The Baird government has rejected a call to more strictly regulate brothels through licensing and a specialist police unit, arguing it would recriminalise prostitution and put the health of sex workers at risk.
Instead, the onus will remain on local councils to take action against suspected illegal brothels through toughened planning laws.
The Sun-Herald has reported on an increase in suburban brothels opening in breach of planning laws under the guise of massage parlours, at inappropriate locations including near schools.
Hornsby Council last year failed in an attempt to have a brothel 50 metres from a school shut down, after evidence collected by a private investigator who had sex with a prostitute was rejected by the court as not sufficient.
A NSW Parliamentary inquiry reported in November that the decriminalisation of the sex work industry in NSW in the 1990s had left it almost completely deregulated, apart from normal planning controls.
It found many brothels were operating where they shouldn't be. NSW Police told the inquiry reports of sexual servitude in brothels were increasing, and 40 of 340 brothels had links to bikie gangs.
Local governments complained of the cost and time it took for councils to pursue illegal brothels through the courts.
But the committee was divided on many of its findings, with the independent MP for Sydney, Alex Greenwich, among three MPs who argued the report overstated the need for greater police powers. The committee chairman, Alister Henskens, is the local Liberal member for Ku-ring-gai, which includes Hornsby.
A government response, to be tabled in NSW parliament on Monday, rejects the inquiry's call for a special police unit, similar to that which exists in Victoria, to be created to ensure brothels are licensed, comply with planning laws and don't have foreign nationals working in violation of their visas.
The licensing of brothel managers has also been rejected on the advice of NSW Health.
Minister for Better Regulation, Victor Dominello, said: "Introducing a licensing regime for brothels may drive more operators underground, which could adversely affect the health and protection of sex workers. The evidence from other jurisdictions is that licensing simply doesn't work."
In Queensland where brothels are licensed, only 24 premises legally exist, suggesting widespread non-compliance.
"Councils have additional powers to crack down on illegal brothels and penalties for non-compliance have been expanded under state planning laws," Mr Dominello said on Saturday.
From July 2015 it became easier for councils to enter brothels without notice to collect evidence such as photos and videos, the government said. Penalties for breaching planning laws have been increased to a maximum of $2 million for corporations.
The government response states: "[Licensing] would be high cost and risks creating incentives for non-compliance. It also risks creating similar adverse outcomes as recriminalisation, such as reduced sexual health screening and protection for sex workers."
Scarlett Alliance chief executive Jules Kim said the sex worker industry was pleased the Baird government had opted to "stay with decriminalisation".
"The government has taken a pragmatic approach rather than a moral approach," she said.
Rejecting a specialist police unit, the government response states: "NSW Police will support the regulation of brothels through the monitoring, investigation and enforcement of the criminal law but will not be designated a primary role in the enforcement of compliance and regulatory offences related to brothels."
The Local Government Association could not be reached for comment.
