The Full Court of the Federal Court of Australia has handed down an important decision in relation to the “sham contracting” provisions of the Fair Work Act 2009 (Cth) (the Act). The decision also provides guidance on the circumstances in which a contract of employment will be deemed to exist between a principal and the person performing the labour.
The first respondent operated serviced apartments in Perth, Western Australia. A number of people were employed by the first respondent to perform house-keeping duties within the apartments.
The second respondent operated a labour hire business according to the so called “ODCO contracting system”. Under this system the labour hire agency has contracts with its customers under which it will supply services in the form of labour by nominated individuals. By means of separate agreements, the agency engages individuals as independent contractors promising to offer them placements at which they can perform labour in return for fees paid by the agency. It is a characteristic of the system that there is no formal contract in existence between the individual supplying the labour and the ultimate recipient of the labour (in this case the serviced apartment business).
In 2009 the first respondent entered into an agreement with the second respondent for the supply of housekeeping labour. The housekeeping employees of the first respondent were informed that they would no longer be employed by the first respondent and that they would be offered independent contractor agreements with the second respondent. This process was dubbed “the conversion”. The housekeepers (with one exception) signed the new contracts.
The applicant (the Federal workplace regulator) took proceedings against the first respondent under section 357 of the Act. The applicant sued the second respondent as an accessory.
Section 357 makes it a civil offence for an employer to represent to a person who is in fact its employee that the contract made (or proposed to be made) with that person is a contract for services under which the person performs work as an independent contractor.
Proceedings at first instance
At trial the applicant claimed that in breach of s.357, the first respondent made representations to two housekeepers to the effect that after the conversion they would be (and later that they were) not its employees but independent contractors performing work at its premises.
The applicant submitted that after the conversion the housekeepers continued to perform work at the premises in the same way as they had always done and this brought about the implied “remaking” of the contracts of employment between the housekeepers and the first respondent.
The respondents argued the employment contracts with the first respondent had been brought to an end after which the individuals entered into legally effective contracts with the second respondent for the performance of services as independent contractors.
The primary judge took the view that it was essential for the applicant to establish that the employees had been constructively dismissed from their employment by the first respondent, and that this could not be sustained because the employees had choices as to whether or not they signed the contractor agreements.
The case was dismissed.
The applicant appealed to the Full Court.
The Full Court found that the primary judge erred in regarding the existence of a constructive dismissal of the employees as being necessary in order to establish a breach of section 357 of the Act.
Nevertheless the appeal was unsuccessful because of the manner in which the applicant had framed the alleged breach of section 357.
The applicant’s claim was that the first respondent had misrepresented to the individuals the circumstances of their work – that is, the first respondent behaved towards the individuals as though the work that they were performing was by independent contractors when in legal reality they were still its employees. The Full Court found that section 357 requires that the representation must relate to the contract or prospective contract with the individuals.
Because the case had not been pleaded in this way by the applicant, it was bound to fail and so the appeal had to be dismissed.
Issue of Implied Employment
The Full Court went on to examine the issue of whether, in legal reality, the individuals were employees of the first respondent. Determination of this issue was not strictly necessary because of the finding that the applicant had pleaded the claim incorrectly vis-à-vis section 357 of the Act.
The Full Court found that if the issue had been relevant it would have been satisfied that the housekeepers were not independent contractors providing services to the first respondent, but were employees of the first respondent working under an employment contract.
The Full Court based this conclusion upon an analysis of the factors that have been traditionally relevant to the distinction between employees and contractors, which revealed the common hallmarks of an employment relationship between the first respondent and each of the workers.
Among the relevant factors were:
- The workers had no capacity to delegate.
- They worked when required by the first respondent and under the first respondent’s direction, supervision and control.
- They wore the first respondent’s uniforms and were portrayed or represented as part of its business.
- The basis for the calculation of their remuneration was consistent with what would be paid to an employee performing the same tasks.
Although the agency and not the first respondent was paying the workers, the Full Court said that this was not inconsistent with the existence of an employment contract, as it is possible to make a contract under which the employee receives payment indirectly from a third party.
The case confirms that liability under the “sham contracting” provisions of the Act is not simply about getting the designation of staff wrong. Attention has to be paid to the precise language of the provisions which create the civil offence. The decision also illustrates the complex, multifactorial test that determines whether someone is truly a contractor or an employee.