As set out in Chapters 2–5, the fragmentation of employment relationships (e.g. contracting and employment chains), as well as the non-compliant and exploitative behaviours that often accompany such arrangements, are rife in the cleaning industry and other sectors. As United Voice emphasised:
In many in industries, the use of labour hire and subcontracting results in a much higher incidence of exploitation and unlawful behaviour than arises from direct employment relationships.
In its 2018 report into the procurement of retail cleaners in Tasmania, the Fair Work Ombudsman (FWO) clarified that it did not hold views on the respective merits of operating models such as insourcing or outsourcing, and that its interest in the topic extended 'only to whether a particular model is lawful and its impact on compliance in the labour supply chain'. However, it noted:
…the FWO’s experience is that multiple levels of subcontracting can create conditions which allow non-compliance to occur. The reasons for this include the pressures of multiple businesses taking a profit as additional subcontractors are added to the contracting chain, and the perceived ability to hide non-compliance within convoluted business structures.
A number of stakeholders emphasised the need for further measures to ensure that vulnerable workers are not preyed upon by unscrupulous business operators. The exploitative behaviours discussed included:
the inappropriate use pyramid subcontracting;
the misuse of labour hire arrangements;
This chapter will examine each of these matters in turn.
The Law Council of Australia (Law Council) informed the committee that multiple levels of contracting created an environment which allowed non-compliance to flourish:
There is a pressure on every level of the subcontracting business to make a profit, coupled with a common belief that complex business structures can be deliberately used to hide non-compliance, facilitates exploitation of those at the bottom of the subtracting chain, who are often already a vulnerable demographic.
The Law Council reported that two examples of such non-compliance commonly disguised in pyramid subcontracting in cleaning were:
one cleaner being provided with the wages for all employees (for them to redistribute to their fellow workers in cash); and
Sham contracting is when workers are wrongly and deliberately identified as independent contractors (when by law they are actually employees) by businesses to avoid paying proper employee entitlements such as superannuation.
The Law Council drew the committee's attention to an example of pyramid subcontracting uncovered in the FWO's investigation and report into the procurement of retail cleaners in Tasmania:
In the [FWO's] Woolworths Inquiry, it was found that the contract price paid by Woolworths was sufficient to meet employee minimum entitlements, but only if there were no more than two levels of contracting. In fact, there was in fact up to four levels of subcontracting, in breach of the terms of Woolworths’ own service agreement.
The FWO report set out the case study which clearly encompassed both of these non-compliant behaviours:
Contractor A operated as a principal contractor in Tasmania for cleaning several Woolworths sites. The inquiry encountered significant difficulties in determining the identity of the employer of labour at each of the sites.
There were a number of sites where there was more than one level of subcontracting occurring, with both the principal contractor and subcontractors adding additional levels to the labour supply chain at different times. As an example, at some sites, Contractor A subcontracted to a wholly owned subsidiary, Contractor B. Contractor C (not related to contractors A or B) acting as a ‘middle player’ then subcontracted to Contractor D. Contractor D then paid an employee on behalf of all workers, and that employee then paid other employees in cash. Contractor D also engaged some purported independent contractors who were really employees.
The multiple layers of people involved in the payment of workers and the insufficient records provided to the inquiry made it difficult for the FWO and the supermarket [Woolworths] to identify the true employer in some instances.
The FWO included a flow chart in its report to illustrate the many levels of subcontracting it found at some Woolworths sites in Tasmania:
Figure 6.1: —Case study labour hire supply chain
Fair Work Ombudsman, An inquiry into the procurement of cleaners in Tasmanian supermarkets, p. 16.
To combat the high risk environment created by multiple levels of subcontracting, the Law Council recommended that legislation should be enacted to limit subcontracting arrangements to a maximum of two levels.
The committee understands that there may at times be valid reasons for a business to engage in legitimate contracting or subcontracting arrangements, an argument put forward to this inquiry by several industry stakeholders.
However, the committee cannot ignore the compelling evidence from credible stakeholders such as expert academics and the FWO that multiple levels of subcontracting create conditions which allow non-compliant behaviour and the subsequent exploitation of workers to flourish.
In light of this evidence, the committee is of the strong opinion that the less removed that cleaners (or for that matter, any other contracted workers) are from the engaging business, the better the ability of that business to have oversight and monitor the conditions and payments of those individuals to ensure they are being lawfully remunerated.
For this reason, the committee sees potential in the suggestion put forward by the Law Council to limit the number of levels of contracting to two. However the committee acknowledges that in certain circumstances there may be legitimate reasons for businesses to utilise multi-tiered contracting arrangements.
The committee encourages the Government to assess how problematic pyramid subcontracting can be eliminated.
The committee recommends that the Government consider an appropriate legislative framework to address the problems identified with pyramid subcontracting.
Misuse of labour hire arrangements
Similar to the exploitation that can flourish in pyramid subcontracting situations, labour hire arrangements can also disguise non-compliant behaviour due to the distance between the business receiving the service and the individual workers performing that service.
Mr Greg Vickery, Chair of the Law Council Business and Human Rights Committee outlined how labour hire arrangements are used in the cleaning industry:
It is often the case that labour-hire cleaning contractors will employ workers to provide a cleaning service to such organisations and the workers are assigned to clean for the host organisation that pays the labour-hire contractor a fee for providing the on-hire cleaners.
The Law Council provided the committee with a summary of the labour hire licensing legislation in operation in Victoria, Queensland and South Australia. It recommended that a national labour hire licensing scheme be established. Mr Vickery noted that it would be beneficial for workers to have a national scheme in place:
It would be good to have a common national system, and that would provide some additional protection for workers in this space. We see that as another element, and this is an area where you would need federal-state cooperation to achieve a national system.
Maurice Blackburn Lawyers (Maurice Blackburn) submitted that there was a need for consistency on the issue nationally:
Labour Hire and particularly the rogue, 'invisible' labour hire operators, often operate outside employment frameworks and routinely exploit workers. While a number of states are implementing Labour Hire Licensing schemes, there is still the outstanding issue of how federal laws intersect with these schemes, while other states continue to be without a framework at all.
The Australian Council of Trade Unions (ACTU) also recommended the establishment of a national labour hire licensing scheme:
Such a scheme should include the capacity to undertake audits regarding compliance with employment standards, taxation and superannuation payments; and to investigate allegations of breaches and impose penalties. It should also include a ‘fit and proper’ persons test for all operators and directors.
United Voice echoed the recommendation from the ACTU, while WEstjustice Community Legal Centre (WEstjustice) also submitted that there was a strong need for a national labour hire licensing scheme.
Professor Allan Fels, when speaking in his role as chair of Migrant Workers' Taskforce, advised the committee that labour hire was 'on the agenda' and that options to deal with unscrupulous labour hire operators were policy issues being examined by the Taskforce.
The committee understands that there may be legitimate reasons for businesses to utilise labour hire arrangements. The committee does not have a problem with these legitimate uses, provided they operate within the bounds of the Fair Work Act 2009 (Fair Work Act).
However, similar to its views on pyramid subcontracting, the committee is persuaded by evidence indicating that fragmented employment arrangements with convoluted labour hire based supply chains work to generate conditions that are demonstrably high risk for illegal behaviour that exploits workers.
Because of this, the committee is of the opinion that there is a need for a national labour hire licensing scheme to ensure that unscrupulous operators are not afforded the chance to abuse labour hire arrangements and take advantage of vulnerable workers.
The committee considers that such an initiative would be highly beneficial in assisting lead firms in choosing ethically sound and legally compliant labour hire operators to engage with.
The committee recommends that the Government, in consultation with all states and territories, establish a national labour hire licensing scheme.
Illegal phoenixing activity involves the deliberate stripping and transferring of assets from one company to another by individuals or entities to avoid paying its debts, including taxes, creditors and employee entitlements. This fraudulent behaviour has numerous detrimental impacts to the community, many of which are pertinent to the cleaning industry, including:
the non-payment of wages, superannuation and accrued employee entitlements;
creating an unfair competitive advantage over other businesses that are following the law;
the non-payment of suppliers;
the avoidance of regulatory obligations; and
the loss of government revenue through the non-payment of tax and the need for increased monitoring and enforcement activities.
WEstjustice drew the committee's attention to instances of illegal phoenixing its clients had encountered:
Many of our clients are unable to recover unpaid wages through no fault of their own. In some instances, an employer has provided false details, or has simply “disappeared”. We have contacted employers on a number of occasions only to be provided with fake email addresses, fake postal addresses, and false promises of repayment. A significant problem for WEstjustice clients is the phenomenon of phoenix companies—whereby directors close down companies to avoid paying debts, and proceed to open a new company without penalty.
Similarly, JobWatch advised that it received a 'significant number' of calls from employees seeking to recover entitlements from contract cleaning companies where their employer has become insolvent, and in many cases, uncontactable.
WEstjustice recommended the introduction of director identity numbers to stop unethical directors using illegal phoenixing methods to reap profits from the exploitation of workers. United Voice and the ACTU also echoed this recommendation.
The Australian Taxation Office (ATO) advised that exposure draft legislation for the director identification number initiative was publicly issued on 1 October 2018. At a public hearing the ATO appeared to indicate that the implementation of the initiative was 'quite complex'. Ms Aislinn Walwyn, Assistance Commissioner noted:
It's part of a much more complex digital transformation. The Digital Transformation Agency is looking at the modernisation of business registries, an identification issue, and the director identification number is dependent on those measures having the right platform and having the right protocols.
The Law Council suggested that given the complexity of identifying and regulating illegal phoenixing activity, regulators needed to utilise 'proactive, creative and innovative' responses:
…identifying illegal phoenixing behaviour necessitates whole-of-government information sharing and dissemination. Where this is obstructed by confidentiality laws, the Law Council suggests that legislative restrictions be amended to facilitate and promote information sharing and dissemination between government agencies and the ATO.
Mr Vickery of the Law Council elaborated on the matter at a public hearing:
In terms of phoenix companies, ASIC [Australian Securities and Investments Commission] has had quite a focus on this, and it does seem to the Law Council that it would be worthwhile having the regulators talk to each other more about this to get the benefit of the work that ASIC is doing, so we don't see recidivists and people who aren't meeting their obligations…
It's that information [on directors who have been involved in phoenixing] that's not being shared, probably the circumstances of the companies involved which is not shared with, for instance, the ATO, who could then track that a new company is being formed. The concern is that you've got a company that doesn't pay its workers' entitlements, goes into voluntary liquidation and then starts up again a few months later. All the regulators should be aware of that and monitoring performance the second time around.
To solve this problem, the Law Council recommended:
Legislative confidentiality restrictions inhibiting the ability for the ATO to receive information from the Australian Securities Investments Commission and other key governmental agencies should be amended to better assist in the anticipation, identification and prevention of illegal phoenix activity.
Any amendments to promote improved information sharing should also be matched with appropriate resourcing and engagement with industry to increase the ability of regulators to anticipate and deter fraudulent phoenix activity.
The ATO reported that there were 'barriers' to information sharing but appeared to indicate that those barriers were there for legitimate reasons. Ms Walwyn stated:
Various agencies have secrecy provisions and some of those constraints concern procedural fairness constraints within agencies. Under the Phoenix Taskforce the ATO can share its information with its members. That's not necessarily the case with other agencies providing information to the ATO.
The committee is aware of the work of the Phoenix Taskforce, an initiative coordinated by the ATO comprising 32 federal, state and territory government agencies.
The committee is also aware that in September 2017 the Government announced a 'comprehensive package of reforms' to address illegal phoenix activity, including the introduction of a Director Identification Number.
The committee strongly urges the Government to implement such reforms as quickly as possible so that unethical directors can no longer use illegal phoenix activities to avoid their legal obligations to workers.
The committee sees the merits in the recommendations put forward by the Law Council to better facilitate whole-of-government information sharing in order to assist in identifying illegal phoenixing behaviour.
The committee recommends that the Government work to implement its announced reforms to combat illegal phoenixing, such as the Director Identification Number scheme, as swiftly as possible.
The committee recommends that the Government work to amend legislative confidentiality restrictions inhibiting the ability for the Australian Taxation Office to receive information from the Australian Securities and Investments Commission and other key government agencies in order to better assist in the anticipation, identification and prevention of illegal phoenix activity.
The committee also recommends that any legislative amendments to promote improved information sharing be matched with appropriate resourcing and engagement with industry as well as procedural safeguards.