In two recent decisions, The High Court of Australia (High Court) has sent a strong message to employers to avoid making misrepresentations when entering into contractor arrangements which are actually employment arrangements. In the first decision, the Court 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. In the second decision, the High Court refused to grant special leave to appeal a decision requiring the employer to pay almost $500,000 for sham contracting and underpayments of employment entitlements.

Triangular relationships

The decision in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45 (Quest Case) 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 employers making misrepresentations to employees 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.

High Penalties

In Linkhill Pty Ltd v Director of the Fair Work Building Industry Inspectorate (M190/2015, 11 September 2015), the High Court denied special leave to a Roy Morgan research subsidiary, Linkhill Pty Ltd, in its appeal against the Full Federal Court’s decision, upholding the decision at first instance, in which Linkhill was found to have engaged in sham contracting when it underpaid 10 contractors over $150,000, even though Linkhill claimed they were paid well above award rates. The initial decision found that there were 139 contraventions of the Act, including misrepresentation under section 357 of the Act, resulting in a total penalty of $313,500. The High Court also ordered Linkhill to pay costs. The decision is significant in relation to the sheer number of breaches found by the Court, although it related arguably to the same conduct and the fact that the Full Federal Court and High Court have not determined whether hourly rates under contractor agreements can be taken to off-set award entitlements where an employment relationship is found.

Implications

The High Court’s decisions have strengthened the protections for employees against sham contracting. In the wake of the recent high profile matters where principal contractors have exposure to liability for employees of third party contractors, including Myer, 7-Eleven and Baiada Group. These cases are a timely warning for organisations that engage individuals as independent contractors (even if through a third party) to be aware that they run the risk of being exposed to employment liabilities and penalties. Employers are strongly encouraged to review all existing contractor arrangements in light of these cases to assess their risk exposure.

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 ensure that any payments made expressly off-set award and legislative employment entitlements; and
  • obtain advice about the prospects of an adverse finding and how such risks can be minimised before establishing such arrangements.