There is growing evidence that a large number of NSW businesses may be going to the wall because of WorkCover’s unjust prosecution of the “deemed worker” laws. Employers First™ is monitoring increased anecdotal evidence of small businesses folding under the weight of astronomical workers comp premium bills – some going back years. WorkCover is exploiting the legal confusion and uncertainty by demanding back payments for contractors who they now deem to have been workers.

The evidence has also exposed the injustices, discrepancies and contradictions surrounding the wage audit system – one based on an unrealistic and inflexible interpretation of commercial practice. WorkCover’s ruthless prosecution of outstanding ‘premiums’ for contractors has created nightmare scenarios that will for many businesses result in bankruptcies, liquidations and moves interstate.

This edition of Employers Adviser™ highlights the typical experiences of businesses, especially in the construction industry. Their horrific encounters with the WorkCover juggernaut spotlights the dire need for reform of this massive loophole in the law – one that is favouring the bureaucracy and driving hard working Australians into bankruptcy. Business operators are being urged to protest directly to their local MPs, Premier Morris Iemma and Minister John Della Bosca for an urgent overhaul of the deemed worker provisions in the state’s workers compensation laws.

Small Business Targeted

We are aware of numerous examples of small businesses whose work includes anything from house construction and extensions to office refurbishments and shop fitouts. They include sole traderships, husband and wife partnerships and small proprietary companies – the very backbone of Australian small business.
 
Typically, WorkCover requests a wage audit and arranges for an inspection of the company’s records for a period of time in the recent past (perhaps the previous five years). The business is asked to provide its profit and loss accounts, group certificates, PPS summaries and contractors’ invoices.

Most of the businesses in question engaged in the routine practice of engaging contractors for specific purposes in meeting the needs of its clients. These contractors are generally trusted business associates with whom they have long standing relationships  – built up over numerous jobs in the normal course of business activity. They are invariably understood to be independent operators who look after their own affairs – including their own personal injury and liability insurances.

The Audit

The wage auditor who is arranged often singles out a small group of contractors as ‘deemed workers’ and not persons who could be considered as carrying on their own businesses. In the cases we have been monitoring, statutory declarations have been provided by the contractors as evidence that, in the relevant periods, they:

• were licensed as carpenters, tilers etc.
• performed work for the company in the relevant period.
• carried on their own businesses in their own names.
• rendered invoices to the company for work performed .
• had payments deducted by the company pursuant to the Prescribed Payments System (pre-GST).
• issued invoices as tax invoices with their ABNs and charged GST (post-GST).
• worked for entities other than the company.
• had the capacity to sub-contract part of the work to others.

The audit report is provided to the company’s insurer and, often after a lengthy delay, the insurer forwards a letter to the company declaring simply that after a “careful consideration of the auditor’s report and based on information made available” there is:

• an increase in the total premium.
• a late payment fee of 1.2% compounded on the amount outstanding.
• a demand also for full payment of the auditor’s report where the wages are understated by 25% or more.

In the cases under examination, the letters contained no explanation of the reasons for the increase or the basis on which the contractors’ evidence had been rejected – nor was a copy of the audit report attached. The business is advised that it can appeal directly to WorkCover, but that the total sum outstanding is to be paid on the due date regardless of any appeal – or that a late payment fee of 1.2% per month compounded monthly would continue to accrue.

Please Explain

What appears as a routine, almost nonchalant demand for payment of workers comp premiums (in some cases involving astronomical sums of almost $200,000) for workers you never knew you had invariably comes as a major shock for the operators of a small family business. Considerable time, energy and emotion is invested in the numerous letters, phone calls, faxes and sleepless nights that must follow for anyone caught in a headlock with a seemingly oblivious bureaucracy.

After some correspondence, a copy of the audit report is obtained. The contractors’ statutory declarations are declared to have been insufficient, and the insurers invariably inform the company that it is the employer’s obligation to keep records of the contractors’ full details – including descriptions, documents proving contractor status, insurance certificates of currency – or the contractors will be deemed to be workers. But there is no such requirement in the legislation.

Applications for review to WorkCover are often lodged at this point and further correspondence entered into. This begins to reveal the arguments WorkCover relies on to assert the premiums are payable. The main points raised by WorkCover include:

• The ‘deemed worker’ provisions in Schedule 1 of the Workplace Injury Management and Workers Compensation Act 1998 provide that:

(1) Where a contract:
(a) to perform any work exceeding $10 in value (not being work incidental to a trade or business regularly carried on by the contractor in the contractor’s own name, or under a business or firm name), or…is made with the contractor, who neither sublets the contract nor employs any worker, the contractor is, for the purposes of this Act, taken to be a worker employed by the person who made the contract with the contractor.

• The courts have ruled this means that people conducting a business in the course of which they are contracted to perform work should themselves carry the risk of personal injury.

• WorkCover claims to take into account some of the main factors that distinguish a contractor from an employee – such as whether:

1. the contractor performs work for others (or has a practical entitlement to do so)
2. they have a separate place of work and/or advertise their services to the world at large
3. provide and maintain significant tools, equipment etc
4. they can delegate or subcontract work
5. the principal contractor presents the contractor to the world as an emanation of its business
6. income tax is deducted from remuneration paid
7. the worker is remunerated by periodic wage or salary or by completed tasks.

• Where the facts do not disclose a clear result, the determination ultimately rests on whether or not the contractor in question operates an independent business enterprise.

• In deciding whether or not an independent business was carried on, it was decided that the following factors were instrumental:

1. there was no evidence the contractors were not subject to direction and control from the company about the nature, time, place and manner of the work to be performed.
2. there was no evidence of any written contract between the parties that included a term referring to the contractor’s liability for bad workmanship.
3. the statutory declarations, business cards, invoices etc that were provided by the contractors did “not constitute sufficient evidence of an independent business”.
4. the fact that some of the contractors held no workers compensation policies for relevant periods and clearly performed the work themselves indicated that they did not conduct independent businesses but were effectively “workers” of the company.
5. some of the contractors received substantial proportions of their incomes from payments made by the company.
6. some of the contractors spent most of their time working on jobs for the company and therefore had “little time for conducting independent businesses”.
7. even where some contractors themselves paid others to perform some of the work on their behalf, this was not evidence that an independent business was carried on.
8. even though the contractors may have actually performed work for other companies in the relevant periods, this was not evidence that they were conducting an independent business.

The Problems

It should be obvious by now where the system is failing – and why countless businesses are facing financial ruin. The deemed worker provisions are clearly nonsensical in terms of commercial reality and far too wide to be of any practical benefit. WorkCover has decided to exploit this uncertainty by clamping down on businesses that fail to provide evidence that is not even required by the Act, the Regulations or even WorkCover guidelines. Demands for “unpaid premiums” are handed out, and recovery action (including bankruptcies and company liquidations) undertaken when payment is not forthcoming. To make matters worse, when businesses have argued the point, WorkCover has even been seen to cave in on some points – sometimes with no real logic or consistency. In other words, the premium demands are being fuelled by totally inconsistent and discretionary demands in the hope that payments are made.

For instance, when it was pointed out to WorkCover in some cases that they failed to apply an automatic discount to 80% of contract payments where remuneration was paid to contractors for supply of labour and plant, they responded that they had been provided with no information that would confirm the contractors provided plant. Yet they immediately proceeded to determine that 85% of the total contract payments were to apply as the relevant wage components.

The “wages definitions manual” issued by WorkCover in October 2003 reassures employers that whether a contractor will be deemed a worker “must be determined on a case-by-case basis” and that WorkCover “applies tests determined by the courts”. But when the solicitors engaged by some of the building businesses outlined the relevant case law, WorkCover dismissed this by claiming some of the judgments occurred “in the context of different legislation and jurisdictions” and that “WorkCover also has case law and legal advice that supports our position”.

Another matter for concern is the wage audit process itself. In the cases at hand, the auditors effectively dismissed the statutory declarations and other evidence and expressed the opinion to the insurers that the contractors should be deemed workers. It was on that basis that bills for “outstanding premiums” were issued, and further corroboration was sought only after the company raised the alarm. How many smaller outstanding accounts are simply paid by unsuspecting businesses? An auditor’s role is that of an independent expert whose job is to examine and verify financial records. In this case the auditor acted as the insurance company’s advocate – and WorkCover acted as its prosecutor. Does anyone know how the relationship between the auditors, insurers and WorkCover is managed? How transparent and accountable is the process? How are the auditors appointed and accredited? The examples at hand bring into question the integrity of the entire wage auditing system.

The Contradictions

The above real cases have pointed out some of the flaws and contradictions in a system that is clearly unsatisfactory and in many instances threatening to drive businesses to the wall. They include the following:

• WorkCover has adopted by way of bureaucratic edict, and without justification in the law, a presumption that contractors will be deemed workers unless an unspecified amount of evidence is presented to the contrary.
• It was claimed there was “no evidence the contractors were not subject to direction and control” – yet every builder in NSW knows that does not correspond to real life. If there were no directions as to the time and place of subcontract work, how would a tradesperson know the relevant job site and the time frame within which the principal builder had to complete the project?
• It was claimed there was no written contract with express terms as to “bad workmanship” – yet it is an acknowledged rule of thumb in the building industry that the contractor does not get paid until any faults have been rectified.
• It was claimed the contractors had to carry the risk of personal injury – yet when evidence of separate policies was provided, WorkCover asserted this was just one inconclusive aspect that had to be considered among many.
• It was claimed that the contractors did not actually employ anyone themselves, and that this led to the conclusion they were to be deemed employees – yet they ignored the fact there is no compulsion on contractors to employ anyone and that they were at all times free to do so since they operated their own businesses.
• It was claimed that since the contractors performed the greater part of their work for the company in the relevant periods, they are to be deemed as workers – yet they did perform work for others on a totally independent basis and at all times had a genuine and practical entitlement to do so.
• In view of the fact that WorkCover pointed to some of the contractors not having workers compensation policies – where do the guidelines say that businesses must employ workers before they will be considered independent?
• On what basis could WorkCover assert that a contractor tradesperson who derives their income from one source in a given period is not running their own business?
• How could WorkCover explain the fact that at least one of the contractors derived the substantial part of their income from another company in one of the relevant periods – and yet was not held to be a deemed worker of that company?
• How could the insurers and WorkCover ignore evidence and statutory declarations sworn under oath and confirmed by the principal companies that the contractors supplied their own plant and equipment, determined their own hours and days of work (after consulting the company), carried their own risk insurance, negotiated prices for the job at hand, retained the freedom to employ or engage others and seek other work at the same time, advertised their services publicly and attended to their own accounts and administration – and still insist they were not conducting their own businesses?

What Next?

We have reason to believe the experiences of small businesses in the building and construction industry are being replicated many times over in NSW. WorkCover has identified the deemed worker laws as a cash cow – and the current NSW government conveniently turns a blind eye. They are effectively deeming all contractors to be deemed workers unless the principal business obtains and provides incontrovertible evidence to the contrary – something the law does not require at present. WorkCover is once again placing its crown upon its own head – and setting its own rules. Pressure from employers, businesses and Employers First™ has forced the government to agree to a Panel for Definition of a Worker. This review of the law is taking too long and is being met with bureaucratic obfuscation and stonewalling.

WorkCover and the unions basically want things to change very little. Employers on the other hand are arguing for a sensible and practical approach that places the onus on independent contractors to prove their status with some basic and clearly understood evidence before they get the job. This could include signed declarations, current ABN, clear agreement on contract terms (including a defective work clause) and agreed upon invoicing practices. The contractors would provide their own plant and equipment and retain the freedom to employ or engage others if required and independently negotiate for their next job – whether it’s with the same principal or not.

It is high time the NSW government put a stop to this situation – which has the potential to turn into a scandal that will cost it votes. At the federal level, the House of Representatives has just released its report on independent contracting. The majority view supports the strengthening of this vital sector of our economy – and calls for greater uniformity, clarity and consistency in identifying independent contractors. It is time for WorkCover to follow suit and cooperate by working towards a genuinely effective definition of “workers” and contractors – so that there will be little need to deem anything. Independent contractors should be encouraged, and businesses should be encouraged to deal with them. They should become regular features of our business environment under basic commercial laws and institutions (including all normal OHS responsibilities) instead of industrial laws and institutions. With such an approach, the deemed worker laws will lose a lot of their relevance and no longer be the plaything of the regulators.