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Comment on the discussion paper
"Development of the 2008 Survey of Contract Work and Labour Hire"
for the Australian Bureau of Statistics
Ken Phillips, Executive Director,
Independent Contractors of Australia
17 August 2007
ICA appreciates the opportunity to make a contribution. We were recently invited to make comments to the Productivity Commission in relation to a review of definitions used in the HILDA survey. Our comments herein are reflective of our comments to the Productivity Commission.
Our comments specifically relate to the way in which the terms
- contract labour
- independent contractor
- owner-managers
are used in surveys when that leads to confusion and imprecision in data collection (and consequent data analysis). We believe that the way the terms are currently used creates confusion in the minds of respondents, thereby causing incorrect responses to be supplied.
We believe that this confusion can be minimised by ensuring that the way in which the terms are used reflects, and is consistent with, the use of the same or similar terms by
- The International Labour Organisation
- The Australian Taxation Office under both PAYG and PSI laws
- The Independent Contractors Act
When it gathers data, we believe that the ABS is primarily seeking to determine the numbers of people who earn their incomes as independent contractors. Or, to put it another way, people who do NOT earn their income as employees.
The difference between an employee and an independent contractor is in fact very simple. It is that as defined at common-law and as tested in the courts. That is, an employee is employed under an employment contract and an independent contractor is engaged under a commercial contract.
Over the last five years or so, the legal fact of this definition has properly been accepted by the ILO and the ATO, and is embraced by the Independent Contractors Act. It is reflected in the administrative systems used or recommended by each of those regimes. We believe that it is appropriate for the ABS to apply the same definition in its surveys.
The importance of terminology
Improving the measure of the number of independent contractors in part relies on improving the precision of the language used in surveys.
We believe that it is important to use the word "engage" in relation to independent contractors and "employed" in relation to employees.
It is imprecise at law to say that an independent contractor is "employed". To do so is to suggest that an independent contractor has some form of employment contract. Further, combining the words "independent contractor" with "employed" creates doubt and confusion in a respondent's mind as to precisely what is being asked of him or her.
Clarity can be enhanced by creating precision in use of language so that
- If a commercial contract exists, the parties are referred to as "engager" or "client" and "independent contractor".
- If an employment contract exists, the parties are referred to as "employer" and "employee".
Note that it is not consistent with common law to say that an "independent contractor" has an "employer". This is a misuse of both terms and does not aid clarity.
The ILO approach
In 2005, the International Labour Organisation (ILO) recognised that confusion existed about the definitional issue of employee/independent contractor, and made an important step towards improving clarity. The ILO now refers to "worker" as a generic term, with "employee" and "independent contractor" as two subsets. Further, the ILO stopped using the term "dependent contractor" and instead now refers to a "dependent worker" as an "employee", which accurately reflects the nature of employment identified by the ILO. The ILO produced an extremely helpful discussion paper on the issue in 2005. (link to this can be supplied if required) The ILO instrument created in 2006 on the issue reinforced and solidified this approach, effectively establishing clarity in the international standards being used.
Contract Workers
We have concerns that the quest to identify "contract worker's employment arrangements" will create confusion. The way the questions are currently worded doesn't identify clearly enough what it is that the ABS is attempting to discover.
Our assumption is that the ABS is seeking to identify the nature of the different contract types under which workers are employed or engaged. If this is the case, two distinct categories need to be identified:
- Workers who have an employment contract and, if so, what type.
- Workers who have a commercial contract and, if so, what type.
Asking if work is undertaken on a "contract basis" is meaningless because ALL work involves a contract of one sort or the other.
It is quite proper to try to determine whether contracts are fixed term, have a completion date, have expectations of renewal, and so on, but these types of arrangements can and do occur under both commercial and employment contracts and should be categorised under the two distinct categories just mentioned.
The difficulty of language with respect to company structures:
One area where some confusion in terminology cannot be avoided is where a person works through a company structure and the only employee is the individual (and perhaps a spouse). The Independent Contractors Act appropriately defines such individuals as independent contractors, basing its identification upon the existence of a commercial contract. In such circumstances, the individual has several sorts of status---being the "employer" (of himself) and the "employee" (of his company), while also being an "independent contractor".
The ABS uses the term "owner-managers of incorporated enterprises" to isolate this category of persons as a distinct subset of income earners. We believe that this is appropriate and helpful for understanding labour force composition and trends. The difficulty arises, however, when seeking to place this group within the broader categories of employee or independent contractor.
We suggest that consistency with the Independent Contractors Act (that is, classifying such individuals as independent contractors) is probably the best approach, because the contract most relevant to the earning of income is the commercial contract between the earning entity and the client. By contrast, the employment contract under a company structure is used as a vehicle for distributing income, not earning income.
As for "self-employment" and "independent contracting", we consider that these terms mean the same thing. They are both typified by the fact that the source of income lies with commercial contracts. We suggest that the survey combine these two terms into one---that is, that "independent contractor/self-employed" be used to further aid clarity.
The development of sharper precision with terminology should make statistical identification easier and more reliable, thereby reducing confusion amongst respondents about the meaning of questions.
Process of discovery
For the purposes of designing questionnaires, it is worth noting that the common-law courts focus on determining the nature of the contract at first instance. The status of the individual follows as a consequence of the discovery of the nature of the contract. This is the approach used under the Independent Contractors Act and it is also the design feature used by the PAYG and Personal Services Income tax laws.
So far, however, the approach taken by most questionnaires seems to have been one of attempting to determine the nature of the individual at first instance. In our view this has probably resulted in confusion amongst respondents when considering questions, because the questions are not tightly enough targeted to the desired end result.
If the conceptual methodology of questionnaires were reconceived to incorporate the identification of the nature of the contract, additional clarity in the way in which questions are posed should emerge, and this should lead to more accurate answers from respondents.
It is recognized, however, that data-collection exercises based on questionnaires cannot be as accurate as the processes conducted by the courts. When undertaking an investigation, the courts have the luxury of conducting an exhaustive and time-consuming analysis of all factors, and arrive at a decision based on the balance of the evidence before them. It is simply not possible to do this on a mass scale through the working population.
The task for statisticians is consequently more complicated than that of the courts. Conclusions have to be arrived at very quickly (literally, in minutes) based on a limited number of questions that can be asked within a questionnaire timeframe. This must produce error. The task is to minimize error.
Self-identification
Discussion point Number 6 raises the issue of making use of self-identification. We consider this highly appropriate. The paramount common-law test used by the courts is the intent of the parties. Intent will often overshadow other common-law indicia. Self-identification should prove a strong indicator of intent.
The proposed data items are reflective of the tests which the common-law courts use to distinguish between the commercial contract (independent contractor) and the employment contract (employee). However, the questions relating to control, dependency, workers' compensation and multiple contracts will lead to confusion and error. When each of these issues is investigated under common law in the courts, considerable detail is studied as to the precise nature of circumstances in relation to each. This is not something that could be done efficiently in the ABS survey. If these questions continue to be used for want of being able to produce more appropriate questions, it should be accepted that high level error is likely to result.
Below is a list of self-identification questions that is offered for contemplation.
Labour Hire
The discussion paper asks for feedback on the labour hire question. It should be noted that there are two distinct forms of labour hire---one in which the worker is an employee of the labour hire company; and the other in which the worker is an independent contractor.
Stand-alone labour hire provisions were made under the PAYG legislation specifically to capture withholding for independent contractors using labour hire. Independent contractors who do not wish to have an ABN or invoice their client/s directly can use labour hire companies to manage their contracts and have withholding conducted by the labour hire company, without affecting their common-law status. They remain independent contractors.
Our experience is that, where independent contractors work through labour hire, the labour hire companies normally go to considerable trouble to ensure that the individual is fully aware of, and agrees to, his or her independent contractor status. Self-identification should prove reasonably reliable in these instances.
Self-identification, however, may not be as reliable, for example, in the IT (information technology) sector, where cascading contracts and multiple use of contract management agencies is common. There is sometimes not a great deal of clarity to be had about an individual's status---either by the management agency or by the IT professional.
Some more background on the ATO Income Tax approach
Withholding Since the reforms to tax laws in 2000, the use of income tax withholding is no longer a legal indicator of status. Before 2000, the power of the Tax Commissioner to require withholding under PAYE was exclusively tied to a common-law finding of employment. The PAYG reforms of 2000 were in part specifically designed to overcome this limitation of legal authority to require withholding. Common-law court cases since 2000 have generally dropped the use of withholding as an indicator of status in recognition of the change in tax law.
Further, the ATO identifies that withholding by the payer may be required for independent contractors where
- An ABN is not quoted;
- A voluntary agreement to withhold is signed;
- Where work is conducted under a labour hire arrangement.
If tax withholding by the paying party is used as a question in the survey as a blanket identifier of employment, it is likely to create confusion and lead to inaccuracy. It would result in an under-identification of independent contractors in the three categories listed above.
If the individual has the responsibility to conduct withholding of his own income, however, then this is probably a reasonable indicator or being an independent contractor.
PSI The Personal Services Income tax laws relate to the levels of tax individuals pay and the deductions to which they are entitled. Employees do not have access to the PSI regime. To access PSI, an individual must pass one of several layered tests for 75 per cent of income in a year. In our view, the primary test (the results test) is largely a common-law test. Our view is based on the wording of the PSI legislation and associated tax rulings. If the results test is not passed, access to PSI can still occur if one of several other tests is passed. In our view, accessing PSI is much easier to achieve than passing the common-law tests. We are inclined to believe, therefore, that the PSI laws are unhelpful for the purposes of ABS data collection. There still exists confusion in the community about PSI---for example, the erroneous belief that the 80/20 rule is the primary test. Using PSI as a test is likely to confuse rather than assist respondents and lead to inaccuracy.
Why questions about workers' compensation should not be asked
We believe that workers' compensation should not be used in ABS data questioning. In most jurisdictions, workers' compensation "deeming" provisions pull large numbers of independent contractors into the workers' compensation regimes.
Workers' compensation initially was intended to apply only to employees but, over time, has been significantly modified to cover large numbers of independent contractors. That is, the structure of workers' compensation laws now requires large numbers of common-law independent contractors to be within the schemes. The Acts typically extend their reach by describing commercial contract situations and declare that workers' compensation premiums must be paid on those specified commercial contract circumstances. Consequently, it is standard and widespread that large numbers of independent contractors are within workers' compensation schemes.
Suggested questions about indicators of independent contractor status
1) Self identification.
- Do you consider that you have clients or do you consider that you work for employer/s?
- If you have clients, how many clients do you generally have in a year?
- Do you consider that you work as an independent contractor/self-employed person?
- Do you think that the people who are your clients consider that you are an independent contractor/self-employed person?
- Do you have written contract/s, or are your contracts mostly oral, or a combination of both?
- Do you consider your contract/s to be commercial contracts or employment contracts?
- If the contracts are written, do they refer to you as an employee or as an independent contractor, or is there no reference?
2) Indicators that an individual's services are available to the public at large:
- Is there one client who dominates your income source? If yes, what percentage?
- If you have one large client, are you prepared to take on other clients if you have the time?
- Do you do things to try to find new clients? (If "yes") Do you do this (a) constantly (b) sometimes (c) occasionally?
3) Indicators that the individual undertakes business-type administration of his or her income.
- Do you have an ABN?
- Do you pay GST?
- Do you issue invoices to your client/s?
- Do you pay your own tax regularly to the ATO under an Income Tax Instalment Statement?
4) Indicators that individuals have contracted out some of the business administration of their incomes:
- If your client makes regular income tax instalment payments on your behalf, is this because it suits you? (If "yes") Is this because:
- You have not supplied them your ABN?
- You work through a labour hire arrangement?
- You have signed a voluntary agreement for your client to do this?
5) Indicators that individuals control their work given market/client demands.
- Do you consider that you have control over the way you perform your work? (a) total (b) high (c) medium (d) minimal (e) none?
- Do you work when (a) you want to (b) when the person who pays you tells you (c) according to the needs of the job/s you are doing?
6) Indicators of the ability to substitute.
- In doing your work, can or could you pay someone else to assist you or conduct part of the work for you if you want? (If "yes") Do you do this (a) regularly (b) sometimes (c) never?
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