The black art of workers' compensation

Some years ago if you asked small business operators what was the most difficult government regulation, the probable answer would have been tax administration. Today the answer would more likely be workers' compensation.

This view was apparently in evidence to the New South Wales Small Business Commissioner, Yasmin King, in her ‘listening tour' of small business she conducted shortly after her appointment early this year.

It's a situation I've been aware of for close to a decade. The administration of workers' compensation premiums is not easy. If a small business has to administer a workers' compensation injury claim the complexity verges on being overwhelming. But the most risky area is understanding whether premiums have to be paid on independent contractors or not.

Common to all state workers' compensation schemes is the requirement that premiums have to be paid on employees but not on independent contractors engaged by a business. But each state also has ‘deeming' provisions (which are all different) requiring coverage of some independent contractors.

The outcome is that understanding when to pay premiums and when not is massively complex. Yasmin King has gone as far as referring to this as a ‘black art!' She said this in her submission to the NSW inquiry into workers' compensation currently underway.

Specifically she said, "There is a complete lack of clarity for small business in the determination of what is an independent contractor. To expect businesses to understand what seems to be a black art of how this is determined is completely unfair.”

The consequences of not understanding this ‘black art' can be and has been bankruptcy for many small business people. Take this commonly occuring New South Wales example of several self-employed bricklayers who are friends. Each employs an apprentice. They pay workers' compensation premiums on their apprentice but not on themselves (they are the ‘employer'). If one has a big job, the others come to help. They network on work. That's common sense.

What occurs is that the workers' compensation authority audits the brickies several years after work has been completed. The authority then claims that when each brickie worked on one of their mates jobs they were ‘employees' and workers' compensation premiums should have been paid. The authority then sends bills for alleged unpaid premiums.

This has happened repeatedly in the past and is happening again. I've provided examples of this in our submission to the inquiry. I've seen back bills for between $10,000 and $200,000. But here's the real twist. If a brickie (or anyone else) wants to appeal they must first pay the alleged debt then lodge the appeal with the workers' compensation authority.

It's not surprising to find that some people could consider this process as verging on legally imposed (alleged) extortion. Yet it's conducted by the state of New South Wales against their own people.

I know people who have lost their business and houses over this. Retirement funds and plans have been blown away along with marriage break-ups and worse. In one 18-month period back around 2006 some research indicted that the New South Wales workers' compensation authority was bankrupting up to six businesses a day. It became a hot political issue for a period.

In response, around 2007 the then NSW Labor government conducted an internal review and the audit activity because less aggressive. Of late it's picked up again but the new O'Farrell government is having a closer look.

The problem lies in the fact that the workers' compensation schemes define who is ‘in' or ‘out' primarily around the common law definition of the difference between an employee and an independent contractor. At one level this is quite simple and clear. This common sense checklist can be applied by anyone.

But it's specific application at law can and is often highly complex. It's this Yasmin King refers to as a ‘black art.'

Problems really arise when regulators use this to determine their powers. As in the case of most state workers' compensation schemes, but particularly NSW, the state monopoly regulators set themselves up as judge and jury. More so, they have a vested financial (revenue) self-interest in the outcome. The result, as seen in New South Wales, is the frequent oppression by the state of its people. Real people suffer real harm.

This needn't and shouldn't be the case. We've suggested and shown how simple administrative triggers could determine who is ‘in' and who is ‘out'. There's some hope that now in New South Wales that this problem is being taken seriously. The effectiveness of self-employment and small business people in NSW and the NSW economy is heavily impacted by this.

Other state governments should likewise consider reviews, as should the Australian Taxation Office on some aspects of tax administration.

Small business needs one major thing from government regulators: clarity. Workers' compensation rules stand out as one of the worst examples of badly designed and oppressive regulation. Hopefully a momentum for change has begun.

Ken Phillips is executive director of Independent Contractors Australia and author of Independence and the Death of Employment.