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The Real Rorters

prepared by Rita Malia, CFMEU

The unspoken sore of the WorkCover Scheme is non-compliance by employers. None more so that in the construction industry, as this CFMEU paper details.

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It is a recognized fact that there is a significant problem in workers compensation premium compliance in the building and construction industry. We believe that there is 30% non-compliance by contractors in the building industry. We have raised this issue with the State Government. Nothing has been done. The problem has only become worse. We now have a crisis. This has resulted in a premium collection system that is not collecting the correct level of premium from across the industry. Legitimate contractors complying with the law are being placed at a competitive disadvantage by these unscrupulous operations.

This paper explores the many ways that Companies rort the Workers Compensation system for their own financial gain and to the detriment of the industry and the managed fund as a whole.

Companies fail to comply with their workers compensation obligations in the following ways:

(a) failure to have a workers compensation policy;

(b) underestimating the number of workers they employ including deemed workers;

(c) underestimating the quantum of wages; they pay each year

(d) nominating the incorrect tariff category; ie. pretending that they are operating in low risk industries

(e) engaging in "phoenix" behaviour;

(f) folding companies to avoid high experience rated premiums;

This combines to deprive the managed fund millions of dollars of benefits. WorkCover and the current Workers Compensation Legislation has proven to be incapable of dealing with this problem. A more innovative approach is required including:

(a) more effective premium collection methods and regulation;

(b) meaningful sanctions which are enforced;

(c) mandatory obligations on principal contractors to ensure compliance by their sub-contract companies

It is only by adopting more radical and direct approaches to the problem will these issues be solved and a level playing field established in the industry.

THE NATURE OF THE BUILDING INDUSTRY

The building industry in New South Wales works on a sub-contracting system. Principal Contractors contract to specialist sub-contractors in all aspects of building work. This system is adopted on construction jobs of all size. The industry is characterized by practices of pyramid contracting (layers of subcontractors) with the bulk of workers being employees of these subcontractors. Other features include phoenix companies i.e companies that constantly liquidate after major projects or contracts and are re-established often by the same people under different company names.

In some sectors individuals are required to be "sham" sub-contractors, where individuals, despite being incorporated or holding ABN numbers, are in fact the employees of those who engage them. Virtually every roof tiler, vinyl layer and ceramic wall and floor tiler has been forced into bogus sub-contract arrangements.

The industry is divided into three main sectors commercial, civil and residential construction. Within these sectors work is highly segregated on a trade basis, for example, there are formwork, scaffolding, bricklaying, concrete, demolition, electrical and plant and machinery companies, with the majority of employees engaged by small to medium sized enterprises. Many workers are forced to work for labour hire agencies on a casual basis.

The workforce is highly mobile, both in terms of sites that are physically worked on and between employers.

THE WORKERS COMPENSATION PREMIUM SYSTEM IN NEW SOUTH WALES

The payment of workers compensation premiums in New South Wales is fundamentally based on an "honour" system. Employers are required to obtain insurance with one of the thirteen licensed insurers. At the beginning of the policy period they must estimate at the beginning of the policy period the number of "workers" (including deemed workers) and the value of their payroll for that policy year.

Employers must also nominate a "tariff" category based on the predominant activity of their business. Each tariff category (based on activities) is assigned a premium rate. This rate multiplied by the value of their payroll roughly determines the amount of premium to be paid. Employers of a particular size are also experience rated where the final premium paid is effected by their individual claims performance as well as other factors.

An employer when taking out a policy of insurance may be required to obtain and show a Workers Compensation Certificate of Currency to an authorised person. The Certificate evidences the information that an employer has given to their insurance company. It is current for a period of not more than four months.

The certificate of currency states the nature of the business (the tariff category), the number of workers of the employer and the amount of the wages estimated to be payable by the employer during the twelve month period of a policy.

At the end of the policy year and before renewing their policy an employer is required to reconcile their estimates with actual numbers of employees and wages and if a shortfall has occurred to correct it at that point and pay whatever additional premiums or receive a rebate for any over-declaration and payment.

THE LEVEL AND NATURE OF WORKER COMPENSATION NON-COMPLIANCE

The level of non-compliance by employers in the building industry is estimated by industry participants to be 30%. In a report commissioned by the Construction Forestry Mining and Energy Union in 1998 it was submitted that the level of non-compliance was conservatively estimated at thirty to forty percent. That is thirty to forty percent of companies in the industry not complying with their premium obligations.

Employers rort the system in a variety of ways.

(a) Failure to have a policy.

A number of employers have been detected not having a policy.

Two examples of this are:

Example 1.A bricklaying company was detected in March 2001 by a CFMEU official employing direct labour, including an apprentice and workers having their own ABN (who as far as we know were not incorporated). The Contractor did not have a workers compensation policy, nor did the "sub-contractors" to the bricklaying company. This matter has been referred to WorkCover for investigation.

Example 2. In February 2001, the CFMEU discovered eight workers employed by the Sri Venkateswara Temple Association on business visas as stonemasons on the site of a temple construction project in Helensburgh being paid wages grossly below the award minimum. The employer also did not have a workers compensation policy.

(b) Underestimating the number of employees.

Employers underestimate the number of employees that they employ. They also fail to declare the number of "deemed" workers as defined in the Workers Compensation Act. Deemed workers include individuals engaged as contractors who are deemed to be workers for the purpose of workers compensation.

Employers declare a small number of employees and those injured become one of those employees covered by the policy. There is no requirement to declare on policies or premium payments the names of the employees covered by a policy.

Employers in the industry also engage people with their own Australian Business Numbers (ABN) as subcontractors when these individuals are in fact employees and not genuine subcontractors. Prior to the introduction of the Goods and Services Tax these individuals would have been employed on the Prescribed Payments System ("PPS"). Employers are generally not paying workers compensation premium for these contract workers.

The industry also has a large number of people working for cash only. These transactions are difficult to trace. In the building industry up to thirty percent of the wages, such as overtime, is paid as cash wages with no tax deducted. This overtime is not included in wage books and therefore is not included in the calculation of workers compensation premium.

If a worker is being paid cash on Saturday and is injured, his or her name is included on the wage book for that day prior to a workers compensation claim being submitted.

Attached are press clippings in respect of major cash in had scams uncovered by the Australian Taxation Office (ATO) where no workers compensation premium was paid.

(c) Underestimating wages.

Employers in the industry underestimate the amount of wages that they pay their employees over the 12 month period of a policy. The average wage for a building worker in the commercial sector is about $50,000/year. It is not unusual to see Certificates of Currency showing the number of employees and the level of wages at about $30,000 per person. There is considerable underestimation of wages.

Many employers do not accurately declare actual wages and simply pay premiums on under- estimated wages.

Some employers may submit a genuine declaration of wages at the end of the year and pay outstanding premiums. In this circumstance this is an extraordinary loss of liquidity for the WorKCover scheme. If the scheme is lucky the premium comes in at the end of the policy but claims have been paid out during the preceding twelve month period.

Employers also fail to include payments to "deemed workers" as well as people engaged as subcontractors with ABNs that are really employees and not genuine independent contractors. Employers under-declare their payroll to avoid payroll tax, the liability for which is calculated in a similar way. The CFMEU believes that non-compliance with payroll tax is much higher than the levels of workers compensation fraud.

It is also common in the industry to pay some wages in cash, for example, for overtime on Saturdays. Again these payments do not exist in an employer's wage records and are not factored in when determining workers compensation premium. Appendix A contains numerous examples of companies underestimating wages by in some case millions of dollars.

(d) Nominating incorrect tariff category

It is also a common practice for employers to nominate a tariff category which is assigned a lower premium rate. The industry tariff rate for building and construction is 10.52%. This is one of the highest rates and is meant to reflect the share of workers compensation liabilities attributable to the construction industry. Other industry/activity tariffs are much lower, such as plant and equipment hire (4.11%), retail categories (3.57%) and woodwork (7.19%) and machinery importing (4.11 %).

Many employers fraudulently nominate an incorrect tariff category even though they are principally involved in building work to avoid being required to pay the higher building rate.

Example 1

Company nominated tariff category of crane hire rather than construction i.e 3.66% tariff rate rather than 9.66%). The CFMEU made representations to WorkCover to have premium order changed to reflect the actual, and proper risk, association with the Company's predominant activity i.e erection and operation of cranes on building sites. Also after

negotiations with CFMEU the company increased wages estimation from $1,002 625 to $1, 904, 325.00.

Example 2

The Company advised the CFMEU during a routine wage book inspection that its employees were engaged in carpet, vinyl and timber floor laying. However, the Workers Compensation tariff nominated on the company's policy was classification 717, importing noc, warehousing noc of 2.41%. The more appropriate industry tariff should have been classification 603 which includes carpet laying, which attracted an industry tariff rate of 7.36%. The matter was referred to WorkCover.

There is an increasing engagement of workers through labour hire companies. These companies supply labour to a variety of different industries. One labour hire company may supply labour to a variety of different industries, where the cost of workers compensation is different for each industry. Labour hire companies nominate multiple categories according to the activities they undertake. There is evidence of increasing non-compliance in this area, with companies attributing more of their wages to activities which carry a lower tariff rating, for example financial services, rather than the higher rated industries such as construction.

Example 3

Recently a worker in Wollongong was seriously injured on a building site. He was employed by a labour hire company that did not declare any wages under the category for building work, even though the Company had several employees on the site for an extended period of time.

(e) Folding Companies with high experienced rated premiums

Whilst companies pay the industry rate, some poor performing companies i.e companies with many workers compensation claims due to large number of accidents are theoretically required to pay an experience rated premium which reflects their poor performance. Companies confronted with such a premium increase, rather seeking to improve safety standards simply fold that Company.

Another technique of premium avoidance is to establish a second company and transfer all non-injured workers to the new company, thereby circumventing the increased premium on the company's workforce. This practice is widespread.

(f) Phoenix Companies

This is the name given to companies that are regularly liquidated and then are re-opened under another name usually managed by the same individuals with different company office-holders. They have generally put in a fraudulent wage estimate for workers compensation purposes plus also go bust not paying the premiums on even this under-declaration. For an example see Annexure B.

(g) The result of the rorts

The net result of all this rorting is the failure to collect proper premiums equaling tens of millions of dollars. Those legitimate employers who do the right thing end up subsidizing the cheats. In an industry where cost and profit margins are extremely tight the ability to rort the system can mean the difference between securing a contract or not. The incentive to cheat is immense.

Many legitimate contractors who attempt to abide by their legal obligations are being squeezed out, losing work to an ever-growing number of shonky operators in the industry.

Principal contractors (i.e the builders) have no obligation to ensure that the subcontractors that they engage properly comply. They may satisfy themselves that a sub-contractor holds a policy but that is about it. In fact they benefit from the rorting by engaging the cheapest subcontractors, ripping off workers compensation and payroll tax maximizing their own profit margins. If a builder uses a shonky sub-contractor, not paying workers compensation, payroll tax and group tax there is a saving of more then thirty percent. There is in fact a preference and incentive to engage contractors not complying with statutory requirements. In the CFMEU's experience these sub-contractors are also the worst performing when it comes to accident prevention.

4. CRITIQUE OF CURRENT SYSTEM OF REGULATION AND SANCTIONS

(a) Failure of WorkCover as the regulator.

WorkCover is incapable of recognizing and preventing this premium leakage. WorkCover has been reluctant to accept that a problem exists despite the endeavours of Labor Council and the CFMEU to highlight the issue with example after example over the last five years.

When examples are brought to WorkCover's attention the response has been to arrange a paper audit of the company's records. This paper approach is flawed as it does not pick up cash payments and payments to sham contractors or deemed workers. There is no WorkCover knowledge of what workers are engaged on what sites. Employers in the industry often have false records or simply do not record these engagements at all. Inspectors should systematically go out on site when a rort is identified and see what is actually happening. WorKCover inspectors due to work pressure seem completely unable to deal with the issue of workers compensation non-compliance. At the moment trade union officials are doing WorkCover's job.

When WorkCover is made aware of particular examples it is slow to react. Investigations into rorts take a long time to finalise and when finalised no action seems to be taken. A company may be issued with an updated premium notice but we are not advised whether the additional premiums is actually collected. Even if they increase their wage estimate they go broke and do not pay the extra premium anyway. WorkCover has recently advised that it now cannot tell the CFMEU what the outcome of their investigations are due to privacy laws. We were only advised of this legal position when we sought to follow up the progress of investigation of complaints. In many of the examples listed in Appendix A, the CFMEU has no knowledge as to the outcome of audits or investigations.

The CFMEU is unaware of any successful prosecutions by WorkCover of any of the companies that we have identified as not complying. By the time WorkCover is in a position to do something many of the companies concerned have closed up operations, often re-opening as new entities with new directors. Companies are regularly wound up with significant debts to WorkCover only to re-open as new legal entities

WorkCover has recently introduced legislative amendments to enable it to prosecute directors, or as described in the Worker Compensation Act, "culpable directors". However a person is not a culpable director where:

"that person establishes that:

a. the corporation failed to obtain or maintain the policy of insurance concerned without the person's knowledge or;

b. the person was not in a position to influence the conduct of the corporation in relation to that failure, or;

c. the person, being in such a position, used all due diligence to prevent the failure by the corporation".

We believe that these exceptions are so broad that most directors will be able to avoid personal responsibility should WorkCover bother to prosecute, especially in the building industry where the people running companies are often not the directors, with these people having their relatives i.e partners, siblings, cousins as the office bearers in a company. This change adds no value to effective enforcement and compliance.

Moreover, there is no effort by WorkCover to track the establishment of new entities by directors of predecessor companies which have been wound up leaving substantial debts owed to the managed fund.

(b) Failure of the Premium collection system.

It is obvious that the method of calculating and collecting premium in the construction industry is fundamentally flawed and wide open to abuse. The system can be easily manipulated.

Insurance companies are unwilling to undertake proper audits of their clients. Employers generally have the same insurance company for all of their insurance needs, so an insurer is not going to risk losing a client. When inadequate policies are identified it is the CFMEU's experience that insurers are reluctant to immediately rectify the situation advising their customer that all estimates can be revised and reconciled at the end of the policy year. Of course by then many companies have ceased to trade!

Insurers solely rely on the information provided by the employer without any independent verification.

(c) Inflexible Guidelines.

WorkCover Guidelines also support the rorting. There is no mandatory requirement for insurers or employers to rectify inaccurate estimation of employees and wages immediately. For example the Guidelines only allow for changes to an estimate of wages if the difference is greater than 33%. A more flexible approach must be taken to ensure immediate compliance when a problem is identified.

(d) No obligation on the principal contractor.

Whilst principal contractors have no legal obligation and indeed a positive financial incentive not to ensure compliance by their subcontractors, the behaviour of subcontractors will not be altered. In fact this lack of legal obligation encourages non-compliance.

5. OPTIONS FOR REFORM

(a) Better system for collection of premium

A more suitable premium collection system is needed in the building and other industries where multiple sub-contracting and sham contracting is widespread. The CFMEU believes that WorkCover should introduce compulsory monthly payment of premiums in these industries, with premium paid against a list of named workers (including deemed workers) which must be updated every month. Employers in the building industry are already required to do this for the purposes of superannuation, redundancy, and extra accident insurance. There is also a requirement for an annual declaration of employees for the purposes of the building industry long service compliance. It would not be onerous for this to be adopted for the purposes of workers compensation premium collection.

Auditing of companies by WorkCover could then involve cross-checks with these other industry funds to assist with proper declaration being made. This supplemented by on-site audits and checks would be helpful.

In addition, if claims are made by injured workers who have not been declared, non-complying companies can be easily and immediately identified, investigated and dealt with.

Compulsory monthly payments of premium will mean that defaulters can be immediately dealt with, giving less opportunity for companies to wind up their businesses before recovery action can be undertaken.

The CFMEU believes this would be best achieved by establishing an industry owned and managed workers compensation system.

(b) Meaningful sanctions

The Government should develop meaningful and enforceable sanctions. For example defaulting employers should be fined on the spot. Where an undeclared worker makes a claim, the employer might have to pay for some or all of that claim and charged a claims excess.

WorkCover should show itself to be serious about the issue and prosecute employers who fail to do the right thing. Successful prosecutions would send a powerful message and will go along way to changing industry behaviour.

There should also be some method in place for company searches to be done and records kept on repeat offenders to avoid the problem posed by phoenix companies. Legislative amendments should be introduced which allows Work Cover to more easily pierce the corporate veil and prosecute individuals associated with companies that repeatedly rort the system.

(c) Mandatory Obligations on Principal Contractors

Principal Contractors must be obliged to ensure the compliance of its subcontractors. Where a subcontractor is found to be non-compliant the principal contractor should also be held to account, this should involve fining principal contractors and sheeting home to them parts or all of the costs of individual claims. Principal contractors should also be fined in the event that a subcontractor winds up leaving debts to WorkCover.

6. OTHER EFFECTED INDUSTRIES

The problem of workers compensation non-compliance is not limited to the building and construction industry. The same problems are experienced in the rural sector in fruit picking and shearing, contract cleaning and other industries characterized by itinerant and casual workforces and in the contract cleaning industry. The introduction of industry specific solutions will be the only way to ensure that all employers pay their fair share.

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  Issue 92 contents

»	Costa To Join Della�s List
»	Compo Campaign Gathers Steam
»	Della�s List: Dissident MPs Targeted
»	Day of Mourning to be Compo Focus
»	Small Steps in Negotiations � But Hard Yards Still to Come
»	Important First Step for E-Mail Privacy
»	Outraged Cleaners Continue AXA Axings Protests
»	Grenadier Picket Ends � But Legacy Lives On
»	Entitlement Dramas in Health and Printing
»	Nurses Still Waiting on Olympics Bonus
»	IRC Delays Hit Eight Month Barrier
»	Claims of Dirty Tricks Conspiracy at Mobil
»	Sydney Water Workers On Strike
»	MUA Rides Anti-pollution Wave
»	Governments Urged On Child Slavery
»	Time To Act on Pay Discrimination
»	Construction Union Supports Folk Festival
»	Activists Notebook

»	The Soapbox
»	The Locker Room
»	Trades Hall
»	Tool Shed

»	Workers Comp: The People Speak
»	Dellas List: Rhiannon-V-McDonald
»	Crosby Responds to Douls
»	English Teacher Ripped Off
»	Protocol of Cabinet Solidarity??
»	Tom Collins Goes Off
»	Vote One: Tony Abbott

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