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Education and Employment References Committee
24/09/2015
Australia's temporary work visa programs

HARDY, Dr Tess, Private capacity

CHAIR: Welcome. Information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. Do you have any comments to make on the capacity in which you appear?

Dr Hardy : I am from Melbourne Law School.

CHAIR: I now invite you to make a short opening statement of no more than a few minutes and at the conclusion of your remarks, I will invite members of the committee to put questions to you.

Dr Hardy : I would like to start by thanking the committee for providing me with an opportunity to be heard today. In line with my written submission, my remarks will focus on a particular aspect—that is, the adequacy of the monitoring and enforcement of employment related entitlements in relation to temporary work visa holders, particularly the low-paid workers in the workforce. Obviously, ensuring that employers comply with key employment standards such as basic rates of pay is integral not only to the temporary work visa programs but to the workplace relations framework more generally. A lot of the issues that have been identified in the investigations as well as this inquiry apply beyond temporary migrant workers.

There is growing evidence which suggests that the compliance behaviour of employers is often driven by industry dynamics and structural forces, and my colleague Joo-Cheong Tham touched on some of these issues in his earlier submission. In my view, it is unlikely to be a matter of mere coincidence that the industries which have been the subject of recent and intense public scrutiny—the horticulture industry, the food-processing industry and the convenience store/franchising industry—all display a set of common features. These include intense price pressures, a concentration of market power in lead firms—and depending on the nature of the corporate arrangement those lead firms can include those at the top of the supply chain or the franchisor in the case of a franchise network.

Another common characteristic is a network of smaller firms which directly employ those workers, and that could include either labour hire agencies or franchisees. Of course, then there is the large proportion of vulnerable workers, including temporary migrant workers, which are also a feature of particular industries, including those under scrutiny.

These fragmented or so-called fissured work structures, where multiple entities are responsible for shaping the terms and conditions of employment, are now common features of the Australian labour market and go well beyond the industries which I have just mentioned. Again, I am sure you have already heard that sectors such as cleaning, security and fast food are all those which experience or show outsourcing, subcontracting, labour hire et cetera. Having fissured employment practices is not of itself a bad thing. Many of the so-called fissured forms of employment are legitimate and lawful business strategies. For example, labour hire can be a useful way of filling temporary labour gaps, which is a particular challenge in seasonal industries like horticulture. Similarly, the franchising model, which has ballooned in Australia in the last few decades, has provided avenues for many small-business owners to attach themselves to a leading brand and thrive. However, as this inquiry and various investigations have shown, the use of these particular employment forms may not always lead to good outcomes for workers.

In my view, from a compliance perspective, there are two key problems of fissured employment. The first is there seems to be mounting evidence that fissured working arrangements may be perpetuating some of the issues of employer noncompliance. That can be related to the fact that lead firms are increasingly stepping away from a direct employment relationship and creating a market for those services which is highly competitive, and that puts downward pressure on the profit margins and this can have flow on effects, of course, for wages and conditions of workers.

The second main problem is that fissured employment magnifies some of the challenges of monitoring and enforcement. So detection of these issues and investigation into them can be exceedingly difficult and resource intensive, given that vulnerable workers such as temporary migrant workers are reluctant to speak out for obvious reasons which have already been canvassed in previous submissions and also that employment records have not been kept and have been destroyed or otherwise manipulated. So the forensic investigations that were undertaken by various people, including the regulator, into the 7-Eleven issues demonstrate, I think, the level of resources that are required to uncover and reveal these issues.

It makes it very difficult for regulators, including the Fair Work Ombudsman as well as unions, to piece together the necessary evidence to successfully pursue enforcement litigation and seek the imposition of civil penalties. Even where the contraventions can be identified and supported with sufficient evidence, even where temporary migrant workers are willing to testify—they have not been deported; they remain in the country—the deterrence effects of any litigation may be undermined by the doctrine of limited liability and corporate restructuring. So you have asset shifting taking place—phoenixing behaviour.

If the labour hire agency or franchisee, which is ordinarily the direct employer, is wound up then the enforcement proceedings against that entity are normally stayed—they basically end at that point—and the directors of the relevant company, if they can be tracked down, may be pursued for penalties. But these penalty amounts are much reduced because they are being imposed against natural persons and, in many circumstances, they may not even cover the underpayment amounts. Another limitation of this approach is that imposing penalties at the level of the workplace may not be effective in changing some of the structural or sectorial drivers of the compliance behaviour, which I have just mentioned—the price pressures on these employers, the vulnerability of workers et cetera.

Professor David Weil, a US economist, who currently leads the Wages and Hour Division of the US Department of Labor, which is the federal labour inspectorate responsible for enforcing minimum wages, has argued that because the breakdown of the traditional employment relationship has occurred in the context of specific markets and sectors, regulatory activities and regulatory interventions should be aimed at changing the behaviour of employers at the market level rather than at the level of the individual workplace.

Weil's model of what he calls strategic enforcement has influenced the Fair Work Ombudsman in various respects and the regulator has actively sought to harness the power position and resources of lead firms such as franchisors, parent companies and corporate groups and those companies sitting at the top of the supply chain in a number of different ways—for example, under the auspices of enforceable undertakings, proactive compliance deeds and programs such as the National Franchise Program. These initiatives have required these lead firms to voluntarily commit to take steps to actively prevent employer noncompliance in the relevant franchise, in the relevant supply chain or in the relevant group.

These are all very important initiatives and they are important in the sense that they maximise the resources that are available to the Fair Work Ombudsman. So, in a sense, they shift some of the enforcement burden to the lead firms who are in a position to shoulder some of this responsibility. There are, however, some potential weaknesses with these so-called softer approaches—these voluntary approaches. Previous research suggests that, in order to induce or compel these initiatives, particularly in the longer term, it is necessary to have sufficient positive and negative incentives, as well as an adequate level of transparency and accountability. However, under the existing statutory regime and, in particular, the Fair Work Act, it is not clear that the Fair Work Ombudsman and unions, for that matter, are in a position to effectively pursue sanctions against lead firms in order to change some of these structural drivers of behaviour, as much as this strategy may be justified from a regulatory perspective or as much as the public may demand this outcome. First, the accessorial liability provision—section 550—allows civil remedies to be pursued against not just the direct employer responsible for the relevant contravention but any person said to be involved in the contravention.

One of the issues or challenges we face in this current environment is that the scope of the accessorial liability provisions is yet to be fully tested—we do not know at the moment how far they will extend—although it does appear, on the basis of case law emerging from the consumer sphere, that it is generally necessary to show that the person has been knowingly concerned in the contravention. This is not necessarily a straightforward exercise, particularly when you are trying to attribute knowledge to a corporation and the knowledge may need to be aggregated between different employees in that corporation, for example.

Another limitation arises in relation to the sham contracting provisions. They have proven to be problematic in various respects, and a number of proceedings have fallen down because of pleading problems. They are complex; the defences which are available are overly broad.

The final limitation I am going to touch on today is that, even if these issues in relation to the accessorial liability or sham contracting provisions can be overcome, the civil remedy regime under the Fair Work Act is not enough to deliver the necessary deterrence. It is fairly weak, particularly when you compare the sanctions available under the Fair Work Act to those which are available under legislation such as the Competition and Consumer Act. For example, the maximum penalty for a contravention of a civil remedy provision under the Fair Work Act is $54,000 for a corporation. When you compare that to the maximum penalty, for example, for breaches of certain consumer protection provisions under the Competition and Consumer Act, it is $1.1 million for a corporation, and it is far more significant in respect of trade practices contraventions; it can be up to $10 million. In addition to the maximum penalties which are available, there is no capacity for the Fair Work Ombudsman or unions to seek an incapacitation order either against the corporate employer or the relevant officers and, in particular, there is no licensing regime which applies to employers generally or labour hire agencies more specifically. Unlike ASIC and the ACCC, the Fair Work Ombudsman does not have the power to seek disqualification orders against directors or office holders for managing corporations for a relevant period.

Obviously the senators are familiar with all the problems; but what is the solution? What can and what should be done? I think this raises a number of important questions for policymakers, but also for society more generally. And they are: in what circumstances is it justified to place responsibility for workplace contraventions on an entity other than the direct employer? What level of responsibility is justified? Should it be full responsibility, should it be shared responsibly or should it be residual—so the lead firm, for example, is only liable where the direct employer is unable to meet outstanding liabilities? And the third question is that, assuming some level of responsibility is justified, what legal provisions or techniques can and should be used to achieve these outcomes? I think we need to be careful to ensure that, in devising any regulatory reform, we promote the right type of liability avoidance—we promote the type of avoidance where lead firms seek to do more to prevent non-compliance happening, rather than less. Sometimes some of the extensions of liability, particularly those which pivot on control, can have a counterproductive effect in that lead firms then seek to distance themselves from the employment relationship even further.

On the basis of various reforms which have been implemented both in Australia and elsewhere and which I have outlined in my written submission, I believe that there are a number of different ways in which some of the deficiencies I have just mentioned may be addressed. In my view, these measures can be implemented without wholesale revision of the act and without destabilising key concepts such as what it means to be an employer in this country.

First, following the various test cases which are currently on foot, to the extent that the statutory provisions relating to accessorial liability and sham contracting are ultimately found to be insufficient in their current form, they should then be amended. There is currently an appeal to the High Court, for example, in relation to the sham contracting provisions, and there is also a test case brought by the Fair Work Ombudsman in relation to section 550 and the extent to which it can apply in relation to supply chain firms. As I said before, we do not yet know how far the current section 550 may extend. Where they are found to be insufficient in addressing some of the issues which have been identified in this inquiry, then it may be justifiable and appropriate to provide workers with enhanced rights to recovery against third-party entities including lead firms or key officers, within, of course, certain limits. For example, section 550(2) could be amended by expanding the definition of what it means to be involved in a contravention of another person, rather than simply relying on the way in which the provision was originally drafted, which was developed in the context of very different regulatory circumstances.

Second, in order to deliver the necessary deterrents to support a strategic enforcement model, the civil remedy regime should be strengthened in various ways, including by significantly increasing the maximum penalties available under the Fair Work Act, by introducing the power for the Fair Work Ombudsman to seek disqualification of officers and other key individuals. Another option is to extend the rights of recovery, which currently apply in the TCF industry, to other sectors. As I said before, some of the issues which have been present in certain industries, such as the textile, clothing and footwear industry, are no longer confined to those particular sectors; they are found throughout the labour market. Therefore, it could be appropriate to extend those particular provisions beyond the textile, clothing and footwear industry.

My final and related recommendation is that a licensing regime for labour hire providers should be introduced either in specific sectors or more generally. I point to the example of the Gangmasters Licensing Authority, which is a UK agency responsible for licensing labour hire agencies in the UK horticultural sector. It has been found to address some of the most extreme examples of worker exploitation in the UK. I think that there are some good ideas there about how we might go about implementing a licensing regime in Australia.

One of the important things that should be recognised in relation to a licensing scheme is that it creates a level playing field for growers and legitimate labour hire agencies. It also allows supermarkets and lead firms greater confidence that their supply chain is clean of worker exploitation. From the government point of view, the licensing fees help with revenue building and revenue raising—self-supporting in a sense. They are all my comments for the moment. I look forward to your questions.

CHAIR: Thank you very much, Dr Hardy. I wonder, in relation to the licensing scheme in the UK, have you also looked at the model that operates in the UK for determining visa shortage, for example? In Australia, it is employers who make the claim that there is a shortage of Australian workers, so that category goes on the list or off the list. But in the UK it is an independent body because they make the claim that you cannot have an employer in a particular state making the claim of a worker shortage. It really needs to be a committee that sits across the country that can really analyse whether or not there is a true shortage. Ultimately, they make it a political decision—the minister then also makes the final decision of what category of worker goes onto the shortage list.

Dr Hardy : I have not looked specifically at that regulator. My focus has been on the extent to which you can improve compliance and enforcement in relation to workplace entitlements. No, I have not looked at that.

CHAIR: You named a number of sectors across our economy where—for whatever reason—competition is tight. Have you also looked at the contract cleaning industry, for example, where it is wages that are in competition amongst contractors because, given that wage costs are 75 per cent of the business, that is what contractors will compete around?

Dr Hardy : Of course, yes. That is certainly part of the problem relating to fissured employment—because you are competing on price, the profit margins are reduced and because labour costs are such a huge part of that profit margin it places downward pressure on the payments that are ultimately made to workers.

CHAIR: In your experience, in a franchise model, is it the charge that the lead company is making against the franchisee that makes it difficult to operate a business at a profit? What is the pressure there?

Dr Hardy : It can be a whole range of different circumstances. It certainly can be the way in which the royalty fees are structured, or it can go to how much they have to buy in that initial investment, the interest payments that are charged or the control which is exercised in relation to the franchisee. There is a whole range of different issues at play. Franchising is a difficult concept to make generalisations about because franchising cuts across so many different sectors and the different issues which arise can depend on whether the worker is operating in a highly competitive sector—like fast food, for example, or like convenience stores—or whether it is more akin to franchising taking place in construction, like Jim's Mowing or something like that. They are very different kinds of business models and they raise different issues.

CHAIR: If you look at the 7-Eleven model, Allan Fels said on the Four Corners program that he did not think the current structure would enable franchisees to pay the correct wages. Given that—whether the head company is liable for those wages—it seems to me that with the model itself, because the fees and the royalties that are paid are too high, you would need to put some controls in along that chain.

Dr Hardy : Yes, quite possibly. It is a difficult question, though: who is responsible for that? Is it the ACCC, who looks at the fairness or otherwise of a business model? Is it the Fair Work Ombudsman who has a role to play? To what extent has the business model led to the underpayments? As I said, it goes to those earlier points I was making in relation to section 550. There are very different questions that are raised in relation to section 550 from those that you have just mentioned. Whether the business model means that they were knowingly concerned in the contravention—that will be the critical test, and we just do not know. This particular question is not something that has ever been before the courts.

CHAIR: Is Senator O'Neil on the line?

Senator O'NEILL: Could I put questions on notice? I have many, and I really want to ask some questions of the next witnesses, so I will cede my time.

CHAIR: Thanks very much, Senator O'Neil. Senator Rice?

Senator RICE: Thanks, Dr Hardy. It was a really interesting and informative submission. Could you explain a bit more about the benefits and limitations of joint employer legislation and how that could work in the Australian context?

Dr Hardy : Joint employment is a concept which has come out of the US and it has had a long history in the US context. In very general terms, it is imposed in circumstances where two entities are seen to share or co-determine matters relating to the employment. Generally, it also pivots on the extent to which an entity controls terms and conditions of employment. It has never been accepted in Australia authoritatively; it has been entertained by various tribunals or courts. It would be a radical step to adopt a concept of joint employment under the Fair Work Act, particularly if it were in general terms and not confined to particular circumstances such as unfair dismissal provisions in relation to labour hire workers, for example.

It is something that is interesting, but I am not sure that it is our first step or our starting point. I think that there are simpler and more straightforward ways in which to achieve the relevant policy objective without necessarily adopting a concept like joint employment which, arguably, would destabilise some of our fundamental foundations of the Fair Work Act, like the definition of an employer.

Various people have pointed out at certain times that there are some practical difficulties with the joint employment concept in relation to things like pay. For example: if you decide that two entities are responsible for the employment, who is responsible for leave entitlements? It goes back to some of those questions that I raised earlier in terms of in what circumstances that would apply, and to what extent one or the other entity should be made liable—is it fully or is it shared in some way? There are lots of different questions that are raised that are not really answered in relation to joint employment.

Senator RICE: Could you have some model along those lines to deal with the franchise-franchisee relationship, such as we have been exploring today with 7-Eleven?

Dr Hardy : Certainly, that is something that is being explored in the United States right now. Currently there are proceedings pending against McDonalds, trying to assert that the head franchisor of McDonalds along with the franchisees are joint employers of the fast food workers in that particular franchise network. The issue with joint employment, again, is that it will depend on the facts in those particular cases. Because it still turns on questions of control, it is something that will be determined in the particular circumstances of that case. We do not know yet how that case will play out in the United States. I watch it with interest, but I am not sure we are at a stage where we can say, 'Well, that worked to address particular issues in the US and therefore we should adopt it in Australia.' I think it is a bit premature at this stage.

Senator RICE: Okay. With section 550—the accessory liability provisions—which we do have but which have not been used: what have been the reasons that section 550 has not been used? Why do you think—

Dr Hardy : They have been used. They have been used in various ways. Predominantly they have been used where the direct employer entity has gone under. They have been used to pursue the directors which were said to be involved in the contravention—so those individuals who sit behind the corporate entity.

They have also been used in relation to HR managers who may have constructed 'creative' kind of contracting arrangements to try to evade some of the protections provided under the Fair Work Act. They have also been used in the most novel proceeding so far instituted by the Fair Work Ombudsman, in relation to Coles. In that instance they initiated proceedings against Coles as the principle contractor in respect of contraventions which had taken place in relation to trolley collectors. There were labour hire agencies which had been engaged by Coles. That proceeding never went to final determination; it was ultimately settled by way of an enforceable undertaking, and other measures were put in place.

They were very positive outcomes in some respects, because Coles did ensure that the underpayments were rectified. They have put in place various measures; in fact in the longer term, rather than outsourcing trolley collectors they are bringing them in-house. So there are very fundamental changes to the way in which their business model operates. But because those proceedings, which were novel, did not make it to final determination we do not know whether section 550 can be applied in that way.

Senator RICE: Do you think that this current situation with 7-Eleven would be a good chance to test out the provisions?

Dr Hardy : I think there are many people who seem to be interested in bringing various types of actions, so yes. From what I understand to be the case—and I have only seen the details which are available publicly—it does seem to provide a basis for a section 550 claim. Whether or not it will succeed is another question.

Senator McKENZIE: Thank you very much, Dr Hardy. I want to go to the franchise code. Within that code, we go to the franchisee's business acumen, we ask questions about whether they have all the information they need about this model, we talk about the site, and we talk about how we are going to organise IP between the head honcho and the franchisee, yet nowhere in that document does it talk about the relationship between the franchisee and the type of employment standard that they are going to practise in their company. Do you think we need to amend the franchise code?

Dr Hardy : It is an interesting question, and I think that it goes back to the comments I made earlier, which the chair raised, in respect of: if there are problems with the business model, which regulator should be identifying those issues? It is a difficult question, to be honest. I am not sure. I would have to take that on notice.

Senator McKENZIE: Yes, could you take that on notice please? In your opening remarks, you also spoke about the great difference between the fines, if you like, for breach of compliance between competition and consumer law and the Fair Work Act, so I would really appreciate your thoughts around that area. On the business model, and we heard countless evidence today from workers within 7-Eleven—international students from both India and Pakistan—about being encouraged, coerced and supported to actually breach their visa obligations of 20 hours: 'It's okay. We'll look after you. You'll have plenty of opportunity to work more than 20 hours.' Given that the business model seems to be inherently unstable and unviable, how do we actually address the practice of encouraging vulnerable people to break the law?

Dr Hardy : Are you referring to franchisees breaking the law or—

Senator McKENZIE: No, the international students.

Dr Hardy : So the workers breaking the immigration laws. Sorry, can you just reframe that?

Senator McKENZIE: The evidence we heard today was that franchisees were explicitly encouraging and supporting breaches of the immigration law with the young employees. How do we address that?

Dr Hardy : I would have thought that that should be something that should be dealt with under the immigration legislation, to the extent that—where they have certain obligations in respect of temporary migrant workers and they have breached those, particularly if they are, taking the section 550 language, 'involved' in those contraventions—then maybe that is a way of addressing some of the issues that you have just mentioned.

Senator McKENZIE: I know that you have made some comments around this sort of model which systematises, if you like, the evasion of workplace standards. Could you expand on your views around that?

Dr Hardy : Yes, it is based on Weil's research, to some extent, as well as my own research on franchises in Australia. Because the franchisor often has a certain level of control over the way in which a business is run—in that they set the opening hours, they set the prices at which goods can be sold and they set discount strategies—franchisees are often limited in the extent to which they can control the way in which their business is run. It goes back to the fact that, if you have a business which is inherently unstable because it is a model which does not appear to allow for labour costs when they need to be open 24 hours a day, then the only way in which the franchisees' businesses will survive is if they start to squeeze the costs. The one thing that they can control is labour cost. That is why you seem them cutting corners on labour.

Senator McKENZIE: I am looking forward to your answer on notice, and I will have some more questions on notice. Thank you.

Senator PERIS: Can you elaborate on gangmasters? How could that work here in Australia?

Dr Hardy : Gangmasters is a funny term, but really it is just a term which is used to denote labour hire agencies. The way it works in the UK is labour hire agents are required to be licensed, those licences are registered and they pay a fee for that licensing. In order to be licensed, agents have to meet certain requirements—they have to meet fit and proper person tests, they have to ensure that records are kept and they have to ensure that accommodation is of a certain standard. Many of the things that were identified as problems in the Slaving Away program, for example, are built into the licensing regime. Even some of the things that were mentioned earlier today in terms of how you address brokers or recruiters that are offshore are dealt with as part of the gangmasters licensing regime. So it is something that I think, to some extent, is a good model. It is not without critics or flaws. There have been some changes recently in terms of it being built into a broader discussion around anti-slavery and the modern slavery project, which is a development of the Cameron government. Research suggests that it has made good progress in addressing some of the exploitative practices of labour hire agents.

Senator PERIS: Would there be certain aspects or elements of that that could be built in here in Australia? Does anything like that exist here in Australia?

Dr Hardy : No, there is nothing comparable at this stage. There have been a number of inquiries over the last few decades which have floated the idea of licensing labour hire agencies, but, as yet, we have nothing equivalent. The Gangmasters Licensing Authority provides for licences in respect of horticulture or shellfish industries—very confined sectors. The question is: to what extent should it apply across the labour market more generally or to particular sectors which are known to have problems in relation worker exploitation? I understand that there is a Victorian inquiry going on into the particular question of labour hire and whether or not operators should be licensed, so I expect that there will be further discussion around this point.

Senator PERIS: Thank you, Dr Hardy.

CHAIR: Thank you very much, Dr Hardy. Thank you for your presentation.