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Response to Victorian Small Business Statement Issues Paper
16 August 2005
Independent Contractors of Australia (ICA) is an association which was formed to protect the rights of independent contractors. Independent contractors are small business people. ICA operates through its Website at www.contractworld.com.au.
With the dramatic changes in the nature of work and workforce engagement systems over the last 20 years or more, it is important that government regulatory regimes understand and respond to the new environments in positive and constructive ways. ICA was formed to assist that understanding.
Amongst its activities, ICA has made submissions to:
- The Personal Services Income tax legislation reviews;
- The Cole Commission Inquiry into the construction industry;
- The Dawson Review of the Trade Practices Act;
- The South Australian Review of Workers' Compensation;
- The Senate Inquiry into Insolvency laws;
- The Victorian Occupational Health and Safety Inquiry 2003;
- Response to the Maxwell Report Victorian OHS 2004; and
- The NSW Review into OHS August 2005.
In addition, in June 2003, ICA was appointed an observer to, and attended, the International Labour Organisation debate on the 'Scope of Employment'.
ICA is a member of the Australian Taxation Office Home-Based Businesses community advisory committee.
Independent contractors are true small businesses. The issues relevant to small business are relevant to independent contractors. ICA welcomes the opportunity to contribute to the Victorian Small Business Statement. In this submission, our comments are principally focused on regulatory settings.
General comment on the July 2005 Issues Paper
Page 14 of the Issues Paper states:
In addition to ensuring a competitive environment, the Government is concerned with promoting a fair operating environment for small business, particularly in their dealings with larger business that are in a stronger bargaining position.
ICA holds the view that small business is best protected by government ensuring a competitive environment. Where government seeks to determine what is a 'fair' operating environment and takes a policy position potentially against 'big' business, it risks damaging competitive environments. Caution in this respect must prevail.
ICA holds this view for the following reasons.
What distinguishes an independent contractor from an employee is that an independent contractor provides his or her services through the commercial contract. It is this factor that determines that an individual is a business. All businesses provide services and goods through the commercial contract.
Essential and critically important features of the commercial contract are that
- It is freely entered into by the parties.
- The parties determine both the terms and prices of the contract.
These two key features are necessary to the successful functioning of free and effective economies and for both small and large businesses.
Government plays a legitimate and necessary role in protecting the integrity of the commercial contract and hence business and economic activity. Protecting the integrity of the commercial contract is essential to ensuring competitive business environments. It is important that, in undertaking this protective role, government remains value-neutral. That is, government policy should not operate from a predetermined position that one party or class of parties to a contract is superior or inferior to the other. Government policy should not assume that one party by virtue of its size or character will behave either positively or negatively. What government regulation needs to do is to focus on ensuring the integrity of the commercial contract. This is a primary and important thing that government can do to 'protect' small business.
For this reason, ICA does not support government policy that operates from a predetermined position that 'small business needs to be protected from big business'. Small business people (independent contractors) need and want big businesses as clients. It should not be assumed that big businesses will seek to behave badly toward small businesses. Sometimes, in fact, small businesses behave badly towards big businesses. Government policy should not attempt to second-guess on these matters.
ICA does, however, support business regulation that protects against misleading, unconscionable and anti-competitive conduct by any party. Policy in this respect should apply to all parties equally.
ICA is cautious about, and potentially suspicious of, business regulation that seeks to consider and determine 'unfair' market practices. 'Unfairness' regulation suggests that government will attempt to regulate prices and supply of goods and services. This would entail government making value judgements on the behaviour or potential behaviour of parties. In doing this, government can come dangerously close to interfering with, damaging, distorting and limiting business activity. Where government does this, it can and will damage the ability of small business people to function and succeed.
Within this in mind, ICA comments on some current relevant small business issues in Victoria. Some of these issues are mentioned in the Issues Paper.
2.1 Fair Trading Act: Small claims
The trader-to-trader small claims processes under the Victorian Fair Trading Act are a positive for small business---indeed for all business. The ability to quickly and cheaply have a contract dispute reviewed according to the terms of a contract, and to have it settled, enhances business and community confidence in commercial contracts. Consideration of potentially misleading and/or unconscionable conduct within the small claims process also enhances confidence in contract and commercial transactions for all parties.
2.2 Small Business Commission
The following services provided by the Small Claims Commission are positive for small business and all business in Victoria:
- Business dispute mediation services.
- The promotion of speedy payments systems by government when dealing with small business.
Investigation of 'unfair' market practices, however, needs to be handled with great care so as to not interfere with genuine market and competitive activity. If government mishandles this process, it can actually damage small business while claiming to 'protect' small business. ICA would be keen to engage with the Victorian Government on its proposed policy settings in this respect.
2.3 Victorian Competition and Efficiency Commission
The creation of the Commission is a positive development for all business, including small business.
2.4 Victorian Owner Driver Act
The Victorian Owner Drivers and Forestry Contractors Act 2005 is a prime example of a government policy damaging a competitive environment while at the same time claiming to protect small business against 'unfair' practices. Most owner-drivers would probably be independent contractors---that is, they do not employ anyone.
The Act has two major flaws that remove contract integrity, thereby damaging small business. The Act enables the regulator to:
- Declare a price under a contract to be 'unfair' and to reset a price retrospectively.
- Apply this price setting mechanism to 'classes' of contracts.
These contract interference mechanisms remove integrity of contract and will damage small businesses in the owner-driver sector because they prevent owner-drivers having control of their contracts. The provisions are anti-competitive and destructive of a free economy and business activity. They will favour larger businesses in the transport sector, disadvantage small businesses and encourage monopolistic tendencies. ICA would be happy to detail how this will occur.
ICA believes that the Act should be referred to the Victorian Competition and Efficiency Commission to investigate those aspects of the Act that are anti-competitive and anti-business. ICA would make submissions if a review were undertaken.
Other aspects of the Act are positive and include:
- The collection and distribution of financial information covering vehicle leasing and operating costs and other information on the cost of running a business as an owner-driver. These calculations should not, however, be used by government instrumentalities to dictate prices in the industry.
- The requirement that insurance and other 'services' provided by an engager of an owner-driver should be verifiable services and entered only as a matter of choice by the owner-driver.
What small business people need more than anything else is accurate information, delivered in succinct and appropriate ways. Small business people do not need government pretending that it can make commercial decisions for them under the guise of 'protection.'
The Owner Driver Act is a perfect example of a government policy which attempts to create a 'fair' business environment but which nonetheless destroys 'competitive' business environments.
2.5 Overview of the small business situation
Self-employed, independent contractors, indeed all small business people, are time-poor. They have to perform every business function from marketing and selling to accounting and regulation compliance. It is the breadth of knowledge and skills required that makes small business people unique. They must be specialists in everything. Because of this, government policy should seek to ensure that policy keeps all commercial service possibilities open for small business. The areas of payroll tax and workers' compensation in Victoria in relation to labour hire provide a good example of how policy can be inconsistent.
2. 6 Payroll tax and workers' compensation: Labour hire provisions
Labour hire is a legitimate way in which businesses can engage staff. For small business, labour hire can be particularly helpful because labour hire can be cost-effective in
- providing recruitment services;
- assisting with OHS issues; and
- managing payroll, PAYG, superannuation, workers' compensation and other administrative tasks.
Victorian Government policy affects the capacity of small business to make use of the labour hire option in both positive and negative ways.
Payroll Tax: On 1 January 2005, the Victorian Government removed the 'end user' principle for threshold calculations. Until 1 January, payroll tax was not payable on labour hire if the end user was liable. In other words, small businesses using labour hire did not have payroll tax factored into the labour hire charge. By abolishing the 'end user' principle, the government has artificially increased the cost of labour hire for small businesses by imposing payroll tax on them. This breaches the intent of payroll tax policy---that is, to free small business from payroll tax. This effectively makes labour hire comparatively too expensive for small business, restricts competition and small business effectiveness, and puts small business at a disadvantage to large business.
Workers' compensation recovery: 'Recovery' is a process where, when a workers' compensation claim is made through labour hire, the workers' compensation authority then seeks to 'recover' the cost of the claim against the client's public liability insurance. This makes a mockery of workers' compensation insurance and disadvantages all business in Victoria, including small business.
Workers' compensation premiums: The proposal to align labour hire premium rates to the industry rate of the labour hire clients (due to take effect on 1 January 2006) is a positive. This will enhance the integrity of the workers' compensation scheme for all businesses, including small businesses that use labour hire.
ICA believes that, in reviewing its small business policies, the government should look at all its administrative systems and policies to see if and where policy restricts the commercial options available to small business.
Question 1. What do you consider to be the key trends and challenges that will influence Victoria's small businesses in the coming five to ten years?
Demographic trends, for example, the ageing of the population, are likely to increase the number of people becoming self-employed independent contractors. Being self-employed is often a lifestyle decision. People want to work when it suits them and being self-employed is one possible way to achieve this. As the post-War baby boomers retire from full-time employment, self-employment (particularly home-based self-employment) is likely to become increasingly popular. This is likely to place increasing pressure on payroll tax, workers' compensation, work safety and other systems where government will become increasingly less reliant on big business to undertake administration and management.
Question 2. What sort of support, if any, should the Victorian Government provide to small business to assist with these trends and challenges?
Government will need to learn to relate its systems to situations where individuals are self-administrating.
Question 4. What are the main compliance burdens impacting on your business?
For small business, workers' compensation administration is by far the most complex and frustrating of all compliance burdens. Where claims are made, particularly where the claim may appear 'dubious', small business feels the 'unfairness' of the system most directly because the cost and the time wasted directly affect the small business person's income.
Question 6. How can the Victorian Government, through its regulatory regime, enable small business to grow and thrive?
By:
1. Focusing on ensuring competitive business environments as a principal priority.
2. Constantly reviewing its regulatory environments from the perspective of government being a 'service' provider and business being the 'client'.
Question 7. In your view, how can the Small Business Commissioner further enhance a fair business environment for small business?
As previously stated, ICA is suspicious of the policy idea of 'fair' business environments. This question suggests that the Small Business Commissioner should make progress toward 'fairness.' ICA believes that the policy position itself should be questioned and reviewed.
Question 8. What unfair advantages and practices do larger businesses exercise over small businesses? How can governments, State or Commonwealth, address these?
If 'unfairness' is to be a consideration, government should, in the first instance, look to itself. Most 'unfairness' is created by government. Being both policy-setter and service-deliverer in many instances provides a great temptation to sanctify breaching the principles of contract when government deals with business. Government is always the largest of large business!
What government should do is focus on the protection of competition. Further, it should apply full competition rules to itself.
Question 9. What is necessary to promote entrepreneurship and a high growth culture? What role can government plan in facilitating this?
Being a self-employed, independent contractor, small business person means being entrepreneurial at all times. Letting people 'do their thing' in a truly open, free, competitive business environment is the best thing that government can do to encourage entrepreneurship in a general sense.
Question 17. Do you think Victorian Government information and advice could be made simpler and more useful and accessible? If so how?
Government information for small business should at all times be:
- to the point; and
- in simple language.
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