Integrity, Governance and Public Sector Employment Standards

COMMUNITY AND PUBLIC SECTOR UNION SUBMISSION TO THE INQUIRY INTO THE LABOUR HIRE

INDUSTRY AND INSECURE WORK

December 2015

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Integrity, Governance and Public Sector Employment Standards Community and Public Sector Union submission to the Inquiry into the Labour Hire Industry and Insecure

Work

The Community and Public Sector Union makes this submission to the Inquiry into the Labour Hire Industry

and Insecure Work on behalf of CPSU members employed in the Victorian Public Service and throughout

many areas of the public sector.

Karen Batt

CPSU State and Federal Secretary

11 December 2015

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CONTENTS

Executive Summary 4

Introduction 7

Issues with labour hire/insecure work across the Victorian Public Sector 14

Integrity 14

Transparency 16

Accountability 18

Governance: Potential breaches of legislation 19

Sham Contracting and Misclassification 19

Financial Delegations 22

CPSU Case Studies 23

Conclusion 25

Recommendations 27

References 29

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EXECUTIVE SUMMARY

The Community and Public Sector Union Victoria Branch (CPSU) makes the following submission to the

Victorian Government’s Inquiry into Labour Hire and Insecure Work (the Inquiry) on behalf of CPSU

members employed in the Victorian Public Service and throughout the public sector.

In making this submission CPSU seeks to bring to the attention of the Inquiry the extent, nature and

consequence of labour hire and other forms of insecure work across the Victorian public sector, with regard

to the powers and obligations of the State of Victoria as both a regulator and employer, and make

recommendations to address these problems.

The Victorian Government is the largest employer in the State, employing approximately 36 000 people in

the Victorian Public Service (VPS) and 256 000 people across the public sector (including health care

services, schools, TAFE institutes, police and emergency services organisations, water and land

management, and other bodies).1

In addition to this, each year the Victorian Government spends hundreds of millions of dollars on thousands

of labour hire/contractors across the public sector.2

The Victorian community deserves to have absolute confidence that the expenditure of public monies –

including through public sector employment – is subject to the highest standards of integrity, accountability,

transparency and good governance.

The use of labour hire/contracting arrangements across the Victorian public sector has been subject to

numerous investigations and adverse findings from the Fair Work Ombudsman, the Victorian Auditor-

General’s Office and the Victorian Ombudsman.

These investigations have found that public sector employers have utilised labour hire/contracting

arrangements in order to misrepresent the actual cost and number of people involved in the delivery of public

services, particularly in response to the Baillieu-Napthine Coalition governments’ ‘Sustainable Government

Initiative’ and ‘Labour Sustainability Cap’.

In utilising these practices, public sector employers have exposed the State of Victoria to:

Risks, costs and liabilities

Improper practices relating to management, procurement and financial delegations

Potential breaches of legislation, including the Fair Work Act 2009 (Cth) and the Financial

Management Act 1994 (VIC)

Unnecessary workforce disruption, including consequential increases to workloads; and

1 Victorian Public Sector Commission (2015) The State of the Public Sector in Victoria 2013-14, pp. 4-62 See: Victorian Auditor-General’s Office (2013) Portfolio Departments and Associated Entities: Results of the 2012-13 Audits, November 2013 p. 26 and also McMahon, Stephen (2013) ‘Napthine Government spends $145 million on contract workers’ in the Herald Sun, 1 December 2013

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Unscrupulous recruitment and labour engagement practices characterised by conflicts of interest and

nepotism.

In these cases, labour hire/contracting arrangements were deliberately utilised in order to subvert integrity,

accountability and transparency, and allow public sector employers to circumvent budgetary controls and

oversight.

In the Report on issues in public sector employment, the Victorian Ombudsman found that:

‘Such examples cause significant reputational harm to the organisations at which they occur. Further

harm is caused to the reputation of the wider public sector as an institution that is open and

transparent in how it selects its officers and spends public money.’3

This is of particular concern for CPSU members, who take their duties and obligations as public servants

incredibly seriously, and cannot tolerate the undermining and erosion of public sector employment standards,

and the detrimental impact on the integrity of the public service.

Aside from the responsibility to act as model employer, the Victorian Government has an obligation to be

accountable for its employment practices, and ensure that Victorians have confidence in the dedicated men

and women entrusted with the functioning of government and the delivery public services.

In order to ensure that the capability of the Victorian public sector is rebuilt, employment standards are

protected, and integrity, accountability, transparency and the highest standards of good governance remain

the touchstone of public sector employment, this submission makes the following recommendations:

1. That the Victorian Government strengthen the regulatory framework – including the option of new

legislation – to restrict the use of labour hire/contracting arrangements across the Victorian public

sector and protect public sector employment standards

2. Provide the Victorian Public Sector Commissioner with the ability to receive, respond to, investigate

and enforce compliance regarding issues with labour hire/contracting arrangements

3. Grant “Follow-the-Dollar” powers to the Victorian Auditor-General’s Office to ensure the Victorian

community receives value for money in all labour hire/contracting arrangements

4. Make the power of public sector employers to engage or enter into labour hire/contracting

arrangements subject to the approval of the Victorian Public Sector Commissioner

5. For the Special Minister of State to establish and Chair a tripartite Public Sector Employment

Integrity Committee with public sector employers, public sector unions and the Victorian Public

Sector Commissioner

6. That the Special Minister of State and the Public Sector Employment Integrity Committee establish a

Code of Contractual Ethics; and

7. That the Victorian Government in consultation with public sector unions and the Victorian Public

Sector Commissioner establish a series of binding Government as a Model Employer Principles.

3 Victorian Ombudsman (2013) Report on issues in public sector employment, November 2013 p. 145

INTRODUCTION

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The Community and Public Sector Union (CPSU) is a registered organisation comprised of two divisions –

the Public Sector Union and the State Public Services Federation – and represents approximately 140,000

members nationally. This submission is on behalf of the CPSU SPSF Victorian Branch, which has been

representing union members in the Victorian public sector since 1885.

As the union representing workers across many areas of the Victorian public sector, CPSU is seeking to

bring to the attention of the Inquiry the extent, nature and consequence of labour hire and insecure work in

the Victorian public sector, having regard to the powers and obligations of the State of Victoria as a regulator

and an employer.

The engagement and use of labour hire/contract staff undermines collectively negotiated terms and

conditions of employment, including the payment of wages, superannuation, overtime, penalty rates, and

paid leave, including sick leave, annual leave, parental leave and numerous other conditions of employment.

It also extinguishes the notion of employment security, which is an integral and long-standing principle of

public service.

The use of labour hire/contractors is of particular concern for CPSU members who, as dedicated public

servants, hold grave concerns for the integrity of the public sector when employment standards are eroded

by this insidious practice.

These practices also needlessly expose the State of Victoria to numerous liabilities, including potential

breaches of the workplace laws.

Reporting in February 2015, following an investigation of an allegation of sham contracting made by CPSU

against the former Department of State Development, Business and Innovation (DSDBI), the Fair Work

Ombudsman stated:

‘By disguising employment as independent contract work, employers avoid their obligation to provide

employees with their correct entitlements such as minimum ordinary hour wages, overtime, penalties

and other allowances. Employees may also have been denied access to leave payments,

superannuation and tax exemptions.

‘Contraventions of the sham arrangements provisions of the FW Act [Fair Work Act 2009 (Cth)]

involve knowing or reckless behaviour designed to result in workers being denied employment

benefits and protections. As stated, sham arrangements give the employer an unfair competitive

advantage. Such contraventions are treated seriously and the FWO has instituted proceedings

against several enterprises for engaging in this type of behaviour.

‘Misclassification of an employment relationship can result in a business being found to have

contravened the National Employment Standards [NES], minimum wage orders, a Modern Award or

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an Enterprise Agreement as provided for in the FW Act.’4

In highlighting the proliferation of labour hire/contracting arrangements across the Victorian public sector the

primary concern is the alarming extent to which this practice is rampant, unchecked and uncontrolled.

Indeed, multiple investigations have found that public sector employers have deliberately engaged in these

practices to circumvent government policies – particularly, budgetary controls and employment restrictions.

Reporting on the use of contract and temporary (labour hire) staff in November 2013, the Victorian Auditor-

General’s Office found that:

‘In December 2011, the [Coalition] government announced the Sustainable Government Initiative

aimed at delivering an efficient, responsive and sustainable public service. The initiative required the

reduction of 3,600 employees across the Victorian public sector, including 2,815 full time equivalent

positions from the 11 portfolio departments.

‘Reducing staff numbers increases the risk that portfolio departments may look to increase the use of

contract and temporary staff in order to deliver the services for which they are funded. Such

practices can give the appearance that staff numbers are being cut and savings achieved.’5

Significantly, in its 2015 report the Fair Work Ombudsman found the connection between the Baillieu-

Napthine Coalition governments’ State Budget announcements dating back to 2011 – specifically, the

Sustainable Government Initiative and the Labour Sustainability Cap – and the DSDBI’s labour procurement

practices in 2013: ‘in particular, in seeking to achieve savings required by the various budget

announcements, the DSDBI had commenced changing operating model characterised by non-traditional

forms of labour engagement.’6

The findings of the Fair Work Ombudsman reinforced the findings of the Victorian Auditor-General’s Office

from November 2013:

‘Contract and temporary staff [labour hire] were engaged for extended periods, suggesting that these

resources were being used to fill permanent roles. This has legal and cost implications for portfolio

departments, is not consistent with the government’s policy aims, and understates the size of the

public sector workforce. In a time of budget constraints and downsizing of staffing, controls over the

appointment and management of contract and temporary staff need to be robust.’7

CPSU makes the explicit point that it was fundamentally opposed to the Baillieu-Napthine Coalition

government’s ‘Sustainable Government Initiative’ and ‘Labour Sustainability Cap’ policies. The point made

4 Fair Work Ombudsman (2015) The Fair Work Ombudsman’s Inquiry into the Victorian Department of State Development, Business and Innovation – labour hire and independent contractor arrangements, February 2015 p. 85 Victorian Auditor-General’s Office, 2013 p. 206 Fair Work Ombudsman, 2015 p. 117 Victorian Auditor-General’s Office, 2013 p. 21

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above is to emphasise the rampant, unchecked and uncontrolled nature of these labour engagement

practices, and to highlight how these practices have deliberately been used to obscure and misrepresent the

total number and cost of people engaged in the delivery of public services.

These findings form a pattern, and are consistent with the findings of the Independent Inquiry into Insecure

Work in Australia, chaired by former Deputy Prime Minister of Australia, The Honourable Brain Howe AO:

‘Governments have embraced the same strategies as the private sector to circumvent industrial

relations legislation and cause disadvantage to workers.

‘It is important to note also that the impact of this strategy is broader than in the private sector as it

affects matters concerning transparency. Part of the intent appears to disguise the total number of

people engaged in delivering services and other work and to obscure information to the community.

In this way, public sector employers can deal with financial pressures on staffing levels by not

recruiting new ongoing employees but by engaging contractor and labour hire employees.’8

To allow this practice to continue is antithetic to transparency, accountability and good governance.

It must also be emphasised that these practices are not benevolent, and have far-reaching impacts on the

lives and families of both labour hire/contract staff and also those affected by their engagement within the

workplace.

As the Independent Inquiry into Insecure Work in Australia found:

‘Associated with that insecurity are the same disadvantages encountered by other groups of

insecure workers – lack of opportunity for advancement, training and payment or promotion

consistent with classification practices ostensibly part of a merit based career system, insecure

income, lack of access to credit and eligibility for loan finance, and insufficient retirement income.

‘The stories we heard from workers in the public education sector truly supported the AEU’s

statement that there “is a human story of unsustainable workloads and stress, of financial hardship

and unsought career change, of resounding frustration and of deep distrust of management by the

workforce.”’9

Equally, a recent report by the Australian think tank, Per Capita, found that the unchecked increase in

precarious employment arrangements characterised by the transfer of risk from employers to employees

presents a threat to Australian living standards.10

Particular to the public sector context, these labour engagement practices create both direct insecurity –

8 Howe, Brian (2012) ‘Lives on Hold: Unlocking the potential of Australia’s Workforce’, The Report of the Inquiry into Insecure Work in Australia p. 539 Ibid., p. 6110 Per Capita (2015) Paradise Lost? The race to maintain Australian living standards p. 11

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reflecting the precarious nature of the employment arrangement/relationship for the labour hire/contracted

worker – and also a sense of vicarious insecurity within the immediate workforce; a sense that if this practice

can be allowed in one instance, the security of all employees is diminished.

This sense of vicarious insecurity is heightened when labour hire/contract staff are engaged to perform “core”

functions or duties, work previously performed by VPS employees, and/or engaged for long periods of time.

Significantly, in its 2013 report into labour hire/contractor arrangements across portfolio departments, VAGO

conducted a review of 35 individuals contracted across eight portfolio departments and found that:

‘The contract staff had been engaged by portfolio departments for periods ranging from one day to

15 years, with:

10, or 29 per cent, engaged for less than a year

15, or 43 per cent, engaged for between one and five years

six, or 17 per cent, engaged for between five and 10 years

four, or 11 per cent, engaged for more than 10 years.’11

Following its investigation, the Victorian Auditor-General’s Office found that: ‘It is unclear whether individuals

employed as contract staff for extended periods, are legally “employees” entitled to accrue employee

benefits.’12

CPSU members suffered through – and experienced first-hand – the ordeal that was the Baillieu-Napthine

Coalition government’s ‘Sustainable Government Initiative’ and ‘Labour Sustainability Cap’. Together, these

policies slashed thousands of jobs from the Victorian public sector.

CPSU members witnessed many of these positions being replaced by labour hire/contractors; people

engaged through precarious employment practices, with no employment security and diminished rights and

entitlements.

The result was a workforce stretched to breaking point with an entrenched sense of insecurity, which in turn

had a detrimental impact on services.

The damage caused by these policies and the consequential precarious employment practices, led to a

commitment from the then Leader of the Opposition, now Premier of Victoria, The Hon Daniel Andrews MP,

in November 2014:

‘As the State’s largest employer, the Victorian Government should set an example.

‘Labor will seek to reduce, and where possible eliminate, the use of outsourcing of publicly funded

employment and workplaces covered by government wages policy; include a secure jobs clause

11 Victorian Auditor-General’s Office, 2013 p. 2412 Ibid., p. 19

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during EBA negotiations, committing agencies to a secure employment recruitment target and

improving casual conversion arrangements.

‘If outsourcing work, Labor will ensure that public sector terms and conditions of work transmit with

employees to the new employer and are maintained, with access to future wage improvements and

including protections from unlawful discrimination and forced redundancy.

‘Labor will also formalise and ensure the enforceability of agreed public sector redundancy

provisions.’13

CPSU welcomed this commitment.

The rampant use of labour hire/contracting arrangements across the Victorian public sector is of particular

concern when considered in light of the recent decision of the High Court of Australia in Fair Work

Ombudsman v Quest South Perth Holdings Pty Ltd in which the High Court considered whether the

protections against ‘Sham contracting arrangements’ in the Fair Work Act 2009 (Cth) prohibit an employer

from misrepresenting the employment relationship to an employee by declaring that the employee performs

work as an independent contractor under a contract for services with a third party.

In the decision, French CJ, Kiefel, Bell, Gageler and Nettle JJ found:

‘the Full Court [of the Federal Court] construed s 357(1) to have a much more confined operation.

The Full court held that, to contravene the provision, a representation by an employer to an

employee must mischaracterise the contract of employment that exists between the employer and

the employee “as a contract for services made between the employee and the employer”. That

construction, the Full Court considered, was compelled by the text of s 357(1), read in light of its

purpose as illuminated by its legislative history.

‘We disagree.’14

The High Court found that the ‘Sham contracting’ protections under the Fair Work Act 2009 (Cth) concern the

character of the employment relationship between the employer and the employee or prospective employee,

rather than whether an employee is told that a contract for services exists between the employee and the

employer, or the employer and a third party.

This decision of the High Court of Australia will have a profound impact on the practice of engaging labour

hire/contractors, and will have significant implications for the use of these arrangements across the Victorian

public sector.

13 Andrews, Daniel (2014) http://www.chooseyouremployer.com.au/The_Labor_Response.pdf14 Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45, 2 December 2015 at 12-13

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Governments have a responsibility to act as a model employer. In addition to this obligation, the Victorian

community deserves and requires the highest standards of integrity, transparency and accountability in

relation to the spending of taxpayer’s money, including through public sector employment.

The Victorian Government simply cannot adhere to these obligations whilst allowing these practices that

misrepresent and obscure the total number of people and costs involved in the delivery of public services,

and needlessly expose the State of Victoria to potential breaches of legislation and other associated costs

and liabilities.

This submission addresses the Terms of Reference by examining:

the extent, nature and consequence of labour hire employment across the Victorian public sector;

and

the extent, nature and consequence of other forms of insecure work across the Victorian public

sector.

Having regard to item (c) of the Victorian Inquiry into Labour Hire and Insecure Work Terms of Reference,

this submission focuses on the obligations and powers of the State of Victoria as an employer and a

regulator.

In doing so, this submission:

Identifies relevant issues and examples of the use of labour hire by the State of Victoria across the

Victorian public sector, with particular reference to relevant investigations by the Victorian Auditor-

General’s Office, the Fair Work Ombudsman and the Victorian Ombudsman

Canvasses issues relating to the extent, nature and consequence of labour hire and insecure work,

particularly its impact on workers, their families and communities, and also the social and economic

impacts for Victoria through relevant research and case studies; and

Makes recommendations that would address these issues and concerns, and ensure that

transparency, accountability and good governance remain the touchstone of public sector

employment.

This submission concludes that:

By its very nature, public sector employment is unique, and the Victorian community must have

absolute trust and confidence in the public sector

Given the position of privilege inherent in public sector employment, public sector employment

practices must be beyond reproach

The prevalence of labour hire/contracting practices across the public sector undermines integrity,

transparency and accountability of the public sector, and needlessly exposes the State of Victoria to

costs, risks and liabilities, including potential breaches of legislation; and12

CPSU welcomed the commitment from the then Leader of the Opposition, now Premier of Victoria, in

relation to rebuilding the capabilities of the public sector and protecting public sector employment.

ISSUES WITH LABOUR HIRE/INSECURE WORK ACROSS THE VICTORIAN PUBLIC SECTOR

‘If you have integrity, nothing else matters. If you don’t have integrity, nothing else matters.’

Alan K. Simpson, United States Senator from Wyoming (R), October 2000

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The Victorian community must have – and indeed, deserves to have – absolute confidence in the public

sector.

Given its unique nature, particularly relating to the exercise of power, the implementation of government

programs and the expenditure of public monies, public sector employment is rightly held to a higher

standard.

It is for this reason that the principles of integrity, accountability and the highest standards of governance are

enshrined in the Public Administration Act 2004.

Equally, the importance of the Victorian Public Sector Commissioner and the significance of the VPS Code of

Conduct are further expressions of the unique nature of public sector employment and consequential

importance of trust and confidence in the public sector.

Public servants take their obligations incredibly seriously, including adherence to the public sector values of

responsiveness, integrity, impartiality, accountability, respect, leadership and human rights.15

It is the contention of this submission that the prevalence of labour hire/contracting arrangements across the

Victorian public sector undermines and subverts the essential principles of integrity, transparency,

accountability and the highest standards of governance, and needlessly exposes the State to risks, costs

and liabilities, including potential breaches of legislation.

These issues are further highlighted and explored below.

Integrity

The constant and relentless pursuit of unimpeachable integrity is the prerequisite in order for the Victorian

community to have trust and confidence in the public sector.

One of the fundamental concerns for CPSU members regarding the prevalence of labour hire/contracting

arrangements throughout the public sector is that by eroding employment standards through these practices,

the overall integrity of the service is diminished.

There have been numerous investigations and reports into public sector employment practices (particularly

labour hire/contracting arrangements) by the Victorian Ombudsman, the Fair Work Ombudsman and the

Victorian Auditor-General’s Office that have made adverse findings and raised concerns relating to integrity.

Perhaps the most serious case was the Investigation into allegations of improper conduct by CenITex

officers report released by the Victorian Ombudsman in October 2012.

In its report the Victorian Ombudsman found:

15 Public Administration Act 2004 (VIC) s. 714

‘Companies and their contractors were awarded significant contracts totalling up to $4 million without

competitive processes. In one instance, a competitive process was ostensibly conducted; but, in

reality it was a sham.

‘In some instances, nepotism and favouritism influenced procurement and recruitment practices.

Often, the companies or contractors were chosen because they were associates or friends of other

contractors already working at CenITex.

‘Some appointments were made on the basis of fabricated or false documentation.

‘Some engagements were initiated or overseen by individuals within CenITex who had a clear

conflict of interest and stood to gain financially from the transactions. Such conflicts were often not

declared, or declared late, inadequately or misleadingly. Even conflicts that were declared were ill-

managed by CenITex. This led to opportunities for improper conduct.’16

The Victorian Ombudsman also uncovered the fact that despite a ‘mandatory’ requirement to attend

induction courses and receive procurement training, ‘Most contractors interviewed during my investigation

said they had not received procurement or recruitment training and were not aware of the Code of Conduct

for Victorian Public Sector employees (the VPS Code of Conduct). It is therefore not surprising that poor

practices developed.’17

Another relevant issue that was evident in the CenITex case was the engagement of contractors in positions

of (senior) management.

In this case, the Victorian Ombudsman found:

‘In August 2008, CenITex engaged two contractors at the following rates:

- Chief Operating Officer: $487,000 for 12 months. His contract was later extended for a

further 24 months at an annual rate of $493,680.

- Chief Information Officer: $396,000 for 12 months.

‘The rates paid to the Chief Operating Officer and Chief Information Officer were well in excess of

the salary level of government agency heads and appear to be excessive.’

And alarmingly:

‘There was also no requirement in their contracts for the contractors to comply with the VPS Code of

Conduct.’18

Although it could be argued that the CenITex case is an extreme example, it perfectly highlights the risks,

costs and liabilities to which these practices expose the State of Victoria.

16 Victorian Ombudsman (2012) Investigation into allegations of improper conduct by CenITex officers, October 2012 p. 317 Ibid, p. 1318 Ibid, pp. 35-36

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It is also important to note that these issues are not confined to the CenITex example.

In its 2013 report, VAGO found that:

‘Only nine of the 35 contract staff (26 per cent) had signed a conflict of interest declaration relating to

their engagement with the portfolio department. It is unclear how, or whether, portfolio departments

had satisfied themselves that no perceived or real conflict of interest existed, or whether there was a

risk that needed to be managed, as a result of engaging the individual.’19

The fundamental concern with these issues is not necessarily just the immediate monetary cost of isolated

examples; the most significant and lasting damage is in the erosion of public trust and confidence in, and the

integrity of, the public sector.

Reporting in 2013 on Issues in public sector employment, and specifically citing instances of nepotism and

conflicts of interest regarding the engagement of labour hire and contractors across the public sector, the

Ombudsman concluded:

‘Such examples cause significant reputational harm to the organisations at which they occur. Further

harm is caused to the reputation of the wider public sector as an institution that is open and

transparent in how it selects its officers and spends public money.’20

Transparency

Whether deliberate or unintentional, one of the most significant consequences of engaging labour through

labour hire/contracting arrangements is the misrepresentation and/or confusion of the cost and number of

people involved in the delivery of public services.

As was highlighted by the Independent Inquiry into Insecure Work in Australia: ‘the impact of this strategy is

broader than in the private sector as it affects matters concerning transparency.’21

Perhaps the most damning evidence in relation to labour hire/contracting arrangements being antithetic to

transparency is the finding by the VAGO in 2013:

‘We were unable to obtain complete and accurate information on the number and cost of contract

staff engaged across the 11 portfolio departments, because of the lack of data and centralised

records, and inconsistencies with the data due to differing definitions used by portfolio departments.

The ability of the state and individual portfolio departments to monitor the numbers of, and spending

on, contract staff is therefore reduced. Three portfolio departments were unable to determine the

19 Victorian Auditor-General’s Office, 2013 p. 2520 Victorian Ombudsman, 2013 p. 1421 Howe, 2012 p. 53

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number and cost of contract staff they engaged in 2012-13.’22

These issues relating to integrity, accountability and transparency are by-products of the ‘contemporary

trends in public service delivery’23 that led to a campaign by successive Auditors-General for a re-write of the

Audit Act 1994 (VIC).

As VAGO identified in 2014:

‘The world has changed, with governments now using contracts and partnerships to deliver many

services funded by taxpayers’ money. And yet, this money and the services it funds remain off the

radar, simply because Victoria’s audit legislation has not been updated. This means Victorian

citizens are prevented from knowing how well their money is being spent.’24

This campaign culminated in the unprecedented step of the then Auditor-General, John Doyle, joining with

three former Auditors-General, Des Pearson, Wayne Cameron and Ches Baragwanath, to publicly raise their

concerns during the November 2014 Victorian State election campaign.25

In arguing the case for the VAGO to be given “Follow-the-Dollar” powers, the current and former Auditors-

General stated:

‘The top reform priority is follow-the-dollar powers, to allow auditing of all activities funded by

Parliament.’

And concluded that:

‘We need contemporary audit legislation, early in the term of the new government, so that Victorians

get an integrity system that works, and Parliament’s (and thus the citizen’s) right to know is fully

strengthened.’26

CPSU joins the VAGO in welcoming the commitment of the Victorian Government to provide legislated

“Follow-the-Dollar” powers.27

However, it is clear that – as has been highlighted above – some public sector employers have deliberately

engaged in these employment practices in order to misrepresent the actual costs and number of people

engaged in the delivery of public services, particularly in order to circumvent government policies and

22 Victorian Auditor-General’s Office, 2013 p. 2123 Doyle, John, Pearson, Des, Cameron, Wayne and Baragwanath, Ches (2014) ‘Victoria’s outdated Audit Act needs urgent attention’ in The Age, 16 November 201424 Victorian Auditor-General’s Office (2014) Annual Report 2013-14: Auditing in the Public Interest, October 2014 p. 625 Tomazin, Farrah (2014) ‘Auditor-General to get beefed-up powers of scrutiny’ in The Age, 7 December 201426 Doyle, J, et al., 201427 Victorian Auditor-General’s Office (2015) Annual Report 2014-15: Auditing in the Public Interest, September 2015 p.6

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budgetary controls.

Given that public sector employers have deliberately engaged in these practices for those reasons, the

Victorian community cannot have trust and confidence in employment practices across public sector while

these arrangements continue.

Accountability

Our entire system of government is predicated on the notion of accountability, which is fundamental for trust

and confidence in the public sector. Indeed, it is embedded in the Public Administration Act 2004, and forms

one of the seven public sector values.28

The prevalence of labour hire/contracting arrangements has – and continues to – undermine accountability

across the public sector.

As identified above, VAGO found that even a task as simple and basic as identifying the number and cost of

labour hire/contract staff engaged across portfolio departments could not be done.

Issues of accountability in relation to labour hire/contracting arrangements have been repeatedly identified by

the Victorian Ombudsman, the Fair Work Ombudsman and the Victorian Auditor-General’s Office.

In its investigation into CenITex, the Victorian Ombudsman found that: ‘contractors were able to engage

other contractors, at significantly high rates, and with little (if any) oversight.’29

In its 2013 report, VAGO found that:

‘Five portfolio departments had no policy specific to their engagement and management of

temporary staff. The five had no basis for providing consistent guidance about the use of temporary

staff, leaving decisions about their engagement and use to individual work teams. This may result in

temporary staff being appointed inappropriately and inconsistent practices.’30

Significantly (and alarmingly), in the Fair Work Ombudsman’s 2015 report following an inquiry into an

allegation of sham contracting within the DSDBI, the FWO found that DSDBI had not responded to or acted

upon the recommendations made by VAGO.31

The Fair Work Ombudsman specified that:

‘All audited portfolio departments had an opportunity to respond to the VAGO report. The Inquiry

disclosed the DSDBI did not provide the VAGO with a response to the report or its

28 Public Administration Act 2004 (VIC) s. 7(d)29 Victorian Ombudsman, 2012 p. 1230 Victorian Auditor-General’s Office, 2013 p. 2831 Fair Work Ombudsman, 2015, p. 2

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recommendations. The Inquiry considered this failure to respond as unusual, given the DSDBI’s

declared strategic intent to decrease reliance upon labour sourced from on-hire (labour hire)

agencies.’32

In its Report on issues in public sector employment, the Victorian Ombudsman stated that:

‘My investigations identified continuing issues with conflict of interest and favouritism in recruitment

and the engagement of contract or casual labour. Again case studies in this report detail instances

where public officers directly or indirectly assisted family members or friends to obtain employment

within their agency. In particular, I substantiated a number of such allegations in relation to schools

and tertiary education institutions.

‘In some instances I concluded that the failure to appropriately manage a conflict of interest was not

simply due to a lack of knowledge, rather it reflected an intention to deceive.’33

These findings are unacceptable, and could not possibly meet community standards and expectations.

Given the unique nature and importance of the public sector, employment practices that give rise to these

issues are simply not good enough.

Governance: Potential breaches of legislation

In addition to the concerns highlighted above regarding labour hire/contracting arrangements eroding and

undermining the integrity, transparency and accountability of the Victorian public sector, these practices also

expose the State of Victoria to unnecessary risks of breaching legislation, particularly the Fair Work Act 2009

(Cth) and the Financial Management Act 1994 (VIC).

Sham Contracting and Misclassification

In November 2013, CPSU referred an allegation of sham contracting against the Department of State

Development, Business and Innovation to the Fair Work Ombudsman.

‘Sham arrangements’ and/or ‘Sham contracting’ are serious issues that are dealt with sections 357, 358 and

359 of the Fair Work Act 2009 (Cth).

According to s 357(1) of the Act:

‘A person (the employer) that employs, or proposes to employ, an individual must not represent to

the individual that the contract of employment under which the individual is, or would be, employed

by the employer is a contract for services under which the individual performs, or would perform,

32 Ibid., p. 1833 Victorian Ombudsman, 2013 p. 4

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work as an independent contractor.’34

This is particularly significant due to the fact that under Subsection (2) of s 357 of the Act, there exists a

reverse onus of proof on the employer:

‘Subsection (1) does not apply if the employer proves that, when the representation was made, the

employer:

(a) did not know; and

(b) was not reckless as to whether;

the contract was a contract of employment rather than a contract for services.’35

Reporting in 2015, the Fair Work Ombudsman found:

‘While the Inquiry found no evidence of “sham contracting”, of the five cases examined, two were

considered likely to be lawful contracting arrangements and three were identified as raising concerns

for the potential misclassification of employees.’36

Despite the fact that, in this instance, the Fair Work Ombudsman found no evidence of sham contracting, it is

alarming that three out of the five cases examined raised the concern of the potential misclassification of

employees.

According to the Fair Work Ombudsman:

‘”Misclassification” occurs when an employer engages a worker as an independent contractor who is

at law an employee but there is no evidence the engagement involved any deliberate intent to

circumvent the existence of an employment relationship.’

…

‘Misclassification of an employment relationship can result in a business being found to have

contravened the National Employment Standards [NES], minimum wage orders, a Modern Award or

an Enterprise Agreement as provided for in the FW Act.

‘Although not deliberate, in some instances where there is a misclassification of an employment

relationship, employers are required to take corrective action and rectify underpayments resulting

from any contravention.

‘Misclassification and sham contracting can also result in contraventions of employer obligations to

provide employee records and pay slips, and may expose employers to an infringement notice.

34 Fair Work Act 2009 (Cth) s. 357 (1)35 Fair Work Act 2009 (Cth) s. 357 (2)36 Fair Work Ombudsman, 2015 pp. 10-11

20

‘Where an employee / employer relationship is identified, the employer will also be required to

ensure they met their legal obligations in relation to taxation and superannuation.’37

The concerns of the FWO were consistent with concerns that had been raised by the VAGO in 2013, when it

concluded that:

‘It is unclear whether individuals employed as contract staff for extended periods, are legally

“employees” entitled to accrue employee benefits.’38

And:

‘Contract and temporary staff were engaged for extended periods, suggesting that these resources

were being used to fill permanent roles. This has legal and cost implications for portfolio

departments, is not consistent with the government’s policy aims, and understates the size of the

public sector workforce.’39

Sham contracting is a serious issue, and aside from significant reputational damage, employers could be

liable for penalties of $10,200 for an individual and $51,000 for a corporation for each contravention.

CPSU notes highly significant recent decision of the High Court of Australia in Fair Work Ombudsman v

Quest South Perth Holdings Pty Ltd, upholding an appeal by the FWO of a decision of the Full Bench of the

Federal Court in relation to Sham arrangements under s 357 of the Fair Work Act 2009 (Cth).

In this decision, French CJ, Kiefel, Bell, Gageler and Nettle JJ found that:

‘To confine the prohibition to a representation that the contract under which the employee performs

or would perform work as an independent contractor is a contract for services with the employer

would result in s 357(1) doing little to achieve its evident purpose within the scheme of Pt 3-1 [of the

Fair Work Act]. That purpose is to protect an individual who is in truth an employee from being

misled by his or her employer about his or her employment status. It is the status of an employee

which attracts the existence of workplace rights.

‘To confine the prohibition in that way would, moreover, be to give the provision a capricious

operation. An employer would be liable to pecuniary penalty if the employer said to an employee

“you are employed by me as an independent contractor”. The same employer would act with

impunity if the employer said to the same employee “you are employed by X as an independent

contractor”. That would be so even if X were entirely fictitious. Either way, the employee would be

misled by the employer to think that the employee was an independent contractor, and the extent of

37 Fair Work Ombudsman, 2015 pp. 8-938 Victorian Auditor-General’s Office, 2013 p. 1939 Ibid., p. 21

21

the practical denial of workplace rights would be the same.’40

French CJ, Kiefel, Bell, Gageler and Nettle JJ, referring to the Explanatory Memorandum for the Independent

Contractors Bill 2006 (Cth), upon which the Full Bench of the Federal Court had placed weight, further found

that:

‘the relevant concept of a “sham arrangement” was explained to encompass “an arrangement

through which an employer seeks to cloak a work relationship to falsely appear as an independent

contracting arrangement in order to avoid responsibility for legal entitlements due to employees”. It

was recorded that courts had held that parties “cannot create something which has every feature of a

rooster, but call it a duck and insist that everybody else recognise it as a duck”. “Employees in

disguised employment relationships”, it was said, “should have appropriate remedies available to

them”.’41

This decision by the High Court of Australia will have profound implications for the application of the ‘Sham

arrangements’ provisions of the Fair Work Act 2009 (Cth).

CPSU also notes that this decision could potentially have altered the findings and consequence of the Fair

Work Ombudsman’s inquiry in 2015, and the Victorian Auditor-General’s Office in 2013.

The State of Victoria will have to review and closely scrutinise all labour hire/contracting arrangements and

consider any future practices in light of this decision.

Financial Delegations

A significant and consistent concern for CPSU members is the fact that labour hire/contractors are often

engaged in positions that exercise management, procurement and financial delegations on behalf of the

State of Victoria.

Beyond presenting serious challenges for the integrity and accountability of the public sector, in 2013 the

VAGO found that the then Department of Health was in breach of the Financial Management Act 1994:

‘Two contract staff engaged by the Department of Health (DH) during the 2012-13 financial year

have been appointed in positions that were allocated financial delegations. Contract staff must have

authorisation from the Minister for Finance before becoming a financial delegate. Neither of the two

contract staff had such authorisation, and the portfolio department was therefore in breach of the

FMA [Financial Management Act]’42

CPSU has been advised by members of further instances of contractors exercising financial delegations and

40 Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45, 2 December 2015 at 16-1741 Ibid. at 2142 Victorian Auditor-General’s Office, 2013 p. 26

22

making procurement decisions within portfolio departments. Given the issues raised regarding governance

and oversight issues, and the example found by the Victorian Auditor-General’s Office, this is a serious

concern.

CPSU Case Studies

A sample of 25 different inquiries received by CPSU regarding labour hire/contractors between 2011 and

2015 highlights a number of consistent concerns:

1. CPSU has received numerous reports of unscrupulous practices, including allegations of sham

contracting and the misclassification of employees

◦ These issues have been well-documented and have in some instances been the subject of

investigation by the Fair Work Ombudsman, Victorian Auditor-General’s Office and/or the

Victorian Ombudsman

◦ The findings of the above-mentioned agencies have often reflected and re-enforced CPSU’s

experience with these matters, as evidenced by two particular examples:

▪ CPSU understands that contractors in the Victoria Police IT department were engaged on

rolling three month fixed-term contracts paid at $990 per day in order to circumvent a

restriction on contractors being paid more than $1000 per day; and

▪ CPSU has been made aware of numerous cases during the Sustainable Government

Initiative of a VPS employee leaving work on a Friday and returning to work on the Monday

morning – to the same desk and duties, exercising the same financial delegation – but as a

contractor

2. CPSU members regularly raise concerns regarding the improper use of labour hire/contractors in the

performance of

◦ Ongoing duties/roles

◦ “Core” functions; and/or

◦ Roles previously performed by VPS employees

3. CPSU members have raised concerns regarding the payment of exorbitant fees for management-

level contracts

◦ This creates the difficult situation of having labour hire/contractors supervising VPS employees,

exercising financial delegations, and involved in procurement decisions on behalf of the State

◦ It also creates a lack of coherence in terms of management arrangements

4. Many CPSU members have also raised concerns regarding the practice of re-engaging staff in

labour hire/contracting arrangements that had previously been subject to an involuntary redundancy

or non-renewal of a fixed-term contract (this was particularly prevalent during the Sustainable

Government Initiative process)

◦ In these instances, the State not only bore the cost of significant pay-outs, but then re-engaged

workers for significant fees in highly insecure arrangements

◦ CPSU was advised that the former DSDBI circulated ‘Request for Tender (RFT)’ and ‘Request

for Quotation (RFQ)’ documents amongst employees and labour hire staff, and had also advised

labour hire staff that they must obtain an ABN and enter into a contract for service delivery 23

directly with the Department. CPSU believed that these practices constituted ‘Sham Contracting

arrangements’ and were in breach of ss. 357, 358 and/or 359 of the Fair Work Act 2009 (Cth)

and referred these allegations to the Fair Work Ombudsman in November 2013

5. The engagement of labour hire/contract staff often causes workplace disruption and confusion at the

local management level, particularly

◦ Lack of clarity in the execution of duties and reporting arrangements

◦ A sense of isolation and exclusion amongst contractors; and

◦ Significant impacts on workplace morale

6. The insecurity of labour hire/contracting arrangements often causes disruption in the workplace,

contributing to higher workloads and increased levels of workplace stress

◦ In one instance, a CPSU member documented an additional 66 hours of work – after hours, on

weekends and public holidays – in a single month

◦ Contractors who work for several years become de facto colleagues, which causes anguish

amongst employees who see their (often hard working) “colleagues” without any employment

security or protection; and

7. Utilising labour hire/contractors creates different ‘classes’ of workers, and entrenches divisions within

the workplace, particularly related to different entitlements including paid leave.

CONCLUSION

The Victorian Government is the largest employer in the State, and employs people – as VAGO has

identified – in the delivery of public services and to generate economic benefit.

The Victorian community has a right to know that the expenditure of public monies is subject to the highest

standards of integrity, transparency, accountability and governance. This includes employment, and in

particular, employment standards.

It is only then that the Victorian community can be assured that the public interest is served.

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The importance of public sector employment standards was perfectly articulated by the Victorian

Ombudsman in 2013:

‘The reputation and performance of the public sector is dependent on the quality of the people it

employs. Employment in the public sector should not be based solely on the skills and experience of

individuals but must also take into account the character and past behaviour of prospective

employees.

‘This necessity is borne of two main considerations. The first of these is the public expectation that

tax payer money is spent in an appropriate fashion. This expectation is no different for wages than it

is for any other form of public spending.

‘The second consideration is the role the public service fulfils in our society. In our political system

the public sector acts as a link between the State and its citizens, implementing the many and varied

government programs and services available throughout the community. In this way public sector

employees are the representatives of the State in its interactions with the community.

‘Many of the people who rely on government services are among the most disadvantaged and

vulnerable in our community. In areas such as health; child protection; public housing; emergency

services; and disability services, the safety and wellbeing of members of the community rely on

public officers fulfilling the State’s duty of care. It is therefore the State’s responsibility to ensure that

its employees are suitable for the role.’43

We know that the engagement of labour hire/contract staff undermines collectively negotiated terms and

conditions of employment, and enables employers to avoid obligations such as the payment of overtime,

penalty rates, paid leave and superannuation.

In response to the Baillieu-Napthine Coalition governments’ ‘Sustainable Government Initiative’ and ‘Labour

Sustainability Cap’ public sector employers deliberately engaged labour hire/contract staff in order to

misrepresent the actual cost and number of people engaged in the delivery of public services, and to

circumvent budgetary controls and oversight.

These practices have been subject to numerous investigations and adverse findings by the Fair Work

Ombudsman, the Victorian Auditor-General’s Office and the Victorian Ombudsman.

These investigations have consistently found:

Inadequate governance and oversight

Unscrupulous and deceitful practices; and

Increased risk of breaching workplace laws and other legislation.

43 Victorian Ombudsman, 2013 p. 725

Labour hire/contracting arrangements have been deliberately used by public sector employers to undermine

and circumvent integrity, accountability, transparency and governance measures, without regard for the

risks, impact and damage caused by these employment practices.

The engagement of labour hire/contractors to undermine secure public sector employment and/or avoid

employer obligations in the delivery of public services is antithetic to integrity, and the Victorian community

cannot have confidence in the employment practices of the State of Victoria while it continues to engage in

these practices.

CPSU welcomed the commitment from the then Leader of the Opposition, now Premier of Victoria, Daniel

Andrews, in relation to government acting as a model employer, protecting public sector employment and

rebuilding the capabilities of the public service.

CPSU also welcomes the commitment to legislating “Follow-the-Dollar” powers for the Victorian Auditor-

General’s Office in order to ensure Victorian’s receive value-for-money in government contracts (including

labour hire/contracting arrangements).

The Victorian Government must put in place measures that protect the standards of public sector

employment, and by extension, the interests of the Victorian community.

CPSU is committed to partnering with the current Victorian Government in rebuilding the capability of the

public sector and ensuring that integrity, transparency, accountability and the highest standards of

governance remain the touchstone of public sector employment.

RECOMMENDATIONS

1. That the Victorian Government strengthen the regulatory framework – including the option of new

legislation – to restrict the use of labour hire/contracting arrangements across the Victorian public

sector and protect public sector employment standards.

2. Establish an independent investigatory authority within the Victorian Public Sector Commission that

can receive, respond to, investigate and enforce compliance regarding issues relating to the use of

labour hire/contractors and/or the misclassification of employees. This authority would have a

mandate to ensure that at all levels of government the question of resourcing is addressed through

the prism of building and developing public sector capacity and capability.

26

2. Grant “Follow-the-Dollar” audit powers for the Victorian Auditor-General’s Office in order to

investigate value for money in the use of government contracts, particularly relating to labour hire

and contracting arrangements.

3. Mandate that the power of public sector employers to engage or enter into labour hire/contracting

arrangements be subject to the approval of the Victorian Public Sector Commissioner. VPSC would

have the responsibility to ensure that this arrangement was:

For the provision of specialised expertise that is not readily available across the Victorian public

sector; and

To perform a one-off project-based task for a defined period.

In granting an approval for labour hire/contracting arrangements, the VPSC would have to be

satisfied that:

These arrangements do not undermine the spirit of either the public sector values or the public

sector employment principles

There is a genuine need to enter into such an arrangement, and all opportunities for ongoing or

secure employment have first been exhausted; and

That the entering into of such arrangements is in the public interest.

4. That the Special Minister of State establish and Chair a tripartite Public Sector Employment Integrity

Committee, comprised of public sector unions, public sector employers and the Victorian Public

Sector Commissioner; and

a.Require all Victorian Public Service and public sector employers to provide – and regularly

update – the Committee with a complete list of all labour hire and contracting arrangements

(including time of each engagement and full costs) and information demonstrating the

employer’s adherence to the Code of Contractual Ethics (see Recommendation 5); and

b.The Victorian Public Sector Commissioner would regularly present to the Committee findings of

the independent investigatory authority (Recommendation 1) and decisions relating to approvals

for the use of labour hire/contractors (Recommendation 3).

5. That the Special Minister of State – in partnership with the Public Sector Employment Integrity

Committee (Recommendation 4) – develop a binding Code of Contractual Ethics, based upon

Victorian Public Sector Values, the Public Sector Employment Principles, the VPS Code of Conduct

and the principle of building the capabilities of the Victorian public sector.

6. That the Victorian Government in consultation with public sector unions and the Victorian Public

Sector Commissioner establish a series of binding Government as a Model Employer Principles that

would enshrine principles relating to employment security, fair and reasonable treatment, integrity

and transparency, and the development of a career public service that would apply to all public

sector employers.

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REFERENCES

Andrews, Daniel (2014) http://www.chooseyouremployer.com.au/The_Labor_Response.pdf

Doyle, John, Pearson, Des, Cameron, Wayne and Baragwanath, Ches (2014) ‘Victoria’s outdated Audit Act

needs urgent attention’ in The Age, 16 November 2014

Fair Work Act 2009 (Cth)

Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45, 2 December 2015

28

Fair Work Ombudsman (2015) ‘The Fair Work Ombudsman’s Inquiry into the Victorian Department of State

Development and Business Innovation – labour hire and independent contractor arrangements’ Fair Work

Ombudsman Inquiry Findings, February 2015

Tomazin, Farrah (2014) ‘Auditor-General to get beefed-up powers of scrutiny’ in The Age, 7 December 2014

Howe, Brian (2012) ‘Lives On Hold: Unlocking the potential of Australia’s Workforce’, The Report of the

Independent Inquiry into Insecure Work in Australia

McMahon, Stephen (2013) ‘Napthine Government spends $145 million on contract workers’ in the Herald

Sun 1 December 2013

Per Capita (2015) Paradise Lost? The race to maintain Australian living standards

Public Administration Act 2004 (VIC)

Victorian Auditor-General’s Office (2013) ‘Portfolio Departments and Associated Entities: Results of the

2012-13 Audits’, Victorian Auditor-General’s Report, November 2013

Victorian Auditor-General’s Office (2014) Annual Report 2013-14: Auditing in the Public Interest, October

2014

Victorian Auditor-General’s Office (2015) Annual Report 2014-15: Auditing in the Public Interest, September

2015

Victorian Public Sector Commission (2015) The State of the Public Sector in Victoria 2013-14

Victorian Ombudsman (2012) ‘Investigation into allegations of improper conduct by CenITex officers’,

October 2012

Victorian Ombudsman (2013) ‘Report on issues in public sector employment’, November 2013

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