The High Court has unanimously found that an employer, in entering into a “triangular contracting” arrangement with its former employees and a labour hire company, breached the Fair Work Act’s sham contracting provisions by misrepresenting an employment relationship as one of independent contracting.

On 2 December 2015, the High Court in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd & Ors [2015] HCA 45 unanimously allowed an appeal from the Full Court of the Federal Court of Australia, and held that an employer breached the sham contracting provisions at section 357(1) of the Fair Work Act 2009 (Cth) (FW Act) by misrepresenting an employment relationship as one of independent contracting.  The decision centres on the employer entering into a “triangular contracting” arrangement, or “Odco” style of contracting, with its former employees and a labour hire company.

Background    

Quest South Perth Holdings Pty Ltd (Quest) operated a business of providing serviced apartments.  Contracting Solutions Pty Ltd (Contracting Solutions) operated a labour hire business.

In 2009, through the very simple mechanism described below, two housekeepers and a receptionist of Quest were moved onto what are commonly known as “Odco” triangular style independent contracting arrangements with Contracting Solutions [1].

Contracting Solutions met with the Quest employees and provided them with “contractor applications” which indicated that if the employees completed the form they would be:

“an independent contractor  for [Quest] rather than an employee.  Nothing will change in terms of your roster of shifts and you will all get work at [Quest].  The pay rates are going to change so you’ll get one flat rate whenever you work but it will be higher than the base rate now.”   

The Fair Work Ombudsman (FWO) commenced proceedings in the Federal Court claiming, amongst other relief, pecuniary penalty orders against Quest for contraventions of section 357(1) of the FW Act.  Section 357(1) prohibits a person from misrepresenting employment as an independent contracting arrangement.

At first instance the Federal Court (in 2013) rejected the FWO’s argument that the Odco style arrangements were a sham under section 357(1) of the FW Act.  An appeal from that order was later dismissed by the Full Court (in March 2015). In dismissing the appeal the Full Court held that section 357(1) did not cover a representation by an employer about a contract, or future contract, with another person.  The majority judges said:

“a representation made by an employer to its employee that he or she is providing work as an independent contractor under a contract for services made with another person is not actionable”. 

High Court decision

By grant of special leave, the FWO appealed to the High Court.  The FWO argued that the Full Federal Court’s “restrictive construction” of section 357 does not reflect its wording; is “contrary to its obvious purpose and is plainly wrong” and “allows for the provision to be easily circumvented through third party contracts”.   The FWO said that the Full Federal Court’s ruling revealed a potential loophole in the application of section 357 to the triangular relationship of labour hire company, worker and “end-user” employer.

The High Court unanimously allowed the appeal, holding that section 357(1) prohibited the misrepresentation of an employment contract as a contract for services with a third party.  The Court declared that Quest contravened section 357(1) by representing to the employees that the contracts of employment under which they were employed by Quest were contracts for services under which they performed work as independent contractors.

Odco system 

The “triangular contracting” arrangement the subject of the High Court appeal in the Quest decision reflects what has become known as the “Odco” system of contracting.  The Odco system is a method of engaging workers through commercial contracts (contracts for services) as opposed to employment agreements (contracts of service).  Under the system, there is an interposed third entity and as such there is no direct contractual relationship between the worker and the person or entity for whom or which the work is performed.  The Odco system is now licensed Australia wide by Labour Force Australia Pty Ltd.  

Until now, the legitimacy of this type of arrangement had the endorsement of a 1991 decision of a Full Bench of the Federal Court of Australia in Building Workers Industrial Union of Australia & Ors v Odco Pty Ltd (1991) 29 FCR 104 (from which the “Odco” system takes its name). 

The brief facts were that Odco Pty Ltd (Odco) supplied contract carpenters, labourers, shopfitters and other construction workers to the commercial building industry in Melbourne.  The workers supplied were self-employed contractors and not employees of either Odco or Odco’s client builders.

Odco met with opposition from building unions, who opposed Odco workers from entering building sites.  Odco brought proceedings in the Federal Court against the then Building Workers Industrial Union (BWIU) (now the CFMEU). That action alleged that the union had breached section 45D of the then Trade Practices Act 1974 (Cth), in that their actions in requiring builders to remove Odco contractors from building sites were secondary boycotts.  The core decision which the Federal Court was required to make was whether, at common law, Odco workers were contractors or employees.

The Court determined that the Odco workers were contractors and not employees of anyone. The BWIU appealed the decision, however, the Full Federal Court unanimously dismissed the appeal.  The BWIU then sought special leave to appeal to the High Court.  Special leave was unanimously refused.

Implications for employers

The High Court’s decision now makes it clear that an employer cannot avoid the FWA’s sham contracting provisions merely through use of third party labour hire contracts.    

The decision is significant for any Australian business which has adopted the Odco style of contracting.  While some, perhaps many, of those arrangements will retain their legitimacy as arrangements untouched by any suggestion of a “sham”, we have no doubt at all that, like the arrangements in Quest, some such arrangements will contravene not only the sham contracting provisions of the Fair Work Act, but also a host of other employment related regulation.

Think compliance with awards, tax, super and workers’ compensation regulation; but each case will turn on its own facts. 

It is also important not to overlook the facts that:

  • at first instance in the Federal Court, Quest faced difficulties independently of the prohibition against misrepresenting an employment arrangement to be something it wasn’t;
  • there it was found that a threat by Quest to dismiss one of the staff involved, a receptionist, in order for her to be re-engaged as a contractor, itself involved a contravention of section 358 of the FW Act.  Section 358 prohibits dismissal or threatened dismissal of a person working as an employee in order to re-engage them, to perform the same work, as a contractor.  That finding was unaffected by the subsequent appeal decisions; and
  • even though the Full Federal Court found no contravention by Quest of section 357(1) of the FW Act, it ruled that the so called conversion of two housekeepers from employees to contractors had been ineffective.  They continued to be employees of Quest.  That outcome is unaffected by the High Court decision.

In light of the Quest decision, businesses operating an Odco contracting system should seek advice as to whether they may, potentially, be in breach of not only FWA’s sham contracting provisions but the myriad other regulation applicable to employment, rather than contracting, relationships.