In a decision handed down yesterday, the High Court has found that an employer engaged in sham contracting by hiring workers via a ‘triangular’ labour hire arrangement. The company which made misrepresentations to workers about the character of their engagement was liable, notwithstanding it was not the company which engaged those workers.

This decision will be significant for any company that engages independent contractors through an intermediary entity – whether under a labour hire arrangement, or where the worker contracts via an incorporated entity.

The sham contracting provisions of the Fair Work Act 2009 (Cth) provide that a person that employs an individual must not represent to the individual that the contract of employment is an independent contractor arrangement. Previously, there had been doubt as to whether the sham contracting provisions could apply to an entity which did not have the direct contractual relationship with the individual. The Federal Court, at first instance and on appeal in this case, held the provisions did not.

Quest South Perth Holdings entered into an arrangement with Contracting Solutions, under which two housekeepers, previously employed by Quest, were purported to be engaged by Contracting Solutions as independent contractors. The services of the housekeepers were then provided to Quest under a labour hire agreement.

The Fair Work Ombudsman brought proceedings against Quest arguing it had contravened the sham contracting provisions of the Act. At first instance and on appeal, the Federal Court found that to contravene the sham contracting provision, the relevant representation must have been made by the party engaging the individual under an independent contractor agreement. In this case, it was not Quest, but rather Contracting Solutions, that had entered into the independent contractor agreement with the individual. The Federal Court therefore found that Quest had not misrepresented to the workers that its relationship with them was one of independent contract rather than employment.

The High Court overturned this interpretation. It held that an entity other than the contracting party could have made the relevant representation. The High Court found that Quest, by its conduct, had misrepresented to the individuals that they were performing work as independent contractors of Contracting Solutions. It did not matter that Quest had not sought to engage the individuals directly.

In view of the finding that the individuals were properly characterised as common law employees, Quest was found to have misrepresented the character of the arrangement as an independent contractor agreement with the third party, when in fact the individuals remained employees of Quest under implied contracts of employment.

The High Court's reasoning makes it clear that where a company misleads an employee to think that they are instead an independent contractor, the company may have breached the sham contracting provisions regardless of the entity the individual is contracted to.

Companies which engage independent contractors via a third party should examine such arrangements to determine whether there is exposure to liability for sham contracting.

Please contact a member of our Employee Relations and Safety team to discuss how this might affect your business.

Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd & Ors [2015] HCA 45