The cleaning industry will be subjected to ongoing scrutiny, including more audits, by the Fair Work Ombudsman (FWO). That’s according to the recently released ‘Report on the preliminary outcomes of the Fair Work Ombudsman Sham Contracting Operational Intervention’.
One of the Report’s recommendations is businesses that engage contractors, particular for lengthy periods of time, should periodically review the nature of the relationship to assess whether the arrangements have become more like employment.
The following are extracts from the 25-page document, which also covers the hair and beauty and call centre industries.
Workers in the cleaning services industry rarely require technical training or formal qualifications to undertake work. There are some exceptions in niche aspects of the industry, such as exterior window cleaning that uses specialist access techniques, but on the whole the majority of general cleaning duties can be performed without the need for specialist equipment.
This makes cleaning services readily accessible by non-skilled labour and the audit activity identified a higher proportion of more vulnerable workers in this industry. The low barriers of entry into the cleaning industry create an environment with high levels of competition often with little obvious differentiation between providers. This environment is likely to favour the lowest cost provider. With the ability to access a large and potentially vulnerable labour pool; a need to keep costs low to remain competitive; and labour typically representing the most significant cost to the enterprise, the environment is one that presents a higher risk of non-compliance with workplace laws and obligations.
The cleaning industry also showed a prevalence of multi-tier contracting. This is the situation where enterprise A subcontracts enterprise B to undertake the cleaning work. In some instances enterprise B will then subcontract enterprise C to do the same, and so on. Around 15 enterprises audited were second or third tier contractors of which the majority were in the cleaning industry. With each tier presumably taking a proportion of the contract value, the amount of money flowing to the actual workers reduces with each subcontracting arrangement – exacerbating the potential for workers to receive less than the statutory minimum payable to employees.
Additionally, the audit found a practice in the cleaning industry where subcontracted arrangements were with other incorporated enterprises, and these were often companies with sole directors who perform the actual work. On the face of it, these arrangements are ostensibly between two companies in a commercial agreement yet an assessment of at least some of these working relationships showed an employment arrangement.
Where the misclassification of workers occurred, company directors often advised they had structured their companies based on other enterprises they had previously worked for. In several instances, these were former cleaners who decided to start their own cleaning businesses and simply replicated business models they were familiar with.
Misclassification – why did parties get it wrong?
The majority of the enterprises identified that had misclassified workers as independent contractors were in the cleaning industry and this also represented the largest group audited. Many of these enterprises were small businesses.
These small businesses typically lack any dedicated human resource management function, and, when structuring their operations, principals in the enterprise were often found to have replicated business models they had seen or experienced elsewhere. This included cleaners who had previously contracted to a cleaning company and having decided to start their own business, simply replicated the engagement practices they were familiar with. Some principals of these enterprises described the arrangements as the ‘industry norm’. The audit activity highlighted the need to better focus educative materials to reach small and medium enterprises on the true nature of employment and the risks of misclassifying workers.
In several instances, principals of the enterprises had received advice from accountants on how to structure their operations. Since workplace law is quite different to taxation law and financial accounting practices, it appears the legality or appropriateness of the arrangements under relevant workplace laws was often not considered. The audit highlighted the important role accountancy firms play in providing advice to businesses and the role they can play in highlighting business risk in certain contracting relationships.
In other instances, the relationship between the independent and principal contractor commenced as a genuine contracting relationship but the relationship changed through the passage of time. The ‘morphing’ of a relationship from being one of genuine independent contracting to an employment relationship can occur when a contractor becomes more integrated into an enterprise and ceases working for others.
Although it can be difficult to determine at precisely what point in time a contractor becomes more like an employee, the audit activity highlighted the need for businesses to exercise diligence over the management of contracting relationships, particularly when those relationships continue for a period of time. Allowing a contracting relationship to develop into one of employment adds significant elements of risk to a business and denies the worker the entitlements and protections they ought to enjoy.
Recommendations include periodical reviews
The audit activities revealed the misclassification of employees as independent contractors in each of the targeted industries. The audit activity has demonstrated that greater awareness among businesses of the circumstances that can lead an independent contractor being assessed as an employee would be beneficial.
Businesses that engage contractors, particular for lengthy periods of time, should periodically review the nature of the relationship to assess whether the arrangements have become more like employment. Apart from denying the worker the benefits attached to employment, the business is potentially exposed to risk arising from workplace law, taxation law, superannuation law and worker’s compensation law if the worker should be considered an employee.
Given a heightened risk of these arrangements existing in the cleaning services industry, it should remain the focus of ongoing regulatory compliance activities including, if necessary, by further audit campaigns.