In brief

  • As discussed in previous publications1 sham contracting has been a key focus for regulators in the last few years.
  • The findings of a recent Fair Work Ombudsman (FWO) inquiry into outsourcing arrangements in the Victorian public service clearly indicate a continued intention by the regulator to treat the issue of sham contracting seriously.
  • Recent cases in the Federal Circuit Court also indicate the intention of regulators to prosecute contraventions of the sham contracting provisions of the Fair Work Act 2009 (Cth) (FW Act), and the risk of substantial penalties being imposed for those contraventions.

Learnings from the FWO inquiry into Victorian Government hiring practices

In December 2013, the FWO instigated an inquiry into the Victorian Department of State Development and Business Innovation’s (Department) labour hire and independent contractor arrangements.  

Earlier this year, the FWO published its findings. The FWO made no finding that sham contracting had been engaged in by the Department. However, the FWO noted that the Department had engaged in practices which increased the 'risk' of workers being incorrectly engaged as contractors.

In light of this, the FWO made recommendations to the Department which provide useful guidance for employers more generally. These include:

  • undertaking a comprehensive review all labour engagement policies to ensure compliance with the FW Act,
  • auditing the engagement of independent contractors to ensure each contractor is appropriately classified as a contractor (rather than an employee),
  • to the extent that any workers should be properly characterised as employees, ensuring such workers are engaged as employees (and accordingly receive their entitlements under the FW Act), and
  • obtaining legal advice regarding the engagement of independent contractors for services traditionally performed by employees.

Learnings from recent cases on sham contracting

The FWO’s continued focus on sham contracting arrangements comes at a time when recent cases have indicated that Courts are prepared to impose substantially harsher penalties than have been seen in the past.2

For example, in Director of the Fair Work Building Inspectorate v Linkhill Pty Ltd3(Linkhill) the Federal Circuit Court imposed total penalties of $313,500 against Linkhill, noting that:

  • Linkhill had deliberately engaged in sham contracting,
  • Linkhill had shown no contrition for its behaviour, and
  • the Court should indicate its disapproval by setting penalties at a 'meaningful level'.

In Fair Work Ombudsman v Global Work and Travel Co4 the Federal Circuit Court awarded total penalties of $139,590 against Global Work and Travel Co, a related entity and directors of both Global Work and Travel Co and the related entity. The Court made similar comments regarding the seriousness of contraventions in this case as it did in Linkhill.

Key learning for employers

In light of the FWO’s inquiry and recent decisions, we anticipate that regulators will continue their focus on this area. Employers who:

  • currently engage workers as independent contractors, or
  • are intending to engage persons as independent contractors to perform work customarily or previously performed by employees,

are encouraged to review any current engagement policies, agreements and practices to ensure compliance, so as to reduce the risk of significant penalties being imposed.