Contractor or employee?  

A labour hire arrangement widely used in Western Australia has recently had limitations exposed by a full Federal Court inFair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] FCAFC 37.   

The facts of the case are that Quest dismissed some of its cleaning staff who were then engaged by Contracting Solutions (the labour hire provider) as independent contractors.  Contracting Solutions then entered into a labour hire agreement with Quest in which it was agreed that Contracting Solutions would provide independent contractors to Quest (being Quest’s ex-employees).    

Alleged breach of sham contracting provisions  

The Fair Work Ombudsman prosecuted Quest on the basis that it had breached sham contracting provisions in the Fair Work Act 2009 (FW Act).  The relevant provisions prohibit misrepresenting an employment relationship as an independent contractor relationship (sections 357 and 359) and dismissing an employee in order to re-engage them as a contractor (section 358).

At first instance the Federal Court found that Quest had threatened one of the employees with dismissal if she did not enter into an independent contractor arrangement with Contracting Solutions.  This was a contravention of section 358.  

The Court found that Quest did not breach sections 357 or 359 because it was Contracting Solutions that held the discussions with workers about their contractual relationship, not Quest.  This meant that Quest did not misrepresent its direct relationship with the workers.  

The Full Federal Court upheld the decision at first instance, but importantly, went on to consider the true nature of the relationship between Quest, the workers and Contracting Solutions.    

Finding of employment relationship  

The Court held that there was no independent contracting relationship between the workers and Contracting Solutions.  It found that in order for there to be such a relationship the workers must be carrying on their own business, including the pursuit of profit.  There was no evidence on this. To the contrary, the only difference between the old working arrangement with Quest and the new one was the fact that the workers had public liability insurance costs deducted from their wages by Contracting Solutions.  

As a result, the Court found that the services agreement between Quest and Contracting Solutions was invalid as it only applied to the provision of independent contractors – which the workers were not. The question therefore became: under what contractual relationship did the workers provide services to Quest?  

The Court found that the workers had a direct employmentrelationship with Quest based on a multi factorial approach.  That is, the workers worked exclusively for Quest, under the direction and control of Quest, wore Quest uniforms, had no capacity to delegate and their remuneration was consistent with that of an employee.


This case clearly demonstrates that it is not enough for a company to use labour hire workers in order to avoid industrial relations laws. There remains a risk that the workers will be found to be direct employees of the company. Arguably, such a situation could also arise where a company contracts with an independent contractor through his or her company entity. The courts may find that the company is solely an agent for making payment to the “employee”.  

The case also reinforces the current emphasis in the test of whether a worker is an employee or contractor. That is, is the worker running his or her own business and seeking to make a profit?   

This means that, whether engaging workers directly or indirectly, it is important to ensure that the workers are indeed what they say they are.  It is not enough to rely on the title applied to the worker. If a company gets it wrong, it may not only risk having to back pay monetary entitlements, but there is also a risk of being prosecuted under the sham contracting laws.   Labour hire worker in transfer of business  

In a recent decision of the Fair Work Commission, Deputy President Gooley found that an employee’s service with a labour hire company (Hays) prior to being employed directly by the host employer, ERGT Australia Pty Ltd, was counted as being service with ERGT.  The basis of the decision was that ERGT had “outsourced” its work to Hays and then brought the work back in house.  As a result, there was a transfer of business for the purposes of the FW Act.  

The effect of this reasoning was that, although the employee had only been employed directly by ERGT for three months, her prior service with Hays meant that she had met the minimum period of employment in order to bring an unfair dismissal claim against ERGT following termination of her employment.  

Subject to this decision being overturned if ERGT appeals, when deciding whether to directly employ workers who have been previously supplied by a labour hire company, it is important to consider whether to “recognise” the previous service for the purposes of unfair dismissal laws. It is open to employers to specifically state that previous service is notcounted for the purposes of the minimum period of employment. Employers should also determine whether there is any enterprise agreement that may transfer with the employee on commencement of employment.