Address to the 19th Annual Labour Law Conference
Sydney, August 1 2011
I acknowledge, and pay my respects to, the traditional and original custodians of the land on which this conference is taking place, the Cadigal people of the Eora nation, their elders past and present.
I acknowledge their continuing connection with and contribution to country and their unique role in the life of Sydney and the surrounding region.
I extend my respect to other aboriginal people here today
Introduction
In the time that is allowed to me this morning I plan to update you on the progress being made with the Inquiry into Sham Contracting that I am undertaking.
One of the issues in dealing with "sham contracting" is that there is no widely accepted definition for the term. Very few of the submissions to the Inquiry which I have been conducting attempted to explain what sham contracting is. In a sense, sham contracting fits into Lord Wedderburn's "elephant-test" – it is an animal too difficult to define, but easy to recognise when you see it. And I see it a lot. Currently the ABCC has 126 open investigations into allegations of sham contracting. 36% of all subjects of ABCC investigations are sub-contractors.
However, that is not to say that the building and construction industry is ‘rife’ with sham contracting. I have consistently noted that most of the contracting that occurs in the building and construction industry is legitimate and I have no truck with it.
What I am concerned about is ‘sham contracting’ especially when it affects vulnerable workers.
Common law – a "sham"
Australian courts have considered the common usage of the term "sham" and applied it (for example, in Sharrment Pty Ltd v Official Trustee in Bankruptcy).
At common law, a "sham arrangement" occurs where the parties to an employment relationship intentionally misrepresent or disguise that relationship as being a contracting relationship. There are elements of premeditation and subterfuge; such arrangements are intended to hide the actual relationship between the parties and make it appear as though there is a totally different kind of relationship. Parties know and intend to create an employment relationship (contract of service), but try to masquerade it as a contracting arrangement (contract for services) for the benefit of one or both parties. In this sense, a "sham arrangement" involves intended deception.
The statutory approach to "sham contracting"
The terms "sham contracting" and "sham arrangement" are not defined legislatively at Commonwealth or State level in Australia.
The current provisions of the Fair Work Act 2009 (FW Act) address specific conduct which is referred to as "sham contracting". However, it is to be noted that the words "sham contracting" only appear in the heading to Part 3-1, Division 6 of the FW Act. They are not included in the text of the sections themselves (nor is "sham contracting" defined in the FW Act).
Consequently, behaviour regulated by sections 357, 358 and 359 of the FW Act forms part of the concept of "sham contracting". Under that Act, an employer must employ an employee, but misrepresent the relationship as a contract for services, before it is a "sham". Additional sanctions exist if the employer is reckless in representing a relationship as being a contract for services, when it is in fact a contract of service.
Otherwise there is recognition of the application of the common law test for determining whether someone is an employee or an independent contractor, with one of the potential consequences being that underpayment proceedings can be brought if a person described as a contractor is found to be an employee.
Effect of sham contracting in the building and construction industry
Sham contracting adversely affects every participant in the building and construction industry. In a statement to the Senate Standing Committee on Education, Employment and Workplace Relations, on 20 October 2010, I said:
The existence of sham contracting in any industry adversely affects decent employers, employees and government revenue.
Decent employers in the building and construction industry are at a competitivedisadvantage to those who seek to engage workers through bogus contracting arrangements. They are then faced with an invidious choice: join in the indecency of sham contracting or go out of business.
For workers, it means a reduced capacity to enjoy basic conditions of employment such as annual leave and sick leave. It means that work security is jeopardised and it is usually attended by the absence of a commitment to formal training.
As a whole, there is reduced workplace health and safety performance and poor workplace relations. For government, sham contracting has implications for taxation revenue and the degree of equity in the tax system.
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However, it is vital that industry stakeholders engage with government agencies in [an] endeavour [to eliminate sham contracting]. Employer associations, with their membership of decent employers under attack from sham operators, and unions, representing the interests of workers who are being ripped off, both have important roles to play.
The threat posed by sham contracting is amplified in the building and construction industry compared to other industries. According to data provided by the ABS, and quoted in the Discussion Paper which I released on 22 December 2010 as a part of the ABCC Sham Contracting Inquiry, the proportion of independent contractors working in the building and construction industry is easily the highest of all industries surveyed. Bearing in mind the limitations expressed by the ABS in considering the data, the available statistics indicate that the building and construction industry is uniquely at risk of being exploited by sham operators.
History of litigation and prosecutions in relation to sham contracting
The sham arrangements provisions of the FW Act (and its predecessor, the Workplace Relations Act 1996) have not, to date, been used very often. As a result, there are only four decisions on the issue; two contested, and two where the contraventions were admitted. 6 In relation to the two contested matters, there has only been one decision where the reckless defence was successfully made out.
The ABCC was successful in the one concluded civil penalty proceedings it brought. It presently has another matter before the Federal Court of Australia.
There are a number of reasons which may explain the low number of civil penalty proceedings, including that the provisions:
- "piggyback" off of the common law definitions of "contract of service" and "contract for services". These concepts are not simple and can be difficult to apply in practice. Notwithstanding that difficulty, outside the academic community, there appears to be very little appetite to move away from the common law approach.
- relating to employers making misrepresentations can be defended where the employer can show that they both did not know and were not reckless as to whether the contract in question was a contract for services or a contract of service.
Even where litigation is successful, the result is necessarily restricted to the circumstances of the particular case. Approaching the issue of sham contracting in the building and construction industry by relying solely on enforcing the FW Act provisions in particular cases is inefficient and unlikely, on its own, to significantly change the industry as a whole.
The Inquiry process
On 19 November 2010 I announced that the ABCC would be conducting the Sham Contracting Inquiry and set out the Terms of Reference.
(i) The Discussion Paper
On 22 December 2010 a Discussion Paper was released which raised issues for discussion in relation to the use of sham arrangements in the building and construction industry.
Some comments received in the written submissions incorrectly stated that the Discussion Paper represented my views. The discussion paper makes a clear statement to the contrary.
Although there have been critiques of this method of engagement it is notable that discussion papers are not unique to this Inquiry. They have been used effectively in both the Cole Royal Commission and the Making it Work Report.
(ii) Submissions
Submissions to the Inquiry had to be made in writing via an online submission process by 7 March 2011.
Submitters were required to respond to eleven questions about sham contracting developed by the ABCC. The questions were intended to provide a summary of each participant’s view on important aspects of sham contracting. Responses to each question were limited to 120 words. Submitters could enter N/A in the response field if questions were not relevant to their submission.
Submissions were reviewed by the ABCC against the submission guidelines and moderation guidelines prior to being published. All approved submissions were published on the Submissions page and can be accessed at www.shamcontractingInquiry.gov.au.
In response, the ABCC received twenty one written submissions from various industry participants. The Inquiry received ten submissions from organisations which represented the views of employers including the following:
- the Housing Industry Association; and
- the Master Plumbers and Mechanical Services Association of Australia; and
- the Chamber of Commerce and Industry, Western Australia; and
- the National Electrical and Communications Association; and
- the Civil Contractors Federation; and
- the Australian Chamber of Commerce and Industry; and
- Master Builders Australia; and
- the Australian Constructors Association; and
- the Recruitment and Consulting Services Association; and
- the Australian Mines & Metals Association.
A submission was made by BHP Billiton. Three submissions were made by subcontractors. These included submissions by Bobrick Constructions Pty Ltd, John Smolders FAIB a Chartered Builder and a submissions which was allowed to remain anonymous.
Three submissions were made by academics which in two instances involved collaboration between two academics. They are as follows:
- Andrew Stewart and Cameron Roles; and
- Dr Elsa Underhill of Deakin University; and
- John Howe and Tess Hardy of the University of Melbourne.
There were also four submissions by other submitters. They are as follows:
- the Australian Human Resources Institute; and
- Chris Mazzotta of Troubleshooters Available; and
- Peter Bosa of Troubleshooters Available and Odco Contracting Systems Australia; and
- the New South Wales Government.
(iii) Roundtables
As part of the Inquiry the ABCC facilitated five Roundtables for industry stakeholders to discuss the issue of sham contracting in the building and construction industry.
These were conducted in Canberra, Sydney, Melbourne, Perth and Brisbane.
Across the five Roundtables there were 111 attendees. There were 21 attendees in Canberra, 20 in Sydney, 22 in Melbourne, 34 in Perth and 14 in Brisbane.
The public Roundtables were recorded and transcribed.
Each Roundtable was facilitated by the ABCC, attended by me and hosted by an expert panel of invited guests with expertise in workplace relations or the building and construction industry.
All interested stakeholders were encouraged to attend and participate in the Roundtable as audience members. They were not required to have made a written submission in order to attend.
Roundtable participants included relevant Federal and State government agencies, employer organisations and other peak bodies, individual employees and contractors, experts in accounting and taxation, labour researchers and members of the community.
While the Australian Council of Trade Unions (ACTU) and its construction union affiliates were invited to participate in this process, but chose not to.
The five Roundtables followed the same structure and process. I made an introductory statement after which time the panelists introduced themselves to the attendees. The ABCC facilitator then gave the attendees a general overview of the proceedings and introduced the following three topics of discussion:
- What legislative frameworks or legislative changes might be required to address sham contracting?
- In undertaking its investigatory and litigation work what regulatory response should the ABCC consider to tackle the problem of sham contracting?
- What tools does the industry need to address sham contracting?
After this general introduction the ABCC facilitator would then separately introduce each topic of discussion and make suggestions about factors relevant for consideration for each topic. The ABCC facilitator would then invite attendees to commence discussions on those topics. The attendees sat at tables with an ABCC table facilitator and members of the expert panel. For table discussions to commence the proceedings would be adjourned for around twenty minutes to half an hour per topic. Table discussions were considered to be private and therefore were not recorded.
At the conclusion of each table discussion the proceedings were resumed and the ABCC facilitator would ask each table facilitator to summarise the discussions at their table. Attendees who wished to make further statements then had an opportunity to do so. At the end of each Roundtable the ABCC facilitator gave a recap of the discussions on the topics and I made a closing statement.
The position of the ACTU
On 29 November 2010, I wrote to the Secretary of the ACTU, Mr Jeff Lawrence, to discuss the then proposed sham contracting Inquiry and the more general plan for the future regulatory work of the ABCC. A response was sent by the ACTU in a letter dated 23 December 2010 indicating that I was well aware of the ACTU and construction unions' opposition to the ABCC and noting that my appointment did not change anything. Thus the ACTU declined to participate in the proposed Inquiry.
As noted when I wrote back on 23 December 2010 it was an opportunity missed to present the views of the union movement on an important issue, even if it did not support the ongoing existence of the ABCC. Given the Terms of Reference and opportunities presented by the Roundtables it was a genuine offer on my behalf.
Notwithstanding the non-engagement to date, my offer to engage with the Inquiry remains open; so that the interests of their constituents can be put front and centre before the Inquiry.
What the employer representatives said
The Inquiry received ten submissions from organisations which represented the views of employers in the building and construction industry. A number of key themes emerge from these submissions as follows:
- Further empirical assessment is required to determine the prevalence and extent of sham contracting in the building and construction industry (the ABCC is now commissioning the same as a direct response);
- The concept of "sham contracting" should be confined to situations where an employer intentionally or recklessly disguises an employment contract as a contract for services;
- The concept of "sham contracting" should be confined to situations where an employer intentionally or recklessly disguises an employment contract as a contract for services;
- Freedom to enter into contracts is vital to the industry and should be respected an unencumbered;
- "Labour hire" arrangements are legitimate, of great benefit to the building and construction industry and should not be equated with sham contracting. They do not need further regulation;
- Issues of bargaining power are not one-sided; given the current industry climate of skills shortages, employees have significant bargaining power. In fact, what very clearly emerged from the Submissions and Roundtables was the concept of an employee driven (supply-side driven) notion of sham contracting where worker are not vulnerable, but prefer the independence and flexibility associated with contracting;
- Current legislative "sham arrangements" provisions are adequate and don't need amendment;
- The current common law test is appropriate and should be maintained. Some submissions argued for the test to be enhanced by way of some legislative codification. One submission argued for the common law test to form the basis for a system of statutory registration of independent contractors;
- They do not support the concepts of "dependent contractors" or joint employment; and
- They do not support for the development of a Code of Conduct for Labour Hire in the industry.
What the subcontractors said
The Inquiry received three submissions from subcontractors in the industry. One of the submissions was made anonymously but, given the contents of the submission, it was assumed to have been made by a subcontractor. Summarised below are the key points from the submissions of the subcontractors:
- Subcontractors are losing out on work because of sham contracting. Subcontractors are faced with sham operators on a daily basis and have to compete with them in the industry;
- Employers engage in sham contracting to avoid rights and obligations;
- There is a culture of employers requiring workers to present ABN's in order to work;
- "Labour hire" arrangements are legitimate, of great benefit to the building and construction industry and should not be equated with sham contracting;
- Do not support the concept of introducing a category of "dependent contractor" as the issues are already too confusing; and
- Employers have significant bargaining power and use it to force workers to present ABNs.
What the academics said
Three submissions were made to this Inquiry by academics. Professor Andrew Stewart, of the University of Adelaide, and Cameron Roles, of Australian National University College of Law, made a joint submission, as did John Howe and Tess Hardy, of the University of Melbourne's Centre for Employment and Labour Relations Law. Dr Elsa Underhill, of Deakin University, also made a submission to the Inquiry.
Themes coming from the academic submissions were as follows:
- One of the submissions argues that a broad approach should be taken in relation to considering the issue of sham contracting;
- Workers who are aware of or involved in sham contracting face systematic problems in coming forward to report those issues;
- Sham contracting negatively affects the welfare of the worker. This includes in relation to entitlements and tax benefits, as well as personal safety associated with occupational health and safety issues;
- The current legislative provisions relating to sham arrangements are insufficient and should be amended. In addition, the ABCC should be given powers like those of the FWO, such as the ability to issue enforceable undertakings;
- The current common law test to determine status as an employee should be replaced with a standard definition of "employee", which assumes all workers to be employees unless proven otherwise;
- They do not support introducing the concept of "dependent contractor" or developing a Code of Practice for Labour Hire;
- Further regulation is required in relation to labour hire companies operating in the industry. A registration system for labour hire providers in the industry should be established. Also, persons working for labour hire agencies should be deemed to be employees (i.e. no Odco arrangements); and
- One submission argued against adopting a general doctrine of joint employment. The other two submissions suggested the doctrine be adopted.
The CFMEU's report into sham contracting
While refusing to be involved with the Inquiry, the Construction & General Division of the CFMEU released its own report into sham contracting in March 2011 days before the first Roundtable in Canberra.
Entitled Race to the Bottom: Sham Contracting in the Australia's Construction Industry, the report sought to quantify the nature and extent of "sham contracting" in Australia's building and construction industry. I plan to have regard to the report, but not that the non-participation of the CFMEU in the Roundtables meant that the themes in their report could not be properly tested. Ultimately it will go to the question of weight to be attributed to the CFMEU report.
Amongst other things the CFMEU report considered that the prerequisites for issuing Australian Business Numbers (ABNs) be "tightened up" and that eligibility requirements be amended. Further, that an audit of current ABN's should be conducted and, in relation to enforcement, that prosecutions under the Taxation (Administration) Act 1953 (Cth) for making false statements should be initiated and publicised.
The 'ABN' issue
The CFMEU’s concern about the use of ABNs was also an issue raised during the Inquiry process.
The ABN is a public eleven digit number that acts as a unique identifier for businesses in Australia. It was introduced on 1 July 2000 to enable businesses to deal with a range of government departments and agencies using a single identification number.
Sole traders, companies, partnerships, trusts and superannuation funds can apply for an ABN online or by paper and applications do not attract fees. Applicants receive their ABN in real time provided their details can be validated.
ABN registration details become part of the ABR, which the ATO maintains on behalf of the Commonwealth. Publicly available information contained in the ABR can be accessed online at http://www.abr.business.gov.au/Index.aspx.
Roundtables
The ABN issue primarily came out of the Roundtables. During the Roundtables attendees acknowledged that there was confusion within the building and construction industry around the implications and assumptions that flow from a worker having an ABN.
Participants noted that there is a pervading view in the industry than an ABN is a determination that a worker is an independent contractor as opposed to an employee.
However, the ABN was designed to simplify and streamline interaction between business and government and not as a surrogate for certification that someone is "in business". Determinations for ABNs concern the relationship between the worker and business and not the capacity of the worker to be a contractor. All ATO publications state that having an ABN does not make an individual a contractor, however, it would appear that more education is required.
Participants considered this perception to be particularly disconcerting given the ease with which a worker can obtain an ABN and the notion that to work in the building and construction industry you need to have an ABN.
Written submissions
There were four written submissions in which the ABN issue was discussed. These submissions mirrored similar concerns and proposed responses raised in the Roundtables.
The submission by the MBA also raised the ABN issue. In its submission it proposed the use of a registry or negative licensing system. It recommended that such a registry should be maintained by the ATO and linked closely with a reformed ABN system. There may be merit in this proposal.
The final submission to broach this topic was the AMMA submission. AMMA recommended that the ABCC establish a targeted education campaign run in conjunction with the ATO at the point of making an ABN application. It stated that, at that point, individuals could be informed about exactly what entitlements they were giving up when applying for work as a contractor.
Conclusion
The practice of sham contracting has pervasive negative effects on the building and construction industry, as well as other industries. It is a problem which affects many: workers, employers, regulators and the government and economy generally. It intersects disciplines such as employment law, commerce, taxation and economic policy.
It is a matter about which many players in the building and construction industry have expressed opinions over the course of at least the last two decades.
Consequently, one may assume that the issues related to sham contracting are entrenched as attitudes, in both employers and workers (and their respective representatives). Cultural change is required if any real progress in stamping out sham contracting is to be made.
The issues in question are complex. The current legislative protections, and the resultant civil prosecutions, in and of themselves, do not satisfactorily address the issue. The situation requires that the participants in the building and construction industry consider ways in which the issue of sham contracting might be more effectively dealt with.
As the workplace relations regulatory agency for the building and construction industry, the ABCC plays a central role in examining and addressing sham contracting.
That is why I have undertaken the process of the current Inquiry.
The purpose of the Inquiry was and is to generate ideas and to clarify issues around independent contracting relationships. Ultimately, it is hoped that the submissions, the roundtable discussions, the Inquiry and the final report provide valuable information which can be used by all parties to reduce the incidence of sham contracting in the building and construction industry.
Leigh Johns
ABC Commissioner
1 August 2011