The High Court of Australia (High Court) has found an employer engaged in sham contracting by converting its employees into contractors of a third party. This decision highlights the risks of employers hiding behind third party labour hire arrangements to transfer employees into arrangements that deprive them of employment benefits. 

Triangular relationships

The decision in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45 concerned two housekeepers employed by Quest South Perth Holdings Pty Ltd (Quest) for a number of years who were asked to sign contracts with a labour hire provider, Contracting Solutions Pty Ltd (Contracting Solutions), to continue doing the same work for Quest.

The High Court determined that the housekeepers remained employees of Quest under implied contracts and as a result, Quest contravened the sham contracting provision in section 357 of the Fair Work Act 2009 (Cth) (Act), which prevent employees making misrepresentations to employers regarding their employment status. In doing so, the High Court unanimously rejected the narrow interpretation previously adopted by the Federal Court and Full Federal Court of Australia, which effectively allowed employers to use labour hire companies to indirectly hire workers as contractors without breaching these provisions.

The proceedings will return to the Federal Court to determine pecuniary penalties. Quest could face up to $54,000 per breach for contravening the general protection in section 357 of the Act.

Implications

The High Court’s decision has strengthened the protections for employees against sham contracting. In the wake of the recent high profile matters involving Myer, 7-Eleven and Baiada Group where principal contractors have exposure to liability for employees of third party contractors, this case is a timely warning that organisations that engage individuals as independent contractors (even if through a third party) need to be aware that they run the risk of being exposed to employment liabilities and penalties.

To reduce sham contracting risks, employers need to:

  • be mindful when making labour arrangements to ensure that their actions do not unfairly deprive workers of benefits of employment, particularly where the employees work under the same arrangements;
  • ensure strategic planning when establishing arrangements to outsource employees under third party labour arrangements and ensure no misrepresentations are made by the employer or its representatives;
  • ensure that contracts for such arrangements are drafted to avoid the risk of a finding of an implied contract between the principal and the contractors’ workers; and
  • obtain advice about the prospects of an adverse finding and how such risks can be minimised before establishing such arrangements.