The Federal Court of Australia has found that casual farm workers were underpaid their entitlements under the Fruit and Vegetable Growing Industry Award 2002 (Qld) (Award), in circumstances where they were engaged under a “sham” labour hire arrangement for the purpose of reducing labour costs.

Implications for employers

Employers considering novel ways to reduce labour costs should be conscious that a court may look behind what it concludes to be a “sham” labour hire arrangement. Underpayments and penalties may be awarded in circumstances where a court finds that the employees’ true employer is not in fact the labour hire entity.

Background

Mr and Mrs Baronio (Baronios) were sole directors and shareholders of Eastern Colour Pty Ltd (Eastern Colour). Eastern Colour ran a farm that produced fruit and vegetables. The produce was sold to Coles and Woolworths for a small profit margin. In an attempt to minimise farm costs and increase profit, the Baronios entered into an arrangement designed to allow them to engage workers for longer hours without having to pay overtime or penalty rates for public holidays. The arrangement was as follows:

  • the Baronios established two labour hire companies to be the employers of all workers who performed work on the farm. The labour hire companies supplied the workers to Eastern Colour;
  • the workers were employed by the first labour hire company for up to 40 hours per week;
  • any worker who performed more than 40 hours in a week was employed by the second labour hire company to perform those hours in excess of 40 per week. This was designed to avoid the first labour hire company having to pay overtime penalties; and
  • the employees were paid for all hours they worked (including those over 40 hours per week) at their ordinary rate of pay. No overtime rates were payable.

The workers complained to the Fair Work Ombudsman (FWO) in relation to non-payment of overtime and holiday entitlements.

The FWO brought proceedings in the Federal Court, alleging that:

  • Eastern Colour was the true employer of the workers, while the labour hire companies were merely “payroll” companies;
  • as the employer, Eastern Colour was liable to civil penalties as it had contravened:
    • section 182(1) of the (former) Workplace Relations Act 1996 (Cth). Section 182(1) guaranteed that employees will be paid a basic periodic rate that is equal to or more than the prescribed rate in the Award; and
    • various clauses of the Award, including payment of penalty rates for overtime and penalty rates and a minimum engagement period for public holiday work;
  • the labour hire companies, the Baronios and the farm manager were all involved in the contravention and therefore liable to civil penalties; and
  • Eastern Colour was required to pay to the workers $19,034.11 in underpaid wages and entitlements.

The Baronios resisted the prosecution, arguing that:

  • the employees accepted offers of employment from both labour hire companies and worked for both entities; and
  • the two labour hire companies were the true employers of the relevant employees and therefore there was no contravention.

Decision

The matter was heard by Justice Collier. Justice Collier found in favour of the FWO, holding that:

  • the arrangement whereby the workers were engaged by the labour hire companies was a “sham” and Eastern Colour was the true employer. This was because:

    • the Baronios were viewed as “the bosses” who could hire and fire employees;

    • the employees believed they were working for Eastern Colour;

    • the employees worked on a farm owned by Eastern Colour;

    • the employees packed boxes labelled as “produced by Eastern Colour”;

    • the employees had limited knowledge of the labour hire companies;

    • the employees were not fully aware that they worked 40 hours for one company and the rest for another;

    • the directors of the labour hire companies had no involvement in hiring the staff;

    • the labour hire companies existed only to provide workers for Eastern Colour;

    • there were no employment contracts with the labour hire companies; and

    • despite the Baronios frequently denying that overtime rates were payable, they clearly had knowledge that they were under a legal obligation to pay overtime and this was the sole reason the labour hire companies had been created; and

  • the labour hire companies, their directors and the manager of the farm were also involved in the contravention, as it was clear that these persons knowingly aided and abetted the contravention.

The question of penalty has been adjourned to a later date.

Fair Work Ombudsman v Eastern Colour Pty Ltd (No 2) [2014] FCA 55