The Federal Circuit Court of Australia[1] has recently fined a company and its director $124,000 for sham contracting with a British backpacker on a 417 visa. This decision highlights the dangers for companies and their owners or directors misrepresenting to individuals that they will be engaged as contractors when they in fact are employees. The lesson is that the parties (or one of them) cannot just decide to call the relationship an independent contract.

The company, Australian Sales and Promotions (ASAP) raised funds for various charities. In 2013, the sole director of ASAP, Mr Ainsworth, offered the backpacker, Mr Beckitt, a position to perform work for ASAP as a fundraiser.

ASAP told Mr Beckitt that he was an independent contractor operating his own business and required him to provide an ABN and to invoice a related company operated by Mr Ainsworth, PMA Unit Pty Ltd (PMA). However, ASAP and Mr Beckitt also agreed that he would:

  • attend the ASAP premises on each working day;
  • work set hours;
  • be directed to attend certain locations for the performance of his duties;
  • be subject to the day to day operational direction, supervision and control of ASAP;
  • wear specified uniform;
  • be paid on a weekly basis;
  • be subject to the Fundraising Agreements which placed contractual obligations on ASAP in relation to Mr Beckitt’s conduct and performance of work.

These factors were held to be indicative of Mr Beckitt being an employee, rather than an independent contractor. The Court found that the contract which Mr Beckitt was induced to enter misleadingly purported to make him an independent contractor, and that he was underpaid as a consequence of this mischaracterisation.

Judge Cameron found that Mr Ainsworth and ASAP were aware at all times that a person who worked in Mr Beckitt’s circumstances would “ordinarily be characterised as an employee and not as an independent contractor”. The “interposition of PMA” was designed to “create some form of labour hire arrangement which would distance ASAP from any potential employment relationship with Mr Beckett”. However, Judge Cameron found that there was an absence of an arm’s-length relationship between ASAP and PMA, therefore the arrangement could not be characterised in that way.

Judge Cameron commented that as Mr Beckitt was newly arrived in Australia, he was in a “position of particular vulnerability”, of which ASAP and Mr Ainsworth “must have been aware”.

ASAP had previously been fined in 2012 for treating five employees as independent contractors. Judge Cameron found that ASAP therefore “would have been aware of the likely consequences under the FW Act of confusing employees with contractors” and found it significant that the respondents did not adduce any evidence to “suggest that ASAP did not know and was not reckless as to whether Mr Beckitt’s contract was a contract of employment rather than a contract for services”.

The alleged breaches of the Fair Work Act that ASAP contravened were:

  • s.357, by making misrepresentations to Mr Beckitt that he was an independent contractor;
  • s.293, by failing to pay Mr Beckett minimum wages and casual loading;
  • s.325, by requiring Mr Beckett spend part of an amount payable to him to purchase his own public liability insurance; and
  • s.535(1) by failing to make or keep employment records in respect of Mr Beckitt.

ASAP admitted to all of the contraventions alleged. Mr Ainsworth admitted that he was “directly or indirectly knowingly concerned in or a party to, or otherwise “involved in” within the meaning of s.550 of the Fair Work Act” in each of ASAP’s contraventions.

Judge Cameron considered the deliberateness of the breaches and found that ASAP’s “intention was to enjoy the financial benefit of paying Mr Beckitt as an independent contractor while also enjoying the power and authority of an employer in the control it exercised over him in the course of his work”.