Readers may recall the controversial Odco litigation in the early 1990s where workers engaged under a labour-hire agreement were found to be genuine independent contractors and not employees of either the labour-hire agency or the client.

While growing in popularity, use of Odco-style contractual provisions by companies may not avoid an employment relationship – it all depends on the facts.

The latest case to test this kind of arrangement is Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] FCAFC 37 (Quest).

In Quest, the Full Federal Court found that two housekeepers remained employees of the business, despite its arrangement with an ‘Odco’ system licensee (Contracting Solutions) to ‘convert’ the housekeepers from employees into independent contractors engaged by Contracting Solutions and hired to Quest.

Why was the outcome in this case different to Odco?

The courts look to the “reality” of the situation, not just the parties’ written agreement, to determine whether sham contracting has occurred. It is therefore unwise to simply “cut and paste” contracting agreements without regard to the circumstances of the workers involved.

In Odco, there were numerous factors to support the claim that the workers were genuine independent contractors. For example, they were:

  • skilled tradesmen;
  • not subject to the direction or control of the agency or the client; and
  • entitled to refuse work.

By contrast, the evidence in Quest showed that little changed for the housekeepers following their ‘conversion’ from employee to ‘independent contractor’ status. The housekeepers were still subject to Quest’s control – the traditional mark of an employment relationship. There was also no evidence that the housekeepers were “running their own businesses” for profit such as:

  • taking risks;
  • engaging in advertising / promotion;
  • employing others to work in the business; or
  • the use of business systems.

However, the Full Court agreed with the trial judge that Quest did not contravene section 357 of the Fair Work Act 2009 (Cth) (the Act) prohibiting sham contracting.

Quest essentially denied that there was any direct relationship between it and the housekeepers following the ‘conversion’. Rather, it represented that the housekeepers were independent contractors engaged by Contracting Solutions. On the Court’s interpretation of the provision, this was not enough. In order to breach of section 357, Quest had to misrepresent the contract of employment between it and the employee as a contract for services.

The majority (Bromberg and North JJ) with which Barker J agreed said that:

“…a representation made by an employer to its employee that he or she is providing work as an independent contractor under a contract for services made with another person is not actionable” under section 357 of the Act [our emphasis].

The Court acknowledged that its interpretation of section 357 might be said to limit the beneficial purposes of the sham contracting provisions but suggested that one possible solution was to rely on the more broadly framed section 359 of the Act (which prohibits false statements to employees about independent contracting).