A leading case concerning the scope and application of the Fair Work Act’s sham contracting provisions has concluded, following over five years of litigation in both the Federal Court and the High Court of Australia. The final binding determination in the matter – which was in respect of pecuniary penalties - was handed down on 8 June 2017.

Background

The case of Fair Work Ombudsman v Quest South Perth Holdings considered the effectiveness and legality of triangular contracting arrangements in the context of the sham contracting provisions of the Fair Work Act 2009 (Cth) (the Act).

Quest South Perth Holdings Pty Ltd (Quest) owned and operated an apartment hotel complex in Western Australia. Quest had engaged a third party, Contracting Solutions Pty Ltd (Contracting Solutions), to convert two of its housekeeper employees into independent contractors. These ‘independent contractors’ were to be paid by Contracting Solutions for their labour, but would be supplied back to Quest for the purposes of performing the same work as they had done during the period of their employment.

Nature of relationship

In considering the legal status of the triangular contracting arrangement, the Full Federal Court rejected the assertion that the housekeepers had been converted to independent contractors, and instead held that they had always remained employees of Quest. This conclusion was reached despite the fact that there was clear documentation executed by all parties that outlined the nature of the contracting arrangement, and which required the housekeepers to pay their own public liability insurance.

Factors which supported the Court’s finding of an ongoing employment relationship included the fact that the housekeepers continued to wear Quest uniforms, use Quest supplies and operate under the complete direction and supervision of Quest following the purported conversion. Additionally, the Court was unable to identify any indication that the housekeepers were operating their own business or were interested in making a profit (which would be persuasive indicia of a true independent contractor arrangement).

Sham contracting

Despite the Court’s finding on this point, there was still a live question as to whether Quest had engaged in sham contracting for the purposes of the Act. The sham contracting provisions of the Act prohibit an employer from representing a ‘contract of employment’ as a ‘contract for services’.

In those circumstances, Quest argued that since the relevant ‘representation’ was made in respect of a contract between the housekeepers and Contracting Solutions (rather than about an existing contract between themselves and the housekeepers) there could be no breach of the Act’s sham contracting provisions. This argument was accepted by the Full Federal Court. Ultimately, however, it formed the basis of an appeal by the Fair Work Ombudsman to the High Court.

In December 2015, the High Court rejected Quest’s construction of the sham contracting provisions and held instead that a ‘true employer’ cannot simply introduce a third party to circumvent their operation. In the High Court’s view, the primary purpose of the sham contracting provisions was to prohibit an employer from misrepresenting the true nature of an individual’s employment status and that this should be taken to include circumstances where a third party is involved. The case was remitted to the Federal Court at that time for a hearing on pecuniary penalties.

Penalties

Earlier this month, and relying upon the High Court’s findings, the Federal Court fined Quest $33,000 for its ‘deliberate’ and ‘conscious’ misrepresentation of the contracting arrangement, and a further $21,450 for threatening to dismiss a receptionist for refusing to enter into a similar arrangement.

Separately, Quest’s General Manager was personally fined $4,290 as a result of his ‘intimate involvement’ in the contravention and because he was found to be ‘largely personally responsible’ for its implementation.

Lessons for employers

  • A Court will always look to the true nature of the relationship between relevant parties on a case by case basis in determining the legal status of workers.
  • The express terms of a service level agreement and/or the fact that a worker is being paid by a third party entity will not in and of themselves determine the status of the relationship.
  • An employer may still breach the sham contracting provisions of the Fair Work Act 2009 (Cth) even if they are introducing a third party, such as a labour hire company, into contractual arrangements.
  • Individuals who are intimately involved in the implementation of suspect contracting arrangements may be exposed to personal pecuniary penalties as a consequence of that involvement.

Other relevant issues – Labour licensing schemes

As a result of cases such as this, together with the outcomes of a number of parliamentary reviews into vulnerable (and often unskilled) on-hire workers, ‘labour hire licensing schemes’ have been proposed in each of Queensland and Victoria, with South Australia likely to follow suit shortly. These schemes - which will require labour hire companies to demonstrate that they are ‘fit and proper persons’ - are expected to include strong enforcement and penalty provisions to protect on-hire workers.

More information about the proposed labour hire licensing schemes can be found here.