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ICA Submission to the Senate Inquiry into Insolvency Laws



The Secretary
Parliamentary Joint Committee on Corporations and Financial Services
Parliament House
Canberra 2600

21 August 2003

Independent Contractors of Australia (ICA) welcomes the opportunity to make a submission to the Inquiry into Australia's Insolvency Laws. The Inquiry is investigating a wide range of items concerning how insolvency and voluntary administration laws operate in Australia. ICA makes comment on only two aspects of the Inquiry's scope.

ICA submits that most independent contractors are in the position of being unsecured creditors when faced with clients who have become insolvent. Within this context, ICA comments on:
(1) the rights of creditors.
(2) the treatment of employee entitlements, because the position of independent contractors is best understood when compared with that of employees.

Considering the position of independent contractors is important because 28% of the private sector workforce (Aust Bureau Statistics 2000) are not employees and the trend in this direction appears to be increasing. It should be expected that independent contractors will increasingly feature as creditors of insolvent entities.

ICA's focus is principally on the minimisation of independent contractors' financial loss from insolvent entities.

  • ICA submits that the Inquiry will assist independent contractors if it considers and makes recommendations on policies designed to minimize loss.


    • [Note: This submission considers the situation of independent contractors faced with the insolvency of a party with whom they have done business. The submission does not consider the position of independent contractors who themselves have become insolvent.]

    1. About Independent Contractors of Australia (ICA)
    ICA is the first (and probably the only) organisation in Australia exclusively dedicated to the interests and rights of independent contractors.

    ICA is new: it was formed in July 2001 and incorporated as a non-profit organisation under the South Australian Associations Incorporation Act. ICA has three principal aims:
    (1) To conduct an education campaign to assist independent contractors and the community at large to understand the legitimate status of independent contractors and the important issues relating to them.
    (2) To act as a network for industries structured around or dependent on independent contractors.
    (3) To lobby for the rights of independent contractors.

    ICA operates through its Website at www.contractworld.com.au. ICA is truly a 'virtual' organization. Through its Website:
  • The public can access significant quantities of information about independent contracting.
  • People can subscribe ($50 per year) and access the "subscribers only" section of the site, where core legal, tax and other information is stored.
  • Subscribers can engage in discussion on independent contractor issues and have policy input.
  • Subscribers and interested registered persons can receive regular e-mail alerts on independent contractor issues.

    • The ICA committee is drawn from across Australia with representatives from a range of industries including farming, IT, housing/construction, transport, labour hire and others.

    2. What/Who is an independent contractor?
    An independent contractor is a person who works under and through the commercial contract, known at law as the contract for services. This is defined and found through common-law legal processes. An independent contractor can operate as:
  • A natural person.
  • A natural person working within a partnership.
  • An owner/operator of a structure (company or trust).

    • An independent contractor can be supplying services or goods or both.

    An independent contractor is not an employee, is his or her own business, takes commercial risk and is regulated through commercial law.

    A description of the differences between the employment contract and the commercial contract is available on www.contractworld.com.au.

    3. Overview of the independent contractor situation with respect to insolvency
    Because the commercial contract is the defining point of being an independent contractor, when independent contractors are faced with non-payment of an invoice, or a contract dispute, they usually must use commercial legal avenues (as opposed to industrial relations avenues) to seek redress. When comparing an independent contractor with an employee in relation to insolvency situations, the independent contractor is in a different situation to employees. Independent contractors usually have the status of unsecured creditors and do not receive the special treatment that is sometimes afforded to employees. Where this occurs, there is potential concern over lack of equity.

    4. Independent contractor compared with employees.
    Employees make forced loans to employers. Independent contractors do not
    Full- and part-time employees have money withheld from their regular remuneration for holidays, sick leave, long service leave and other items. These are usually referred to as employee 'entitlements'. ICA views these not as entitlements but as forced loans made by employees to employers as a condition of entering an employment contract. In effect, these forced loans place the employee in a position of being a permanent creditor to their employer. The debate which has occurred for several years concerning security over employee entitlements has in fact missed the key point of forced employee loans. Instead, it has sought to address the problem of security of employee 'entitlements' by creating special trust funds, supplying government hand-outs and so forth. In fact, the security of entitlement problem is a creature of the nature and management of permanent employment. The solutions so far suggested have never addressed this fundamental flaw of employment, namely, the forced withholding of money.

    Independent contractors do not suffer from the same forced withholding of money, other than statutory requirements for tax under PAYG. The non-withholding of employee-like monies is a key benefit of being an independent contractor. Independent contractors invoice their clients and are (normally) paid fully for the invoice. If an invoice is not fully paid, it would most likely relate to a dispute over the invoice amount or the quality of tasks undertaken. But when an independent contractor is faced with a bad debt as a result of an insolvent client, the independent contractor is normally in the position of an unsecured creditor.

    Independent contractors are not party to the system of government-imposed employment law which facilitates employee-forced loans to employers. The General Employee Entitlements Scheme (GEERS) has been introduced to compensate employees for the forced withholding.

  • ICA submits that it is not appropriate to extend the GEERS scheme to independent contractors, because forced withholding does not occur.


    • ICA is, however, aware of suggestions to extend employees' hold over the residual funds of insolvents by giving employees even greater priority over other creditors than is currently the case. ICA believes that this would create inequity. To give employees preferential treatment over independent contractors beyond that of GEERS is to transfer liability to independent contractors to pay out the unsecured loans when independent contractors had nothing to do with forcing of the loans in first place. If government wishes to resolve the problem of employee-forced loans, it should not be done by creating inequity among unsecured creditors, but rather by addressing the problem of forced loans.

  • ICA does not believe that the rights of employees over other creditors should be extended beyond that of GEERS.
  • Subject to the requirements of GEERS, ICA submits that independent contractors, employees and all unsecured creditors (including government) should be treated equally for the purposes of distributing the available assets of insolvent entities.


    • 5. Credit control
    For independent contractors, the key to minimizing exposure to insolvent entities is to exercise discipline over credit and invoice payment.

    The exposure of independent contractors to bad debt is generally constrained to the period in which an invoice has been delivered to a client and payment is pending. In this context, independent contractors should ensure that when selling their services they include strict payments terms as a condition of their contract and should be prepared to stop supplying services or goods if payment is not made within the payment terms. If all independent contractors stuck to this practice, then exposure to bad debt from insolvent entities would be minimized.

    However, this is not what often occurs. Many independent contractors fall into the bad business practices of:
  • Failing to invoice regularly.
  • Failing to agree to credit terms when selling their services or accepting a job.
  • Failing to enforce credit terms. That is, they continue to supply services when prior invoices have not been paid.
  • Offering credit terms beyond their capacity to afford or beyond a level prudent for their personal circumstances.

    • Independent contractors and all businesses are susceptible to this error, which often occurs in the mistaken belief that loose credit is needed to gain or retain a client or arises simply from fear of being 'up front' on payment terms. This is a bad business culture that works against the achievement of disciplined business environments.

    ICA believes that good credit control is an essential management tool needed by independent contractors and is primarily the responsibility of each independent contractor. Government could, however, play an educative role by suggesting to business in general (and independent contractors in particular) that they should exercise tight credit control of their affairs.

  • ICA submits that, as a general preventative measure, government could assist independent contractors by running education campaigns on the benefits and techniques of disciplined credit control.


    • 6. Retention of Title Clauses
    Related to credit control issues is the idea of retention of title clauses in contracts. It is usual that when a good or service is supplied, title to the good or service transfers from the supplier to the receiver at the point of delivery. It is possible to have contracts where title transfers at the point of payment. If title transfers at the point of payment, then, when an entity becomes insolvent, a supplier can recover the goods thus minimizing loss and avoiding becoming an unsecured creditor. For independent contractors who supply only services, it is hard to conceive where retention of title can be created. However, where goods are supplied, this should be available as an option.

  • ICA submits that government policy should not prevent or impede suppliers from creating retention of title clauses and further, that retention of title should be recognized and respected under law in the management of insolvency situations.


    • 7. Contract dispute resolution
    A major problem faced by independent contractors is the difficulty associated with litigating to recover bad debt. ICA believes that problems exist for independent contractors in achieving quick and effective legal resolution to contract disputes or in enforcing payment of an unpaid invoice.

    An effective and efficient economy depends heavily on trust in contract transactions. Yet, when trust diminishes, people will be less inclined to engage in business activity. Integral to trust is the ability of legal systems to ensure that contracts freely entered into are enforceable. If an independent contractor is owed money outside of an insolvency situation, the general view is that the ultimate recourse is litigation. If an unpaid bill is less than $3000, it is unlikely that the cost of litigation would warrant the exercise of recovering the money. Because litigation is expensive, slow and generally ineffective, commercial trust breaks down, thus damaging economic activity.

    ICA has investigated this situation and understands that the Fair Trading Acts of each Australian state were amended in the late 1990s to allow for small-claims type processes which may be suitable for independent contractors. The amendments were created in reaction to problems in the retail tenancy area, but ICA understands that the small-claims procedures were created in a generic way and that they may have strong application for independent contractors. In Victoria, for example, a small lodgment fee initiates investigation and, in applications for payment below $10,000, solicitors are prevented from representing any parties before the Tribunal. ICA believes that the processes and procedures available are similar to small claims for consumers.

    ICA would be pleased if the Inquiry were to investigate the small-claims options available to independent contractors.

  • ICA submits that, as a preventative measure, government actively publicise small claims options available for independent contractors.


    • 8. Fraud
    Most insolvency situations do not come about by intent. There are, however, persons who operate businesses with the intent of running up debt and using insolvency provisions to avoid payment. Often this can take the form of 'phoenix companies'‹the creation of company shells designed to hide and protect the controller from the liabilities of the company. Independent contractors can fall victim to these fraudsters.

    It is, however, important when attempting to prevent this type of fraud that genuine businesses are not caught. ICA recognizes the difficulty of identifying and preventing this type of fraud before the event.

  • ICA supports the strongest legal sanctions against persons who conduct fraud.


    • Summary of Recommendations
    ICA submits that
  • It is not appropriate to extend the GEERS scheme to independent contractors, because forced withholding does not occur.
  • The rights of employees over other creditors should not be extended beyond that of GEERS.
  • Subject to the requirements of GEERS, independent contractors, employees and all unsecured creditors (including government) should be treated equally for the purposes of distributing the available assets of insolvent entities.
  • As a general preventative measure, government could assist independent contractors by running education campaigns on the benefits and techniques of disciplined credit control.
  • Government policy should not prevent or impede suppliers from creating retention of title clauses and further, that retention of title should be recognized and respected under law in the management of insolvency situations.
  • As a preventative measure, government actively publicise small claims options available for independent contractors.
  • The strongest of legal sanctions be directed against persons who conduct fraud.