In a recent decision, the Federal Magistrates Court examined the sham contracting provisions of the Workplace Relations Act 1996 (Cth) (WR Act). These provisions have been retained in the Fair Work Act 2009 (Cth) (FW Act).

In this case, the Construction, Forestry, Mining and Energy Union (CFMEU) brought the application, claiming that two purported contractors providing ABNs and invoices were really employees.

The company and directors in this case escaped penalty because the Court accepted that they did not know and were not reckless as to whether the contracts would be contracts of employment rather than contracts for services. However, the case is a timely reminder to businesses of the existence of these provisions.

Further, while the sham contracting provisions have been retained in the FW Act, there is now a reversal of the onus of proof onto employers, meaning that the case may have been decided differently under the FW Act.

The prohibition on “sham arrangements”

Mr Noy, on behalf of Nubrick Pty Ltd (Nubrick), a subsidiary of Brickworks Limited, offered work to Mr Little and Mr Bonnice. They were offered a flat rate of $30 per hour out of which they had to pay their own tax, had to provide an ABN and were required to send invoices for their work.

The CFMEU brought the application in the Court alleging that the contracts entered into with Mr Little and Mr Bonnice were in reality, contracts of employment and that Nubrick had contravened the sham contracting provisions of the WR Act.

Under the WR Act, it was prohibited for a person to offer to enter into a contract for services as an independent contractor where in reality, the contract was one of employment as an employee.

A person contravened this if:

  • the person offered to enter into a contract with an individual
  • the person made a representation to the individual that the contract, if entered into, would be a contract for services as an independent contractor
  • the contract, if entered, would be a contract of employment rather than a contract for services.

However, there is no contravention if the person proved on the balance of probabilities that at the time the person made the representations, the person did not know and was not reckless as to whether the contract was a contract of employment rather than a contract for services.

In this case, the Court had two issues to decide:

  • whether the contracts were contracts of employment or for services
  • if they were contracts for services whether Mr Noy, at the time he made the representations, was “reckless as to whether” the contracts “would be contracts of employment”.

Was this a “sham arrangement”?

In deciding how to classify the contacts entered into, the Court examined the terms of the offers made to the two workers.

The Court weighed the factors in favour of an independent contract:

  • Both workers were offered a flat rate of $30 per hour out of which they would have to pay tax
  • They were told they would have to provide an ABN and had to invoice the company for the work done
  • They were told they would not get superannuation
  • At least one of the workers was told they could delegate their work to someone else.

Factors that the Court considered were indicative of a contract of employment were:

  • The workers had fixed hours of employment and were told when to start and finish
  • They were engaged to perform continuous work for the company
  • They were provided with some safety gear
  • They did not provide their own tools and equipment but used equipment provided by the company
  • They had no special qualifications and did not provide any skilled labour.

In examining these factors, the Court found that while “both Mr Little and Mr Bonnice were offered and accepted contracts of employment, the Court does not find that the contracts were clearly contracts of employment or that they are indicative either way”.

Of more importance to the Court was the fact that at the time Mr Noy made the representations, he did not know that either of these contracts were contracts of employment.

Was Mr Noy reckless as to whether the contracts would be contracts of employment?

The Court held there was no evidence at all that Mr Noy was aware at the time that there was a risk that he engaged the workers as independent contractors when in fact they were employees.

The Court also held that Mr Noy did not know and was not reckless as to whether the contracts would be contracts of employment rather than contracts for services.

While Mr Noy agreed that he accepted “now” that there would be a risk that there would be ramifications if a person was wrongfully categorised, the Court found at the time there was no evidence Mr Noy was aware of the risk.

Therefore, Nubrick did not contravene the sham contracting provisions in relation to either of the workers.

Implications

This case is a timely reminder to businesses of the sham contracting provisions. It is particularly important to be aware of these provisions under the FW Act because there is now a reverse onus of proof onto the person who is alleged to have contravened the provisions. This means that if a person is alleged to have taken action for a particular reason or with a particular intent, the person is presumed to take that action for that reason or with that intent, unless they prove otherwise.

The case may have been decided differently under the FW Act, if the company and its directors had the more difficult burden of disproving an assumption of misrepresenting employment as an independent contracting arrangement.