Who loses when the public service contracts out labour?

A hallmark of the current federal government has been its reduction of staffing in the Australian Public Service, coupled with an (arguably corresponding) increase in the use of labour contractors.

It was reported in March that, since the 2013 election, annual spending on labour contractors by 18 of the largest federal departments and agencies had more than doubled from $318 million to $730 million. The "big four" consultancy and accounting firms – KPMG, PwC, EY and Deloitte – had also benefited from greater government spending, collectively receiving $1.7 billion worth of contracts over this period.

However, this has come at a time the APS itself has shrunk, in no small part thanks to the staffing cap that the government imposed on it. In fact, the APS is now the smallest it has been since 2006.

Anecdotally, and from my experience over the past few years, it is not uncommon for APS positions to be replaced with contractors engaged to perform essentially the same role. In fact, not infrequently, the same APS employee whose position was given over to a contractor is then engaged as that contractor.

Proponents of this policy argue the public service has never been more flexible. Expertise and specialist skills can be diverted quickly to the areas that need them, and staffing levels can be expanded and decreased as required.

Critics of this outcome point to a loss of institutional knowledge, argue the APS is losing the long-term benefit of skills developed by its workforce to private companies, and suggest there is scant evidence that any savings are actually realised.


I will not wade into that debate.

However, one thing that is not being widely discussed is the industrial law impact of this policy. What does it mean for the contractors themselves, and what is the impact on the APS?

First, though, a quick rundown of the difference between employees and contractors.

The most striking difference is that a contractor operates a business independently to the company or, in this case, government department that has engaged them, whereas employees are part of that department. Employees are (always, in the case of the APS) paid for the amount of time they have worked irrespective of the tasks they perform, while contractors are typically paid to complete certain tasks (though often the amount is calculated on the basis of time worked).

In the APS, contracted workers are typically not engaged directly by the department they operate in. Instead, contract workers are usually employees of another company engaged by a department to provide labour services, rather than the department engaging the worker directly (although this is not a hard and fast rule).

So what are the impacts of being a contractor in the APS as opposed to being an employee?

The main impact on contractors is the loss of the benefits that usually come through employment in the public service. This, of course, includes all the usual candidates, among them generous employer superannuation contributions and flextime.

However, in my opinion, the most serious loss to contractors arises only when allegations of misconduct are raised against them. Public servants are entitled, though various legislative and industrial instruments, to transparent and (importantly) procedurally fair investigations and have broad rights to appeal any adverse decisions. The same cannot always be said for contractors. It is not inconceivable that a different outcome would be reached if a contractor and an APS employee engaged in the same conduct.

So what about the impact of using contractors on the public service itself?

Again, putting aside the debate about the comparative merits of engaging contractors or employees, the industrial law impact is comparatively clear. The legal relationship of the departments engaging contractors is taken out of the realm of employment law and largely into the realm of contracts for services.

Fundamentally, this shifts the risk away from the departments to the contractors. Departments do not need to be assured there is an ongoing position before engaging a contractor – once a task that has been contracted for is completed, the department has no ongoing obligations to that contractor. This makes its mark most clearly in the case of redundancy. Where the APS owes clear and substantial obligations to any of its employees whose roles are no longer required to be performed, a contractor's engagement by the APS may simply be terminated.

The fairness of these outcomes for contractors – the loss of employment benefits traditionally enjoyed by public servants and the shouldering of greater risk – is dubious, particularly as contractors and APS employees are often performing the same role and are, for all intents and purposes other than the circumstances of their employment, indistinguishable.

Of course, there are limits to the APS's ability to contract out roles that were previously performed by employees. Like any national system employer, the APS is also subject to the sham-contracting provisions of the Fair Work Act. Though there is nothing to suggest this has occurred to date, continuing to increase the use of contractors will only increase the likelihood of a claim being brought against the APS, particularly if public servants who are made redundant from their APS positions are then brought back as a contractor to perform substantially the same role.

Despite all this, debate still rages over whether the use of contractors in the APS will be seen as a policy success or failure. What is clear, however, is that this increased use of contractors has not been without costs. To date, it appears as though the brunt of those costs have been borne by the contractors themselves and the employees they replaced. Whether that stays the case remains to be seen.

John Wilson is the managing legal director of BAL Lawyers and an accredited specialist in industrial relations and employment law. He thanks his colleague, Robert Allen, for his help preparing this article. ballawyers.com.au