection. This is to ensure that people will be more willing to offer opinions and advice and that the truth can more readily be discovered. An inquiry into sham contracting---a form of conduct which, by statute, is illegal in Australia---clearly fits into such a category. Yet the ABCC's inquiry offers no protection. It does not offer the protection of parliamentary privilege for example. In fact, the inquiry's website specifically warns anyone contemplating making a submission that legal liability exists as a result of their being involved.
Open-ended and unclear inquiry rules leading to potential risk exposure
When making a submission, participants are required to enter an agreement with the ABCC concerning the inquiry. One of the terms of the agreement is the proviso that the ABCC can change any of the terms of the agreement at any time at its sole discretion and that the participants agree to be bound by the changed terms. That is, the rules of the inquiry can be changed at any time, thereby creating potential unknown liability. This would clearly be an unfair contract term, and contrary to law, if it were contained in a contract in trade and commerce regulated by Australian consumer law (or the Independent Contractors Act).
Silencing online debate of participants
The agreement to which participants sign up also contains some strange clauses that make it a breach of ABCC copyright to reproduce online anything that appears on the inquiry's website. This means that anyone who makes a submission cannot reproduce any submission or material that appears on the website for discussion purposes without risk of litigation by the ABCC. It seems incredible, but read the 'silencing' clauses yourself (below). Perhaps the clauses are just lawyer 'overkill' and that closing or controlling the debate is not the inquiry's intent. But taken at face value, that's the outcome.

Concerns about process

We have additional concerns that go to the integrity of the inquiry process. In fact, when taken as a whole, the inquiry appears more like an investigation and prosecution than an inquiry proper.

a) The inquiry lacks a clear focus
The inquiry is supposedly looking at sham contracting. Yet in almost the same breath it purports to examine labour hire as if labour hire is the same as sham contracting in the way it present problems in the industry. This is a total misrepresentation.

Sham contracting is illegal under the Fair Work Act.
Sham contracting is socially and economically damaging. It is a form of fraud that disadvantages people. It 'dodges' around regulations.

By comparison:

Labour hire is legal. It is subject to the provisions of the Fair Work Actand fully covered by tax, workers' compensation law, and so on.
Labour hire serves important economic and social purposes. It's an efficient way for workers to find work and businesses to find workers. It outsources much of the complexity and transactions costs associated with regulations covering work, thus enabling specialists (in the labour hire business) to bring regulation compliance to bear.

For the inquiry to bundle both of these topics into the one scope of reference muddies the focus of the inquiry and leads to considerable confusion. The two items---sham contracting and labour hire---should be investigated under two different inquiries or at least under different reference arrangements.

b) The inquiry has the appearance of being assumption-driven rather than fact-driven
From what we have studied of the inquiry's material, the inquiry does not seem to ask if sham contracting exists or, if it does, to what extent it exists. No statistics are presented nor is any evidence presented of widespread sham contracts. Given the ABCC's unique position in the construction sector, it should be expected that the ABCC would have a database of actual or suspected sham contracts. Failing to provide such evidence creates the impression that the inquiry simply assumes that sham contracts are widespread.

c) Pretence at narrow investigation, but actually very broad
The terms of reference reveal an inquiry that moves far beyond the issue of sham contracting to embrace broader public policy issue that are not within the legislative jurisdiction of the ABCC. Further, although the consultations are to be limited to players in the construction sector, the issues with which the inquiry is dealing cross the entire spectrum of economic activity and the changing nature of work. The inquiry is likely to have impacts on all self-employed people.

d) The inquiry is looking at issues that are beyond the ABCC's jurisdictional authority
For example, it intends to look at tax issues. But this is something over which the ABCC has no authority and in which it has no expertise. Further, it seeks to question centuries of common-law definitions of independent contracting with (presumably) a suggestion that the inquiry would invent new definitions. In this sense the inquiry is questioning the basis of law (outside the ABCC's authority) rather than the application of law (inside the ABCC's authority).

Comments from the ABCC Commissioner

We find particularly concerning the following reported comments from the ABCC Commissioner (Australian Financial Review, 8 February 2011, page 60). He is alleged to have said

'How it can be suggested that a labour-only form worker or a labour-only plasterer is running a business of their own account and is an independent contractor is beyond me.' If this is his view, it is one that, in our opinion, completely misses the reality of how Australia's 2 million self-employed people work. It is not only feasible but common and normal for 'labour-only plasters' to be self-employed. It is common and normal for hundreds of thousands of other people in the community to also work as 'labour-only' in thousands of different occupations and be self-employed. This is what the changing world of work is all about.

Overall impression of the inquiry process and its assumptions

It would be easy for the cynical to suggest that, like all 'good' inquiries, the outcomes of this inquiry are known in advance and the inquiry itself is merely a vehicle for affirming them. Examination of the defects with the process, the terms of reference, the underpinning assumptions and the risks attached to participation, however, make such cynicism well-founded in our view. This is a pity, given the sterling work that the ABCC has undertaken in the past. We can only hope that our concerns will prove unwarranted.

References from the ABCC Sham Contracting Inquiry Website

Submission Agreement

Below are excerpts from the Agreement on the ABCC website to which participants must be commit themselves before making a submission.

Agreement to be bound by changes to the agreement

'We may amend these Terms at any time. You agree to be bound by any such amendments to the Terms immediately upon a notification of the amended Terms appearing on this Website or otherwise notified to you.'
Agreement to not reproduce material from website thus preventing open online discussion

Intellectual property rights

Prohibited uses of this site and content

Terms of Reference

The terms of reference go far beyond an investigation of 'sham contracting', suggesting a much larger agenda.

Terms of reference

The matters that will be considered in this inquiry include the following:

The sham arrangement provisions in sections 337-359 of the Fair Work Act 2009 (Cth) (FW Act);
Employees, independent contractors, subcontracting and working arrangements in the building and construction industry;
The role of labour hire companies in the building and construction industry;
The current definitions of 'employee' and 'independent contractor' at common law and in statutes;
The evasion by employers of responsibilities owed to employees in the building and construction industry by use of devices including subcontracting and labour hire arrangements;
The evasion by workers in the building and construction industry of taxation and other responsibilities by use of devices including creating businesses and partnerships;
Competition and 'undercutting' in the building industry; the role played by labour hire companies and subcontractors; and
Fairness: inequality of bargaining power as a driver in contractual negotiations between employers and workers.

Questions that have to be answered by anyone making a submission

11 questions about sham contracting

The following 11 questions about sham contracting are required to be answered by each participant in the Sham Contracting Inquiry. A comparison of the responses will be available on the Published Submissions page.

What do you see as the major impacts of sham contracting in the building and construction industry?
To what extent do you think the provisions of the Fair Work Act 2009 (FW Act) work to reduce sham contracting in the building and construction industry? How could existing provisions in the FW Act be improved?
Is there a better approach to identifying the difference between an employee and an independent contractor than the current common law test? If so, what is the best approach to identifying the difference between an employee and an independent contractor?
Do you support the creation of a third category of worker that lies between and employee and an independent contractor? If so, what attributes would you ascribe to a third category of worker that sits between an employee and an independent contractor?
Should economically dependent contractors be treated differently to independent contractors? How?
Is there currently an appropriate level of regulation of on-hire employee arrangements in the building and construction industry?
Is there currently an appropriate level of regulation of on-hire contractor arrangements in the building and construction industry?
Do you support the development of a Code of Practice for Labour Hire in the building and construction industry? If yes, what should be the elements of this Code of Practice?
What role, if any, do you see for the concept of 'joint employment' in the building and construction industry?
What approaches do you support to address the issue of phoenix companies in the building and construction industry?
How could the ABCC better inform workers and industry participants regarding their rights and obligations in relation to sham contracting?

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