A sham contracting shamer

After years of inadequate scrutiny of sham contracting, it is pleasing to see this area of the workplace finally coming under investigation by various agencies. The insidious growth of sham contracting and its devastating impact on job security has been overlooked for far too long.

A number of regulators, including the Fair Work Ombudsman, the Australian Tax Office and the Australian Building and Construction Commission, have recently increased their compliance activity in this area and the ABCC is also conducting an inquiry into the practice.

Some would have us believe that these initiatives represent "a new attack on self-employed contractors" (Ken Phillips) and "a carefully orchestrated campaign to decimate independent contracting in Australia" (Robert Gottliebsen).

While this is not surprising, especially from the ICA, it is misleading and unhelpful.

As far as we are aware, no-one is suggesting that there is no role for independent contracting arrangements in the Australian labour market. The ACTU certainly recognises that there is a legitimate role for these types of arrangements.

But sham contracting is not about legitimate contracting. It is about the abuse of these types of arrangements to avoid obligations and costs associated with standard forms of employment. And the fact that there are multiple agencies taking action on sham contracting is not because of some secret agenda to render everyone who works an employee: rather, it is indicative of the magnitude and gravity of the problem.

Sham contracting is now widespread across the Australian economy, and is especially prevalent in industries such as construction. We know this from numerous inquiries and from official figures. Our affiliate, the CFMEU, recently published a research report extensively documenting the abuse of contracting arrangements in the Australian construction industry. It found that there were up to 168,000 people employed on sham contracts in construction alone, costing $2.45 billion in lost revenue.

Sham contracting is an insidious practice as it shifts a range of costs and risks from employers onto workers, onto employers who do the right thing, and onto governments.

For workers, these arrangements mean no access to and no entitlement to a minimum wage, no entitlement to paid sick or annual leave, no job security and no superannuation.

For employers and bona fide contractors who do the right thing and comply with the law, these arrangements mean an increasingly difficult operating environment as they are forced to compete with those flouting industrial and tax laws. Indeed, one wonders whom in these debates is representing these legitimate employers who do the right thing and whose interests are undermined by more unscrupulous operators who use sham arrangements or turn a blind eye to the practice. Certainly not Ken Phillips and the ICA.

Sham contracting is not just an industrial relations issue. There are serious implications for government revenue. Failure to pay superannuation means more workers relying on taxpayer-funded pensions.

Of even greater concern is the size of the tax revenue lost through sham contracting arrangements. In its 2009 review of the Personal Services Income (PSI) taxation rules, the Board of Taxation found that between 73 per cent and 83.5 per cent of contractors audited by the ATO failed to declare their personal services income. The average underpayment was $18,800. Given that there are approximately 1 million contractors in Australia, this suggests a loss of revenue to the Commonwealth of up to $16 billion per annum.

Yet Robert Gottliebsen assures us that our tax rules are "excellent" and "eliminate most sham contractors". This view is contrary to those of the Board of Taxation, which concluded that the current PSI rules did not provide an acceptable level of integrity and equity and recommended reform in this area. The Board's recommendations were accepted by the Henry Tax Review in 2010.

In light of the abundant evidence of the abuse of contracting arrangements and the implications of this practice, I find it difficult to understand what is making those who oppose measures to address sham contracting so indignant.

First, they seem to essentially be objecting to the proposition that employers should comply with existing laws. For sham contracting is already an offence under the Fair Work Act 2009 and failure to correctly report personal services income is an offence under taxation laws.

Second, they seem to be essentially arguing that employers should be free to engage workers as contractors even if they are in effect employees. The logical endpoint of this is that industrial law has no place in our labour market as employers should be free to contract out of their obligations under awards, legislation or agreements if they wish to do so. If we accept this argument, our labour law system loses all relevance.

Some would have you believe that measures to address sham contracting are really membership drives for unions. This is ridiculous. Unions can and do represent independent contractors. Workers don't need to be employees to be union members. Indeed, our genuine representative role in this regard can be contrasted to the ICA, whose membership is unclear and who claims to represent – simultaneously – both independent contractors and companies that engage them.

The CFMEU's recommendations for changes to industrial laws to make it an offence for employers to engage workers under sham contracts, and reform of tax laws to stop the undermining of the tax system by sham contracting are worthy of further consideration.

The reality is that our laws in a range of areas are not operating effectively to prevent the abuse of contracting arrangements. We need much more done to address this insidious problem, not less.

Jeff Lawrence is Secretary of the ACTU