Small businesses treated as second-class citizens, but they keep the country functioning.
MORE than 2.1 million Australians are self-employed - 28 per cent of the private sector workforce - and they're generally treated as second-class citizens by the banking industry, the superannuation system, governments in general, the union movement and each other. Harder to quantify is the suspicion that they're also the mob who keep the country functioning.
The Independent Contractors Association's compilation of the most recent Australian Bureau of Statistics figures show that in November 2010 there were 1.1 million independent contractors not employing anyone else and another 1 million business operators who did employ others.
But despite the hefty numbers, the self-employed's clout seems to be the opposite of the mortgage belt's. Barely a third of Australians have a mortgage, yet they dominate the media's monetary spotlight - any movement in interest rates is painted as being all about mortgage repayments and politicians react accordingly. It's a federal crime for a bank to fail to pass on a few points of a Reserve Bank movement to its home mortgage clients, but no one seems to know or care what's happening to business loans.
And the home mortgage is as good a place as any to demonstrate blatant discrimination against the self-employed. Want to take advantage of UBank's attractive refinancing deal? Before you even start to fill out a form, you have to specifically confirm that you are not self-employed.
The banking system overall is more subtle than UBank in its application of higher interest rates and, more recently, a credit squeeze. Small-business campaigner David Koch argues that the pendulum swung so far against the self-employed during the global financial crisis that an employee who has been in their job for six months may well have a better chance of getting a cheap mortgage than their employer who might have run the business for a decade.
The box-ticking credit score mechanism plays a role in disadvantaging many self-employed, but it can also be an excuse for a higher interest rate.
The image of the typical self-employed individual was once a tradie, farmer, professional or small-business owner - any shopkeeper, your dentist - but the casualisation, contracting and outsourcing phenomenon has spread the class far and wide. Bigger business likes independent contractors because they're much cheaper. No holiday pay, no superannuation, maybe no payroll tax either. And they're easy to get rid of when they're not required or if they're not good enough - unlike employees.
Little surprise then that parts of the union movement don't like them. It's not hard to be cynical about the ACTU's success in pushing Labor into targeting ''sham contracting'' as a major Fair Work Australia issue - I somehow doubt the CFMEU is primarily concerned about tax evasion.
For highly skilled contractors in areas of scarce supply, the opportunity is there to negotiate pay that compensates for the lack of fringe benefits, but average contractors are more likely to get caught up in undercutting each other in less than wildly buoyant times. They also suffer the freelancer's curse of finding it hard to say no to a job because they're not sure there will be something else. The independence of self-employment often comes at the cost of insecurity.
And while the wage and salary classes are painlessly accumulating superannuation, those 2.1 million self-employed have to have the discipline and ability to find the money left over after immediate needs to take advantage of tax incentives for saving. And if they're not in a high tax bracket, there's not much incentive. There are plenty of small-business owners paying superannuation contributions for their employees while accumulating little for themselves.
Another common problem with the self-employed is that they buy themselves a job, not a business, and therefore build up no equity to cash in on retirement.
As for governments in general, I suspect masochism must play a role in any individual deciding to operate a small business that employs people. The systems and division of labour that have evolved to make big business possible translate into hours of unproductive time for the small-business owner dealing with three levels of government and various statutory bodies with a statute, form or licence for everything from registering that they own the equipment that they own to how many chairs that might be placed on the footpath.
Unions and government, geared to their own ponderous scale of operations, consistently impose administrative systems out of all proportion to the self-employed experience. The promise to ''cut red tape'' is an election perennial - and meaningless as red, green, pink and polka dot tape abound.
The amazing thing is that so many self-employed nonetheless get on with it and successfully go about their business. That a proportion fail gets back to the banks' credit scoring. On those Bureau of Statistics figures, getting on with it comes at a cost. More than half the business operators worked on both weekdays and weekends. Of the men, 73 per cent worked 40 hours a week or more in their main job, with nearly two-thirds of that group working more than 49 hours.
Michael Pascoe is a BusinessDay contributing editor - and a happy member of the self-employed.
Frequently Asked Questions about this Article…
How many Australians are self‑employed and what types of self‑employment does that include?
The article says more than 2.1 million Australians are self‑employed (about 28% of the private sector). ABS figures compiled by the Independent Contractors Association show about 1.1 million independent contractors who don’t employ others and roughly 1 million business operators who do employ others (data cited for November 2010).
Why do self‑employed people often face tougher mortgage and lending conditions?
According to the article, banks and lenders tend to favour wage‑and‑salary borrowers: home mortgage pricing and pass‑through of Reserve Bank moves are closely scrutinised for household mortgages, while business loans receive less attention. Lenders also use box‑ticking credit‑score systems and a post‑GFC credit squeeze that can make it harder for self‑employed borrowers to access cheap mortgages or refinancing (an example cited is UBank asking applicants to confirm they are not self‑employed).
How does credit scoring disadvantage the self‑employed when applying for loans?
The piece explains that standard credit‑scoring and checklist approaches can work against many self‑employed people, treating non‑standard incomes as higher risk and providing lenders an excuse to charge higher interest rates or decline cheaper lending. The article suggests this can mean an employee with six months’ tenure might get a better mortgage deal than a long‑running business owner.
What issues do self‑employed Australians face when it comes to superannuation and retirement savings?
Unlike wage and salary earners who automatically accumulate superannuation, the self‑employed must find the discipline and spare cash to make voluntary contributions. The article notes many small‑business owners pay super for employees while accumulating little for themselves, and tax incentives are less motivating for those not in high tax brackets.
Why do large businesses prefer independent contractors, and what are the consequences?
The article notes big businesses like independent contractors because they can be cheaper — no holiday pay, no employer super contributions and sometimes no payroll tax — and they’re easier to let go than employees. The consequence is broad casualisation of work, friction with unions, and policy focus on issues like 'sham contracting' by bodies such as Fair Work Australia.
Can highly skilled contractors earn enough to offset the lack of employee benefits?
Yes — the article says highly skilled contractors in areas of scarce supply can often negotiate higher pay that compensates for missing fringe benefits. However, average contractors face pressure to undercut each other in weaker markets and the insecurity of needing to accept work because future jobs aren’t guaranteed.
Do small‑business owners work longer hours than average, and what personal costs does that create?
The article reports that more than half of business operators worked both weekdays and weekends. Among men, 73% worked 40 hours a week or more in their main job, and nearly two‑thirds of that group worked more than 49 hours — illustrating the heavy time cost of running a small business.
What kinds of government red tape and administrative burdens do self‑employed people face?
The article describes small‑business owners dealing with three levels of government and multiple statutory bodies, each requiring forms, licences and registrations (sometimes for trivial things). It suggests regulatory and administrative systems often impose costs and unproductive time that are disproportionately heavy for the self‑employed.
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