In brief

  • The Federal Circuit Court recently ordered a company to pay penalties of $47,520 for its contravention of the sham contracting provisions of the Fair Work Act 2009 (Cth) in relation to one of its cleaning staff. Its director was also personally liable to pay penalties totalling $9,504 for his role in the sham arrangement.
  • The Court’s appetite to order significant penalties for sham contracting comes after an increased regulatory focus on this issue and a number of recent decisions of courts relating to sham arrangements.
  • 'Employers' are once again encouraged to:
  1. review their existing contractual arrangements to determine if there are any contractors engaged by the business that may in truth be employees, and
  2. consider their on-boarding and engagement processes, and taxation, superannuation and insurance arrangements, to ensure that there are sufficient controls in place to avoid getting the engagement model wrong from the start.
  • These two steps may prevent employers from being subject to significant penalties and orders for back-payment of wages.

Sham contracting arrangement exposed

Audits conducted by the Fair Work Building and Construction (the FWBC) throughout 2013 uncovered a number of arrangements where employees were misclassified as independent contractors.1 While the responsibility for investigating sham contracting will now generally lie with the Fair Work Ombudsman (FWO)2 the message for business is still the same: review your existing arrangements.

Company and director fined more than $50,000

In the recent Federal Circuit Court decision of Justice Lloyd-Jones in Fair Work Ombudsman v Jooine (Investment) Pty Ltd & Anor 3 (Jooine) the FWO successfully prosecuted a company and its director for breach of the sham contracting provisions of the Fair Work Act in respect of one worker engaged in cleaning duties. Such a finding led the Federal Circuit Court to impose a total of $57,024 in penalties ($47,520 ordered against the company, and $9,504 ordered against the sole director personally). This significant penalty was ordered despite the underpaid wages and entitlements owed to the worker amounting to no more than $1858.53.

In determining that the worker was in fact an employee and not an independent contractor, the Federal Circuit Court referred to the following factual circumstances:4

  • the worker responded to an advertisement by the company, rather than advertising his services,
  • the worker had no previous experience in running his own business,
  • the worker underwent supervised training and was given instruction as to the duties of his role,
  • the company provided the worker with most equipment needed for the performance of his duties including all cleaning products and consumables, a vacuum cleaner and rubbish bags,
  • the company required him to wear a company uniform with the company name and logo,
  • the worker was paid on an hourly basis rather than for the completion of work, and
  • the worker was subject to the control of the company.

The contravention in this case was exacerbated by threats made by the company that the worker should make false statements to the FWO or risk not being engaged for work in the future.

And more penalties for breach of the sham contracting provisions are expected shortly. For example, in late 2013, the Federal Circuit Court ordered a subsidiary of Roy Morgan Research, Linkhill Pty Ltd, to pay $178,941 to workers in unpaid wages and entitlements arising from the company's misclassification of employees as contractors.5 This is significantly more than the amount underpaid in Jooine. The court adjourned the issue of penalties in the Linkhill proceeding to February 2014 – definitely a ‘watch-this-space’ for business.

Risk mitigation: What 'employers' can do

In light of the continued regulatory focus on this complex area, 'employers' should act swiftly to undertake their own audits to be sure that their worker engagement models align in practice with what appears in the relevant contractual documents. As previously recommended,6 such steps may include:

  • Review existing contractor arrangements – Review any existing arrangements to determine if there are any contractors engaged by the business that may in truth be employees. Strategies can then be developed to rectify these issues without expensive litigation.
  • Ensure that the conduct of the parties is consistent with the intended relationship – Despite what the contracts might say, the true character of the relationship will largely be determined by how the parties behave. Ensure that managers are behaving consistent with a contractor relationship if that is the intention. Training and reasonable audit processes are the key.
  • Develop on-boarding processes and templates – Fix the problem once and for all. Developing rigorous on-boarding processes will ensure that the appropriate engagement method is used on each occasion. Sometimes, it might be more appropriate to engage a worker as an employee – this should be determined before the engagement model is implemented.