Throughout the inquiry the committee received compelling evidence about the growing fragmentation of employment relationships, a trend that leads to high levels of regulatory and award non-compliance and ultimately facilitates the exploitation of workers. Chapter 2 of this report provides background details on this trend.
Professor Andrew Stewart, a specialist in employment law and workplace relations at the University of Adelaide, and Dr Tess Hardy, an academic at the University of Melbourne with expertise in employment and labour law, both provided evidence to the committee in their private capacities. They explained how businesses fragment corporate structures and working arrangements into loosely connected networks to essentially 'blur responsibility' for ensuring workplace compliance:
A key feature in such arrangements, whether they involve subcontracting, labour hire, franchising, the use of corporate groups or other types of ‘supply chain’, is the creation of legal distance between a worker and a ‘lead business’ that ultimately benefits from their labour. Even if the worker is employed, and can identify underpayments or other breaches of labour standards by their employer, all too often that employer no longer exists, or otherwise does not have the assets to meet any judgment against them.
The Centre for Business and Social Innovation at the University of Technology Sydney described the fragmentation of the commercial cleaning industry, characterised by 'a contractual pyramid or supply-chain structure, with building owners and tenants at the apex:
Building owners and their tenants rarely have any direct responsibility for the working conditions of cleaners, instead outsourcing cleaning services to businesses that specialise in offering cleaning contracts. Larger cleaning firms may outsource work to smaller ones, with a growing number of franchise operators and small cleaning contractors. At the bottom end of these supply chains lies a workforce of cleaners who are low-paid, award‑reliant and largely unorganised.
The Centre for Business and Social Innovation also emphasised the ultra‑competitive dynamic present in this kind of fragmented structure, and the adverse impact this has on workers:
Competition amongst cleaning contractors is fierce, with the business offering the lowest price frequently having the greatest success in being awarded contracts. As many clients of the industry view cleaning as a necessary cost to be minimised, there is considerable supply chain pressure on contractors to reduce costs. Moreover, the few large cleaning contractors, who set the tone and pace of competition, frequently bid for contracts at a loss to squeeze out competitors. Given that labour is the main cost of a cleaning business, those large contractors then attempt to mitigate any losses by subcontracting work to cheaper providers, thereby reducing labour costs.
It ultimately concluded that the supply-chain approach prevalent in the cleaning industry has resulted in high levels of regulatory and award non‑compliance, intensified exploitation of cleaners, and poor outcomes for businesses.
Echoing these points, the Australian Council of Trade Unions (ACTU) stated that the driving factor behind the exploitation of cleaners in supply chains was 'a simple economic imperative':
While the legal requirements may be clear, the competitive contracting systems results in a market where the only way to survive is to pay below the minimum award and legislated rates.
…where obeying the law is a recipe for financial ruin, worker exploitation has become a rational business model.
Additionally, the committee heard evidence about 'price takers' versus 'price makers'. Price makers are usually those entities at the top of a supply chain who determine the price of a contract, while price takers are typically those at the bottom of a supply chain who must accept that price. The workers at the bottom of these fragmented employment structure invariably have no capacity to influence the price setting that occurs.
In this regard Dr Sarah Kaine, a Research Director of the Centre for Business and Social Innovation, explained:
It is the Woolworths and the Coles and the retail sector and the big property owners in the commercial cleaning sector who are the price makers. This applies across any industry where there's a supply chain. In our view, and in the view of much of the research that we have conducted in other sectors but also in other parts of the world, it should be the price makers, not the price takers, who are responsible for ensuring that there is enough money in that contract for not only the basics but better wages and conditions.
The Building Service Contractors Association of Australia, the national representative body of the contract cleaning industry, also mentioned the concept of price taking in explaining why cleaners are exploited in retail chains:
Retail in Australia is dominated by a small handful of large players. Those large players set rates, conditions and the overarching economic paradigm of the retail industry. Suppliers of cleaning services are very much price‑takers in such an environment. No one would seriously argue that cleaning service suppliers are price-setters!
Dr Hardy opined that the fragmentation of work relationships was a matter of concern for regulators and policymakers as it threatened the integrity of the employment law framework:
…much of the Fair Work Act is premised on the assumption that there is a binary employment relationship in place, that there are two main parties to the contract—and frequently we're seeing that that's not the case, that there are a number of entities above and beyond the employer that are really influencing the performance of work and benefiting from the labour. And they are largely insulated from any issues that occur at the workplace. If that employee is underpaid, their main recourse is against the legal employer at common law, but frequently we are seeing—there is just case after case brought by the Fair Work Ombudsman and the unions, where, either before the proceedings commence or once they have ensued, the direct employer goes into liquidation, insolvency, or is deregistered, so the employer no longer exists or there are no assets available with which the worker can seek redress.
The Australian Industry Group (Ai Group) defended the use of these fragmented employment arrangements such as subcontracting and outsourcing:
Subcontracting arrangements often lead to increased productivity, efficiency, quality and customer service because the work is carried out by specialised businesses that are able to focus upon their particular area of speciality.
The Ai Group denied that there was a need for legislative change to provide additional protections to workers. It asserted that no amendments were needed to the Fair Work Act 2009 (Fair Work Act) as there were already 'very comprehensive' protections in place to protect workers in exploitation. It argued that the accessorial liability provisions in section 550 of the Fair Work Act already provide an effective and adequate means of holding persons responsible if they are knowingly involved in breaches of the Fair Work Act or industrial instruments.
However, as set out earlier in this section, and expanded upon later in this chapter, the committee received a wealth of evidence rebutting this argument.
For example, in February 2018 the then Fair Work Ombudsman Ms Natalie James acknowledged the impact of fissured work arrangements in a speech to the Association of Industrial Relations Academics of Australia and New Zealand conference:
The Fair Work Ombudsman does not set out to pass value judgments on the nature of business operations, stifle innovation or the entrepreneurial spirit.
But our experience is the most vulnerable workers end up in the most exploitative scenarios. And these cases usually involve some sort of ‘fissuring’ in the relationships between those doing the work and those benefiting from the labour.
The effectiveness of legislative measures to combat the negative outcomes of employment relationship fragmentation is discussed in the following section.
Effectiveness of the accessorial liability provisions of the Fair Work Act
Section 550 of the Fair Work Act relates to accessorial liability. It extends liability for breaches of the statute to a person 'involved in' someone else's contravention.
A person is involved in a contravention if they:
have aided, abetted, counselled or procured the contravention; or
have induced the contravention, whether by threats or promises or otherwise; or
have been in any other way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or
have conspired with others to effect the contravention.
Section 550 allows action to be taken for contraventions by directors or senior managers of a company which is not the immediate employer. However, according to Professor Stewart and Dr Hardy, in practice the need to establish 'actual knowledge' of the contravention makes it very hard to pursue lead businesses, regardless of the extent to which their business practices may have contributed to the relevant breaches.
Amendments made as part of the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017, which passed on 5 September 2017, supplemented the accessorial liability provisions contained in section 550 to enable franchisors and holding companies to be held responsible for breaches of the Fair Work Act in certain circumstances.
Under the current Fair Work Act, section 558B provides that, providing certain conditions are met, franchisors and holding companies can be held responsible for a breach by a franchisee or subsidiary of
the National Employment Standards;
an industrial instrument (e.g. an award or enterprise agreement);
the rules concerning the payment of wages or the keeping of records; or
the prohibitions on sham contracting.
The franchisor or holding company, or one of their officers, must have known about the breach, or should reasonably have known of it, or could reasonably have expected that a similar breach would be likely to occur. Liability can be avoided if the franchisor or holding company took reasonable steps to prevent such breaches.
Professor Stewart and Dr Hardy observed that although this amendment has significantly strengthened the law for ensuring compliance with the employment standards established by the Fair Work Act, it only did so for two particular types of business model:
In our view, the arguments for holding companies and franchisors to be held responsible for certain contraventions affecting workers who they do not directly employ apply with equal force to other business models, whether involving labour hire, subcontracting, the use of affiliated companies that are not technically subsidiaries, or more elaborate supply chains.
To address this problem, Professor Stewart and Dr Hardy recommended amendments to the Fair Work Act to incorporate the 'essential concepts' of section 558B, expressed in terms sufficiently general so as to apply to any form of corporate or commercial arrangements. They highlighted that the amendments would also retain the safeguards already present in section 558B (ie taking reasonable steps) to prevent regulatory overreach.
Professor Stewart and Dr Hardy provided further detail on this proposal to the committee:
Specifically, we propose that a person (whether an individual or a corporate entity) should be liable for an employer’s contravention of the NES [National Employment Standards], an industrial instrument, the rules concerning the payment of wages or the keeping of records, or the prohibitions on sham contracting, where the person:
(a) has a significant degree of influence or control over the employer’s affairs, or over the wages or employment conditions of the relevant employee(s);
(b) knew or could reasonably be expected to have known that the contravention (or a contravention of the same or a similar character) would occur; and
(c) cannot show that they have taken reasonable steps to prevent a contravention of the same or a similar character.
Whether a person has significant influence or control over wages or employment conditions should be determined by reference to the substance and practical operation of arrangements for the performance of the relevant work.
A person should be deemed to have significant influence or control if it sets or accepts a price for goods or services, or for the use of property, at a level that practically constrains the capacity of the relevant employer to comply with its obligations.
Professor Stewart and Dr Hardy reasoned that such an amendment would be an appropriate response to the types of non-compliant practices seen in the cleaning sector (and other industries), and also work to minimise regulatory avoidance strategies.
They further argued that the amendment would set the same threshold for secondary liability as that currently applied in the Fair Work Act to franchisors and holding companies:
The main change we recommend, in broadening its application to other types of arrangement, is the deeming provision. A business at the top of a lengthy supply chain may set a price or demand an economic return from a party with whom it is directly dealing that is so low that contraventions of employment standards further down the supply chain become inevitable. So long as that should be reasonably apparent to the lead business, it should not be able to hide behind its lack of direct influence or control over the actual employer or the working conditions of those performing the relevant work.
At a public hearing Dr Hardy was questioned on whether there was 'significant difference' between a franchise arrangement and a contract arrangement in relation to control. Dr Hardy clarified that although there were some differences between franchise networks and supply chains, as well as differences between labour hire and corporate groups, the amendments she and Professor Stewart proposed did not go beyond what was reasonable to expect from the businesses community:
There are a whole range of organisational forms that we now see in labour market. The idea of our proposal was to allow and capture the diversity of arrangements that we now see without making it unduly onerous. We certainly were very conscious that we did not want it to go beyond what was commercially viable or to suppress the kind of economic imperatives of the business community. At the same time, we are very conscious of the need to reframe these provisions to address some of the worst forms of exploitation that we're seeing in the labour market.
WEstjustice Community Legal Centre (WEstjustice) indicated that it supported Professor Stewart and Dr Hardy's proposal. However, it also indicated that the requirement for a 'significant degree of influence of control' as a threshold test could be problematic for its clients, particularly in a supply chain context where a lead firm may turn a blind eye to exploitation and therefore not have or take 'significant' control over non-compliant subcontractors.
As an alternative, WEstjustice put forward several other recommendations to amend the Fair Work Act, including:
extending liability to all relevant third parties;
widening the definition of 'responsible franchisor entity';
clarifying the liability of all third parties;
clarifying the 'reasonable steps' defence to incentivise compliance;
extending outworker protections to contract cleaners and workers in other industries; and
removing the requirement for actual knowledge and requiring accessories to take positive steps to ensure compliance.
In making these recommendations it argued that the law should 'equally hold all businesses to account if they receive the benefit of someone's labour, regardless of how they structure their affairs in an attempt to shirk responsibility'.
JobWatch supported the legislative amendments put forward by Professor Stewart and Dr Hardy, highlighting that it approved of the approach 'in imposing a positive obligation on client entities to take reasonable steps to ensure that the entities with which they contract are complying with the [Fair Work] Act'.
The committee is of the strong opinion that the current provisions in the Fair Work Act fall short in addressing the range of ways that workers are exploited.
While acknowledging the improvements stemming from the passage of the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017, the committee considers there is more to be done to provide a more comprehensive solution to the deliberate and systematic exploitation of vulnerable workers that occurs in some Australian workplaces.
The committee notes that during the Senate Education and Employment Legislation Committee's inquiry into the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017, the Franchise Council of Australia (FCA) raised concerns that franchising as a business model was being unfairly singled out and targeted with the proposed legislative change. The FCA recognised that Fair Work Act contraventions and workplace pay irregularities are not restricted to the franchise sector and argued that 'any new legislation should reflect the economy-wide nature of the employee underpayment concern.'
The committee is persuaded by evidence received during this inquiry illustrating that the increasing fragmentation of employment relationships, resulting in complex supply chains involving several layers of contracting and sub-contracting, leads to increased regulatory and award non-compliance.
While this inquiry has focused on the cleaning industry, the committee notes evidence from a number of submitters that these practices are also prevalent in other industries.
The committee finds it wholly unacceptable that large corporations and businesses, while still essentially controlling the wages and conditions of cleaners through the provision of contracts, are able to distance themselves from the workplace conditions and entitlements of these workers.
Through being 'price takers', the effects are essentially shunted down the line until they come to rest with the most vulnerable individuals in the whole operation, cleaners.
The committee considers that the outcome of this attitude for these businesses—that of all power and no responsibility—is ethically and legally precarious.
As such, the committee sees merit in the proposal for legislative amendments to the Fair Work Act as recommended by Professor Stewart and Dr Hardy.
Finally, the committee acknowledges the point made by the Ai Group that there are some circumstances where it is appropriate for businesses to utilise subcontracting and outsourcing arrangements.
However, it vehemently disagrees with the Ai Group's assertion that to amend legislation to better protect workers in these chains would somehow 'interfere' with these arrangements. Businesses that use subcontracting and outsourcing arrangements in a legitimate, legal and appropriate way have nothing to fear from legislative amendment designed to ensure the protection of vulnerable workers.
The committee recommends that for consistency the Fair Work Act 2009 be amended to extend the protections for vulnerable workers from franchise arrangements to other business models such as subcontracting and labour hire arrangements.
In particular the committee recommends that the Fair Work Act 2009 be amended so that a person (whether an individual or a corporate entity) should be liable for an employer’s contravention of the National Employment Standards, an industrial instrument, the rules concerning the payment of wages or the keeping of records, or the prohibitions on sham contracting, where the person:
has a significant degree of influence or control over the employer’s affairs, or over the wages or employment conditions of the relevant employee(s);
knew or could reasonably be expected to have known that the contravention (or a contravention of the same or a similar character) would occur; and
cannot show that they have taken reasonable steps to prevent a contravention of the same or a similar character.
The committee recommends that the amendment specify that whether a person has significant influence or control over wages or employment conditions should be determined by reference to the substance and practical operation of arrangements for the performance of the relevant work.
The committee further recommends that the amendment specify that person should be deemed to have significant influence or control if it sets or accepts a price for goods or services, or for the use of property, at a level that practically constrains the capacity of the relevant employer to comply with its obligations.
The committee also recommends that the proposals put forward by WEstjustice be adopted in so far as they are consistent with the above recommendations.
Evidence set out earlier in this chapter about the 'price maker' and 'price taker' imbalance prevalent in the cleaning sector suggests there is a need to examine changes to collective bargaining laws in order to allow cleaners to negotiate adequate pay and conditions.
Maurice Blackburn Lawyers (Maurice Blackburn) submitted that the way in which large companies are able to set contract conditions, effectively applying pressure down supply chains or fragmented employment arrangements to suppress wages, had led to a collapse in collective bargaining.
Mr Josh Bornstein, Principal Lawyer for Maurice Blackburn outlined his observations on this matter:
If there is a collapse in collective bargaining then my strong submission to you all is that there is no bargaining. Let me explain that. This is not just a collapse in collective bargaining; it's a collapse in bargaining simpliciter. I see employment contracts every day of my working life. They are in identical terms. They contain template terms that are very easily recognisable to me. I can even discern the font of the law firm that prepared them; I can tell a Herbert Smith Freehills contract from a King & Wood Mallesons contract from a K&L Gates contract. They are all in identical terms, and there is no evidence of any bargaining that goes on.
Mr Ian Scott, Principal Lawyer for JobWatch explained the inevitable link between the set contract prices dictated by lead firms and the lack of bargaining power experienced by cleaners:
…I think, because the contract price is driven down so low there is already no margin to negotiate better than the relevant modern award, if they are ever being paid that in the first place. So employer entry wouldn't be viable if they managed to get an enterprise agreement up that went higher than the modern award because their whole business model is based on the bare minimums at best.
Dr John Martin, Policy and Research Officer for the Queensland Council of Unions also observed that the capacity of cleaners to bargain is non-existent if tender prices for contracts are set too low, particularly once the profit margins for contractors are factored in:
…if the tender price is low enough, I'd suggest that the contractor can't even comply with the award, let alone bargain for something that may be superior to it. Then you've got to factor in a profit margin for the contractor, and if it gets subcontracted further then that's two sets of profit margins that you've got to factor in. Yes, the thought that a group of workers would be in any way able to bargain as is envisaged by the Fair Work Act is—it couldn't happen.
In response to the lack of bargaining power afforded to low paid workers across a variety of industries, the ACTU has argued for multi-employer bargaining. For example, in a speech on 4 October 2018, Ms Sally McManus, Secretary of the ACTU stated:
People need to be able to negotiate fairly with real bosses – those who have the capacity to say yes. Our narrow, restrictive system of single-enterprise bargaining has failed in so many industries because business owners are encouraged to undercut one another to compete on wage costs. To compete in a race to the bottom.
To the committee's mind it is clear that the unilateral imposition of contract terms set by the lead firm and accepted by the intermediary (i.e. the contractor or subcontractor) means that cleaners are left with no bargaining power. In essence, lead firms are setting the price of contracts in a way that makes it impossible for workers to bargain.
The committee considers that the increased fissuring of the employment arrangements has rendered the current bargaining laws insufficient and not fit for purpose. If lead firms seek the lowest cost tender, there is no capacity for the employees of the contractors or subcontractors to bargain.
In light of this, the committee is of the view that the effectiveness of collective bargaining, designed to rebalance the relative bargaining position across supply chains, must be thoroughly examined.
The committee recommends that the Government establish a review into the effectiveness of collective bargaining under the current legislative framework to address stagnating wages and bargaining power imbalances.