Employers that once thought they could avoid the sham contracting prohibitions in section 357 of the Fair Work Act 2009 (FWA) may have to review their operations. Interposing an independent labour hire company between the company and their workers, or "conversion" of employees into independent contractors, will not necessarily work.

In a case handed down on 2 December 2015, the High Court said that the sham contracting prohibition will be read broadly to make true employers liable, even when there are documents to show that the workers are in fact contracted to and paid by a third party labour hire company.

The Fair Work Ombudsman took a Perth serviced apartments manager (Quest) and a labour hire company (Contracting Solutions) to court over sham contracting of two house keepers. The house keepers had been working for the apartment’s manager, Quest, and were told that their employment with Quest would transfer to a labour hire company, Contracting Solutions.  Contracting Solutions would pay insurance, superannuation and would withhold tax for the housekeepers.

On their conversion to independent contractors, the housekeepers would be paid a flat rate, which was higher then their old weekday rate, but lower than their old weekend and public holiday rate. Furthermore, the old employer would pay the new interposed labour hire company a management fee of about 20% on top of the new wages.

The workers kept working at the same apartments, doing the same work and reporting to the same Quest managers. The only change from the old arrangement was the removal of the word "Quest" from the worker's time sheets.  

The Federal Court initially ruled that Quest, as the employer, could introduce a third party such as Contracting Solutions, to contract its employees, and Quest would not be liable for breach of the sham contracting provisions. 

However, the High Court overturned this narrow view of section 257.  The court said:  "The misrepresentation attributed to Quest was squarely within the scope of the mischief to which the prohibition in s 357(1) was directed and is caught by its terms." The court also said that the parliament, in enacting the legislation, had noted that the courts had held that parties "cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck. Employees in disguised employment relationships", it was said, "should have appropriate remedies available to them". 

Australia, House of Representatives, Independent Contractors Bill 2006, Explanatory Memorandum at 9, quoting Re Porter (1989) 34 IR 179 at 184.

The lesson to be learnt is that employers should never misrepresent what is actually ‘employment’ as ‘independent contracting’, directly or indirectly.  They should also get legal advice before taking on independent contractors that will be significantly under their control. Independent contractors are usually responsible for the work and its outcome, can delegate the work to others, use their own equipment and uniforms and assume business risk and benefits, such as goodwill.

Peter McNamara

Partner at CML Lawyers

Read the full case here: http://eresources.hcourt.gov.au/downloadPdf/2015/HCA/45



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