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International Labour Organization finally faces reality

By Ken Phillips - posted Friday, 29 September 2006


Something quite dramatic occurred at the International Labour Organisation (ILO) in June this year. This peak body of world-wide labour regulators accepted for the first time that labour regulations should not interfere in commercial transactions.

As sensible and obvious as this might seem it in fact represents a huge conceptual leap for the labour regulation community. It is an historic development of significant proportions. In some respects it heralds a further unravelling of the moral foundations of leftist ideology.

Most importantly however it holds out long-term prospects for more practical business and labour regulations globally that will aid grass roots economic activity and job creation. It has immediate implications in Australia because it secures a moral and legal underpinning to the Federal Government’s new independent contractor law.

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What are the issues, how did this situation unfold at the ILO and globally, and why is this development so important?

The ILO

The ILO was formed in 1919 at the end of World War I, on a belief that the war was in part a consequence of conflict between labour and capital. This was an understandable view early last century. The Marxist concept of class warfare was in the ascendancy. The old order in Europe was collapsing. Monarchs were being overthrown and organised labour played a major revolutionary role particularly in Russia. World War I seemed to emerge from this chaotic revolutionary environment.

The ILO was formed on a belief that if labour, capital and governments could get together and talk in a structured way conflict could be diminished. Following World War II the ILO survived to become a division of the United Nations. The ILO’s principals and structures remain based on the 1919 vision. It operates on a highly formalised “tripartite” dialogue between unions, employer bodies and governments.

However with the UN now having the all encompassing “world peace” agenda, the core task of the ILO has narrowed. Effectively the ILO is the international standards setter for labour regulation.

The ILO operates constantly but in June each year its activities culminate in a three-week session in Geneva, Switzerland. Government, union and employer representatives from across the globe meet to make the big decisions.

At the heart of every ILO consideration is the idea that class warfare at work is inevitable and that governments must regulate to manage the conflict. The underlying conceptual orthodoxy is that employers will always want to exploit and employees will always be subject to potential exploitation.

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Consequently the ILO has developed a large list of “standards” covering the role of unions, collective bargaining, child labour, work safety, equal opportunity, anti-discrimination and so on.

Unions, labour lawyers, academics, and government policy bureaucrats all take immense interest in ILO deliberations and decisions. The ILO directly impacts on the design of national labour laws. For example most Australian industrial relations, equal opportunity and anti-discrimination laws make direct reference to and draw upon ILO Conventions and principles. Hardly any academic discussions on labour issues will occur without reference to ILO standards. The ILO matters!

Diminishing reach

However in the mid 1990s concern was being expressed by unions, labour academics and regulators that the reach of employment law and regulations was being restricted. The problem identified was the apparent rise of independent contractors. These are working people who are not employees. They are the smallest of small business people being businesses of one.

Problems perceived by the regulators were many. Independent contractors were outside the design reach of most income tax withholding laws. Governments could not require businesses to send income tax to them if the worker was not an employee. In addition businesses allegedly avoided their work safety obligations if independent contractors were used. But perhaps what raised most concern was that independent contractors did and do not formally come within the reach of the organised labour collective - unions. Independent workers by definition do not engage in collective activity. These workers threaten the global institutions of unions.

These and related issues of concern were both practical and conceptual. On the practical side for example, governments need to collect tax, work must be safe and unions need to function. However there exist significant conceptual difficulties when thinking of single people as a business. Surely the reasoning goes, it’s not possible for a sole individual to be a business!

The most extreme view holds that the independent worker is in fact an employer plot to further employers' exploitation urges. It’s a scam many allege, designed to enable employers to avoid financial and social obligations. This view is translated into an academic thesis called the “dependent contractor”. It holds that someone might at law be an independent contractor but if they have only one client they are in fact “dependent” and should be treated as an employee.

The dependent contractor thesis gained strong acceptance among respected economists, statisticians and regulators by the end of the 1990s. What few realised was that they were blurring the line between employment and commercial law.

This blurring developed further with the introduction of the idea of “the problem of the triangular relationship”. This reasoned that if one party had a contract with a second person and the second person contracted further with someone else, that this was, “a problem”. When this process occurs repeatedly it’s a series of cascading commercial contracts. It might be “triangular” but it’s precisely how economies operate.

These concepts of dependent contractor and triangular relationships were not just theoretical. They appeared for example in Australia in repeated legal cases and formed the basis of several pieces of legislation. The New South Wales industrial relations unfair contracts laws are a product of these concepts. It’s why the NSW industrial relations commission has repeatedly made rulings on commercial contracts including retail tenancy leases and franchise agreements.

The issue inevitably found its way onto the ILO agenda. There was one overarching concern, namely that employment law and regulation was under threat. Workers were leaving employment to become independent contractors but many were “dependent”. The process was a sham and an employer scam to avoid obligations. The scam was highlighted by triangular relationships in which employers contracted out of their obligations through franchising, labour hire and so on. The solution it was thought was clear. Labour law needed to extend its reach to capture commercial contracts.

The ILO debates on the issue began in 1996, occurred again in 1998, had a committee of “experts” report in 2000 and reached a major “Conclusion” in 2003. It returned to the agenda in 2006 to achieve a final outcome. It has perhaps been the most protracted and difficult debate in the history of the ILO causing high anxiety and significant emotion.

The ILO result

For many years the debate was inconclusive but started to gain focus in 2003. What started to occur was a slow recognition that there is a sharp distinction between the employment contract and the commercial contract at least in policy terms.

The 2003 ILO “Conclusion”, an interim step to an end result, contained a statement that independent contractors are legitimately outside employment regulations. This was a significant development. The key part of the Conclusion read:

Self-employment and independent work based on commercial and civil contractual arrangements are by definition beyond the scope of the employment relationship.

This demonstrated that a policy understanding was slowly emerging that in economic terms the regulation of commercial contracts and employment contracts are directly opposed.

Commercial contract regulation has as a primary objective the stopping of collusive activity that tries to achieve price fixing and monopoly. In comparison, employment contract regulation facilitates collusive activity to achieve (labour) price fixing by delivering monopoly bargaining power to the labour collective. If employment regulation intrudes into commercial contracts, price fixing and monopoly inevitable become sanctified in the broader economy but by stealth. This is economically dangerous. And once the line has been crossed containment is not possible.

Independent contractors (self-employed) are the line. They are people who by definition earn their living through the commercial contract. To treat these people as employees it’s necessary for legislation to declare a commercial contract an employment contract.

This is what the Queensland Industrial Relations Act allows. When using the Act to declare a corporation to be an employee in 2000, the Queensland Commission said something to the effect, “it troubles us to declare something to be what it is not but given the Act requires us to do so, we must.” In short, the Queensland Act creates legal and economic nonsense and confusion. It distorts reality.

The next ILO development was a first-ever global survey of employment definitions. Key to the debate for a long time was the view that the definition of employment and independent contracting was unclear. In surveying about 80 countries the ILO found the reverse. The 2005 ILO report expressed surprise to find substantial “convergence between the legal systems of different countries” in the way they define the difference between employees and independent contractors. Contrary to many allegations, courts world-wide know exactly what they are looking for.

The ILO found that the distinguishing difference is that employees are legally dependent and independent contractors are not dependent.

In lay language the easiest understanding is that employees are dependent because they do not have the right to control the terms of their work contracts. Independent contractors are not dependent because they share control of the terms of their work contracts with the other party.

Further, the ILO report recognised the illegitimacy of the term “dependent contractor” and instead emphasised three key terms. “Worker” is a generic term in which “employees” and “independent contractors” are subsets. The ILO stated that a “dependent worker” is an employee.

This new level of authoritative definitional clarity set the scene for the 2006. What emerged was historic.

In June 2006, the ILO passed a recommendation. The key clause is clause 8 which reads as follows:

National policy for protection of workers in an employment relationship should not interfere with true civil and commercial relationships, while at the same time ensuring that individuals in an employment relationship have the protection they are due.

This is a new ILO labour standard. It recognises the necessity to keep the line between the employment contract and the commercial contract distinct. It strikes a balance between protecting employees and protecting those who work through the commercial contract. (NB:The other 22 clauses in the ILO Recommendation encourage national processes for locking down definitional clarity.)

The importance

The simplicity of language in this new ILO labour standard understates the huge significance of the 2006 development.

In Australia, the impact is direct and immediate. The industrial relations “employment deeming” provisions in Queensland and the industrial relations “unfair” contracts provisions in NSW are stripped of international labour standards credibility.

The proposed federal independent contractors legislation is in accord with the new ILO standard. It keeps definitions within the common law structures which fit with the ILO standards and targets the elimination of sham or disguised employment.

This flips Australian political norms on its head. Some state labour governments suddenly find themselves in contravention of ILO labour standards with the federal coalition in accord. Australian political orthodoxy would suggest it’s supposed to be the other way around!

However it’s not really that surprising. Since the collapse of the Berlin Wall the traditional 20th century, left versus right simplicity of politics, has rapidly declined. Communities increasingly do not define themselves in class warfare terms between workers and bosses. Issues that divide and unite communities are now more complex, diverse, unpredictable and fluid.

In the work environment many workers seek to be, and many are, their own boss. The right to be your own boss is a human rights issue. Governments must not take away that right. This is now recognised at the ILO.

But there’s more. If labour regulations were to have continued their intrusive thrust into commercial transactions, great economic harm would have been done. Commercial activity has already been severely assaulted by attacks against legitimate contracting out, labour hire, franchising and leasing. In thousands of unseen ways these regulatory attacks and others reduce the success of economies.

In addition, no economy can succeed where certainty of commercial transaction is destroyed by either war, bad public policy or other causes. Where commercial uncertainty exists the opportunity to break poverty cycles and to achieve national and global economic equity is diminished.

In June 2006 the International Labour Organisation made a step in an historic, positive direction. Understanding the significance of this step and following through with national and global policy alignment is the next challenge.

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First published in the Institute of Public Affairs, quarterly journal: Review, Volume 58, October 2006.

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About the Author

Ken Phillips is executive director of Independent Contractors of Australia.

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