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Submission to NSW Review of Workers' Compensation
Definition of a Worker

28 February 2005

Independent Contractors of Australia is pleased to have the opportunity to respond to the NSW discussion paper: Definition of a Worker. The discussion paper is refreshing because it confronts an issue that has long created confusion and commercial uncertainty---namely, who is within the NSW workers' compensation scheme and who is out?

Background perspective

1 Structural confusion

The essential difficulty highlighted by the discussion paper (which is common to Australian workers' compensation schemes) is as follows:
  • Workers' compensation is an insurance scheme that does not follow standard insurance structures. Most usually, a person covered by an insurance policy initiates coverage and directly pays the premium.
  • Workers' compensation, instead, requires other entities (businesses) to pay the premiums for people who are covered (workers). The business is not insured but the worker is. The business pays.
  • Workers' compensation schemes then take the view that persons who in their own right are businesses (that is, independent contractors) are to be refused workers' compensation cover and prevented from paying premiums for themselves.
  • However, when independent contractors perform work for other businesses (as they must do), the workers' compensation scheme then tries to declare a wide range of work situations where the party doing the engaging must pay premiums for the independent contractor.
In effect, workers' compensation in one breath states that a whole range of persons are not to be within the scheme yet a whole range of those same persons are to be within the scheme. This is the cause of the confusion and uncertainty.

2. Deeming creates confusion

'Deeming' is an unhelpful term and a less-than-useful approach to resolving this structural problem and its concomitant confusion. This is why:

Independent contractors are prevented in their own right from joining the workers' compensation scheme. The key identifying mark of an independent contractor is that he or she is a person who works under a commercial contract---the contract forservices. Under commercial law and regulation, including the Trade Practices Act and various State Fair Trading Acts, status and regulatory coverage is clear. A person is identified as a business, no matter what their business structure or size, because they operate through a commercial contract. It is the identification of the commercial contract that leads to commercial regulation to be applied. Commercial law does not seek to deem persons working under a commercial contract not to be in their regulatory reach. Likewise, commercial law does not seek to deem persons who are not involved in a commercial contract to be in their regulatory reach.

Workers' compensation deeming, however, breaks with this commercial standard. Deeming seeks to declare persons who are clearly businesses for commercial regulation and transaction purposes to be 'employees' for workers' compensation purposes. This creates large-scale confusion. A business operates under a commercial contract and has business relationships with persons, but is expected in some instances under workers' compensation to treat some of those persons as not being businesses, but as 'employees' for workers' compensation purposes. And, in applying this contortion to commercial norms, the deeming provisions are technical, legalistic and inconsistent. Clarity is near-impossible.

Further, ICA's observation of deeming is that, as deeming provisions expand, coverage under the NSW workers' compensation scheme is developing into a universal accident-and-illness insurance scheme by osmosis. Yet it would seem that this is not the policy intent. In addition, decisions on who or what to include in deeming provisions are too often an outcome of the management of political pressures rather than an assessment of proper system design that is consistent with policy.

The conclusion is that deeming creates confusion. Workers' compensation deeming not only makes it near-impossible to understand the law for those who try to comply, but creates opportunity for those whose intent is to break the law.

A suggestion

3. Limitations of this submission

The review appears to be narrowly focused on proposals to expand and redesign some aspects of deeming whilst not addressing the core problem of coverage design.

Because ICA finds the deeming approach to be counter-productive in terms of clarity, ICA's recommendations (below) do not specifically address the brief of the review. Nonetheless, ICA's perspective may be helpful for a longer term and more substantial review of how to design the system to achieve desired workers' compensation coverage.

4. Administrative triggers: Some modeling

Rather than taking the legalistic approach of declaring persons outside the scheme and then 'deeming' some of those persons back into the scheme, a more lasting solution might be to look to administrative triggers that businesses and individuals can easily understand.

A model for this is available by looking at income tax withholding obligations under Pay As You Go (PAYG) compared with Pay As You Earn (the old PAYE).

Under the now dismantled PAYE system, the power of the Australian Tax Office to require income tax withholding was exclusively tied to the finding of common-law employment. Under PAYE, the ATO suffered from the confusion about coverage that is now being experienced by the NSW workers' compensation system, and for several decades the ATO experimented with the (eventually hopeless) practice of deeming people to be employees. This never worked. Consequently PAYE was replaced by PAYG.

PAYG has three administrative and legislative legs that cause withholding to be enforceable---and enforceable on a wide basis:

(a) Withholding for employees and directors, etc.
(b) Withholding for independent contractors engaged directly via an ABN.
(c) Withholding for independent contractors under an agency.

The engagement of independent contractors' directly (as per (b) above) makes use of the Australian Business Number as the administrative withholding trigger.

This system has proven highly successful in clarifying withholding obligations. It appears that strong voluntary compliance is reported to have resulted. [Note: nothing of this sort will stop intentional fraud.]

There is an important difference, however, between income tax withholding and the NSW workers' compensation arrangements:
  • Income tax withholding has the intent of capturing everyone.
  • NSW workers' compensation has the intent of excluding some persons.
The Australian Business Number, however, was specifically designed to assist other regimes in regulatory administration where desired. The A New Tax System (Australian Business Number) Act 1999 states:
3(3) [Other objects]
The objects of this Act also include reducing the number of government registration and reporting requirements by making the system available to State, Territory and local government regulatory bodies.
The ABN system may assist as a part of an administrative trigger.

A full administrative trigger, however, cannot be modeled unless NSW decides exactly which self-employed, independent contractors it wishes to exclude from coverage. A fundamental question must be addressed---namely, is NSW happy for some persons in the State not to have access to compulsory work accident and illness insurance coverage?

Tasmania has addressed this question by declaring that all persons at work must be covered by accident and illness insurance of some sort. In Tasmania, an independent contractor providing commercial services to another business is within the workers' compensation scheme unless the independent contractor has alternative, private accident and illness insurance.

If NSW were interested in using administrative triggers, a possible model would be as follows:
1. All common-law employees would straightforwardly be within the workers' compensation scheme.
2. An independent contractor who provided evidence of current private accident and illness insurance would be excluded from workers' compensation coverage.
3. An independent contractor who invoiced without either an ABN or evidence of a current private accident and illness insurance policy would be included in workers' compensation coverage and the engaging business would have obligations to pay premiums.

Regulations could stipulate the minimum amounts of private accident and illness insurance required under (2).

Such a model should:
  • Make quite clear to all employees, independent contractors and engaging businesses whether coverage was required or not and;
  • Thus significantly improve voluntary compliance.
  • Ensure that all workers were actively informed about work-related accident and illness insurance.
  • Assist to ensure that persons on whom workers compensation premiums were not being paid (due to not being within the scheme) could not make spurious claims.
  • Make it easier for the NSW workers' compensation authority to identify fraudulent non-compliance.

5. Conclusion

ICA does not believe that further deeming provisions will provide lasting solutions to the NSW workers' compensation coverage problem. Additional deeming may resolve some issues, but the core structure will remain flawed, thereby continuing the confusion, the uncertainty, the intentional and non-intentional non-compliance, and the auditing and enforcement complexity.

ICA does believe that simple, administrative triggers are more likely to produce lasting solutions because businesses will have high-level clarity that matches the processes of normal commercial transactions. The models described above may not suit NSW. But they are offered by way of demonstration to assist consideration.

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