Union mates don’t come cheap

Apart from a handful of commentators, the most ambitious social change attempted and to some extent achieved by the Gillard government has not had the media attention it deserves. This is its long-term strategy to restore trade unions to the place they once enjoyed not only in the industrial relations system, but also in the economy and the political structure of Australian society. The ambition involved a complementary tactic of suppressing both the spirit and the opportunity for individual entrepreneurship among contractors and the self-employed.

In a ruthless political ploy that puts in the shade Barack Obama’s abuse of the US Internal Revenue Service to harass his opponents, Labor has used the instruments of the public service, particularly the Australian Taxation Office, to suppress an economic and social trend that jeopardises its interests.

One of the landmark social indicators of the Howard government’s period in office was the long-term decline in trade union membership. The total number of unionists fell from 2.19 million in 1996 to 1.69 million in 2007. That was a fall from 31.1 per cent of the workforce to just 18.9 per cent. Very little of this could be directly attributed to John Howard’s industrial relations policies. Apart from minor blips, the graph went steadily downward across the entire eleven years, without any dramatic plunge in March 2006 when WorkChoices was introduced. Indeed, the trend was evident during the five years of the Keating government, which began with union membership at 40.5 per cent of the workforce in 1990.

Across much the same period, the Australian Bureau of Statistics figures for the self-employed (that is, independent contractors plus small businesses that employ others) show much the same trend, only in reverse: as unionism fell, entrepreneurialism rose. From 1.67 million in 1998, the number of the self-employed grew by 2008 to 2.03 million, easily surpassing the total number of unionists.

Again, this could not have been all the doing of John Howard. His government never tried to cajole people into becoming entrepreneurs, nor tempted them with handouts. There must have been a groundswell of demand in society at large from people who saw opportunities and were willing to take the chance to realise them. In his 2005 book that discussed the phenomenon, The (Strange, Recent but Understandable) Triumph of Liberalism in Australia, political scientist Bob Catley observed that a society headed in this direction was not one in which communal political ideologies could readily take hold: 

It was twenty million Australians that made the boom. They were responding to the liberalisation of the economy that had been under way for twenty years. New incentives created a generation of entrepreneurs now earning at levels unprecedented in Australia, although some are, of course, in jail … Workers, faced with their rewards being more closely related to their product output, abandoned unions for skills. Adam Smith’s economy began to replace that of Alfred Deakin and Lord Keynes. 

Moreover, this liberalisation was accompanied by dramatic consequences for political allegiances. The most remarkable was the fall of a number of once safe, blue-collar Labor electorates to the Howard government, where they remained for the next decade.

One of the main reasons union leaders backed Julia Gillard to replace Kevin Rudd as Prime Minister in 2010 was that, after only eighteen months as Minister for Employment and Workplace Relations, she had delivered on the promise to re-establish the former Australian industrial relations regime. Her Fair Work Australia system abandoned individual agreements and a culture of enterprise in favour of the old, failed model based on large businesses and government-owned enterprises, with preferential unionism the favoured option for employees.

Part of her brief was to reverse the downward spiral of union membership and to counter the attractions of individual entrepreneurialism. Ultimately, her backers saw that if the union movement continued to shrink, the Labor Party would either have to re-invent itself or go out of business.

Last month, a press release from the ABS summarised the outcome of her efforts. The long-term decline in trade union membership had finally been stabilised. “The proportion of employees who were trade union members in their main job has been steady at 18 per cent for the last three years,” announced ABS Director of Labour Force, Cassandra Gligora.

Part of the reason was the expansion of public sector employment. Some 43 per cent of public sector employees, compared to only 13 per cent of private sector employees, were now trade union members. According to an analysis by Julie Novak of the Institute of Public Affairs, since 2008 public sector industries have lifted their employment by 406,000. Today, the industries that are the most intensely unionised are, in order: education and training; public administration and safety; public utilities (electricity, gas, water and waste); health care and social assistance; transport and postage.

However, another part of the reason was that in the private sector the last two years have seen the numbers of the self-employed go into decline. Since 2010, some 120,000 contractors and self-employed businesses have disappeared, falling from 2.1 million to 1.98 million in 2012, or nearly 6 per cent. The biggest fall was in the construction industry where there are now 50,000 fewer independent contractors. This was not an effect of recession in the industry, Judith Sloan argued in The Australian, since the fall was much greater than industry contraction can explain.

It is important to understand that this was as much an intended consequence of Gillard government policy as the increase in public sector employment and unionisation. Indeed, an analysis of Gillard government policy in Quadrant in May 2011 by Ken Phillips, executive director of Independent Contractors Australia, predicted the Labor government would seek this very outcome.

Phillips observed that a campaign by three left-wing unions—the Construction, Forestry, Mining and Energy Union, the Electrical Trades Union and the Australian Manufacturing Workers Union—over what they called “sham contracting”, was actually a cover for an attempt to restore union membership to its former strength. The three unions saw that under common law, contractors and other self-employed people were not employees and so were not subject to labour regulation. Or, as the union-friendly academic Professor Andrew Stewart said at the time: “the freedom to choose to work or be engaged as a contractor must be constrained, if the integrity of the labour law system is to be protected”.

Gillard and her successor in the Workplace Relations portfolio, Bill Shorten, responded by appointing an inquiry into sham contracting by the Australian Building and Construction Commission. Although there was no evidence that contractor status assisted an individual to avoid or lessen taxation, the government added clout to the campaign by drawing on the resources of the Australian Taxation Office.

Phillips argues that the most effective policy instrument for the campaigners turned out to be the ATO and its power to allocate Australian Business Numbers to would-be entrepreneurs. When the ABN system was introduced in 2000, the ATO gave a number to everyone who applied, since the system supported better tax compliance and auditing. However, since 2011, the ATO has been rejecting a high number of applications from individuals for ABNs. In particular, it has stopped automatically allocating ABNs to individuals. If someone is a labourer or has no entrepreneurial track record, he or she finds their application will not now be accepted by the online registration system. The decision-making software tool the ATO uses for ABN registration takes applicants through a series of questions, with different answers triggering further questions. Eventually, the system will declare an applicant to be either a contractor or an employee. If the latter, the ABN application is automatically rejected.

Phillips points out the consequences for self-employment are serious. Without an ABN an individual cannot register a business name; indeed, it is an offence to use a business name that is not registered. Moreover, you cannot apply for public tenders, cannot obtain workers’ compensation coverage and other registrations, and will have difficulty with many other transactions, such as opening a bank account under a trading name.

Phillips says that since this system was introduced a year ago, his organisation has received a steady stream of complaints from people who have been rejected. He argues that the ATO is going beyond its legal powers: 

The ABN legislation is clear that the main objective of the ABN is to enable businesses to interact with the ATO for taxation purposes. The Act’s objectives do not include that an ABN is a determiner of employment or contractor status … And imagine the reaction of people who have their ABN application rejected. They either set up a sham company structure or operate in the cash economy, thus more easily avoiding declaring their incomes. On every measure, the denial of ABNs works against the social and economic responsibilities of the ATO.

The chief beneficiaries of this move are obvious. This de facto method of denying applicants the status of self-employment and killing any aspiration they might have to become entrepreneurs gives them little other choice but to go back to the jurisdiction of the unions and the functionaries of the old labour law system. The longer this situation continues, the more it ties us to the obsolete structures of the past and the more it inhibits Australia’s free and natural growth into the future.