Beware the Engaging of ‘Contractors’ – ‘Sham Arrangements’ and the Fair Work Act

December, 2015

By Clayton Payne, Special Counsel 

Can my business engage ‘contractors’ who might otherwise work as its employees?

Does potential liability shift if those ‘contractors’ are on-hired to my business by a third party?

If it should not be done, what are the consequences?

These matters were recently dealt with by the High Court of Australia.

Background

Earlier this year in Fair Work Ombudsman (FWO) v Quest South Perth Holdings (the company), a Full Court of the Federal Court of Australia held that despite the fact a company’s independent contractor arrangements were a ‘sham’, it had not acted in contravention of relevant provisions of the Fair Work Act 2009 (Cth) (the Act), as it had not ‘deliberately’ mischaracterised the arrangements as ‘contracts for services’.

Recently, this decision was successfully appealed in the High Court of Australia.

The Facts

The company in question provided serviced apartments. It employed two workers as housekeepers, until the company decided to enter into what it thought to be a triangular contracting arrangement with the workers and “Contracting Solutions” (the labour hire company).

Under the new arrangements, the workers would continue providing their services to the company, but as independent contractors engaged by the labour hire company to provide services, rather than as direct employees of the company. Despite the new arrangements, the only change in the workers’ working arrangements was that the labour hire company took over the payroll function.

The Full Court had previously found that the workers had not become independent contractors under the new arrangements. This was for several reasons, including the fact that the workers were not running their own businesses. As such, the Full Court held that the workers remained the company’s employees.

The Full Court also held that the company had denied the existence of an employment contract. However, it also held that in order for there to have been a contravention of s 357 of the Act (which regulates sham arrangements), there needed to be a representation which mischaracterised the contract as a contract for services, between the employee and the employer (i.e. the company).

High Court Decision

In the most recent decision in the matter, the High Court overturned the previous ruling that the company had not contravened the sham arrangements provision of the Act when the company moved the workers onto “independent contractor” arrangements with a third party.

The High Court found that the company contravened s 357 of the Act by a representation to the workers that the contract under which they were engaged by the third party, was a contract for services which they performed as independent contractors. It did not need to be a representation that the employees were engaged directly by the company itself in this fashion.

Conclusion

This recent decision highlights the care that needs to be taken when businesses seek to enter into “contracts for services” with workers who might otherwise be classified as their employees. It also highlights that similar care needs to be taken by businesses where a triangular contracting agreement is contemplated with labour hire companies and workers.

The decision confirmed that courts take all factors of the actual working arrangement between the parties into consideration, rather than merely relying on the description of the arrangement used by the parties (such as in a written contract). The High Court also found that the purpose of the Act is to:

protect an individual who is in truth an employee from being misled by his or her employer about his or her employment status.”

If these question are not correctly addressed by a business, not only may it face the prospect of being held liable for significant employee entitlements, but both the business and those “involved” in the decision to enter into the “sham” arrangement, could be held individually liable for significant pecuniary penalties.

Contact Mills Oakley

For more information, please contact:

Ross Levin | Partner
Melbourne
T: +61 3 9605 0070
E: rlevin@millsoakley.com.au

Malcolm Davis | Partner
Sydney
T: +61 2 8035 7932
E: mdavis@millsoakley.com.au

Adam Lunn | Partner
Melbourne
T: +61 3 9605 0868
E: alunn@millsoakley.com.au

Lisa Anaf | Partner
Melbourne
T: +61 3 9605 0857
E: lanaf@millsoakley.com.au

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