Sham contracting protections do extend to triangular arrangements where employees are purportedly engaged as independent contractors via a third party such as a labour hire provider. The High Court inFair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45, has made it clear that the prohibition in s357(1) of the Fair Work Act 2009 (Cth) (FW Act) applies regardless of who is the other party to the contract.  

Employers cannot rely on third party arrangements to avoid liability for misleading representations about the true nature of contracts with employees.  

The Issue  

Section 357(1) of the FW Act provides that an employer (or prospective employer) must not represent to a worker that the contract of employment under which they are (or would be) employed is actually a contract for services, under which the worker provides services as an independent contractor. This section sits within the general protections provisions of the FW Act, which have the broad objective of protecting workplace rights. The High Court in this case acknowledged that the purpose of section 357(1) of the FW Act is "to protect an individual who is in truth an employee from being misled by his or her employer about his or her employment status. It is the status of an employee which attracts workplace rights."[1]    

The Full Court of the Federal Court in its earlier decision [2]  had considered that the protection applied only where an employer mischaracterised an employment contract as a contract for services between the employer itself and the employee and did not apply where the contract that was the subject of the alleged misrepresentation was a contract between a worker and another party.  

The Facts  

Quest South Perth Holdings Pty Limited (Quest), employed  housekeepers to provide cleaning services in its serviced-apartments. After a number of years of service, Quest purported to convert the housekeepers into independent contractors, by entering into a triangular contracting arrangement with a labour hire company, Contracting Solutions Pty Ltd (Contracting Solutions). Under this arrangement, Contracting Solutions purported to engage the housekeepers as independent contractors, and to provide the housekeepers' services to Quest under a labour hire agreement. It was found that the housekeepers continued to perform the same work for Quest that they had always done and in the same manner.  

The Fair Work Ombudsman (FWO), in May 2011 commenced proceedings in the Federal Court seeking, amongst other things,  pecuniary penalty orders against Quest for contraventions of section 357(1) of the FW Act. The claim was dismissed by McKerracher J at first instance [3]. The FWO appealed that decision to the Full Court of the Federal Court which appeal was also dismissed. The FWO then appealed to the High Court.  

The Full Court's view was that it would have held that the representations made by Quest to the housekeepers were contraventions of section 357(1) had it taken the view that section 357(1) extended to representations made by an employer about a contract between the worker and a third party. It found that the housekeepers were not genuine independent contractors, and were in fact employed under implied contracts of employment.  

The High Court's Decision  

The High Court disagreed with the Full Court's construction of section 357(1).  The High Court noted that to confine the operation of section 357 in the way that the Full Bench had done would give it a "capricious" operation, finding that the identity of counterparty for the represented contract for services was immaterial.   

The High Court found that the triangular contracting arrangement fell "squarely within the scope of the mischief to which the prohibition in section 357(1) was directed", because regardless of whether an employer misrepresents to an employee that they are engaged as an independent contractor by the employer or by a third party, "the extent of the practical denial of workplace rights would be the same."   

Accordingly, the High Court held that Quest had contravened section 357(1) by misrepresenting to the housekeepers that their implied employment contracts were contracts of services, and that the housekeepers performed services as independent contractors. The matter will be remitted to the Federal Court to determine any pecuniary penalties to be imposed on Quest. The maximum penalty for a body corporate in respect of a breach of section 357(1) is $54,000.   

The High Court made reference to the Explanatory Memorandum for the Bill for the Independent Contractors Act 2006 (Cth) in which regard was had to the well known statement that parties "cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck" [5]  

It is a reminder that Courts will continue to examine the true nature of working relationships without being confined by the description given to the relationship by the parties. Roosters are roosters and ducks are ducks! This has consequences in many areas not just in relation to the sham contracting provisions. Other risks include underpayment of employment entitlements, unexpected vicarious liability risks and under insurance, incorrect tax arrangements and breach of superannuation legislation.  

Actions for Employers and Principals  

This decision highlights one of the risks for organisations seeking to avoid engaging workers as employees. Clearly, organisations must take care to ensure that misrepresentations are not made as to the nature of a worker's engagement, in order to avoid exposure to prosecution and pecuniary penalties for breach of section 357(1).   

More generally, organisations should be aware that engaging workers under labour hire agreements is not necessarily a guarantee of a genuine independent contractor arrangement, and may be insufficient to avoid the sham contracting provisions in the FW Act. Organisations may still be liable for employees' workplace rights and entitlements if an employment relationship is found to exist at law. As such, a thorough analysis and management of the risks of engaging workers through alternate arrangements such as contracting and labour hire is critical.