Last month, a full Employment Court comprised of three Judges held that a labour hire company employee who exclusively provided temporary services to a particular client could also have been an employee of that client (McDonald v Ontrack Infrastructure Limited and Allied Workforce Limited).

The decision opens up the possibility for a worker employed by an entity to provide services to a third party to argue that they were also an employee of the third party in respect of the same work, perhaps allowing them to "cherry-pick" when seeking to assert employment rights. It could have important implications for employers who source labour from third party providers, including from other entities within the same corporate group.

Such triangular arrangements are not uncommon. An end user hires labour from a third party provider, perhaps on a permanent basis or for casual relief as and when required. The arrangement may be formalised by a commercial contract between the user and provider parties. The provider typically employs individuals (or alternatively contracts with them) to perform the work required.

Statutory protections under the Employment Relations Act 2000 (ERA) apply where there is an employment relationship, for example between a worker and their employer labour company. However, there is no recourse for a worker against an end user under the ERA, unless the worker can demonstrate that they were an employee of the end user under a contract of service.

The case has been remitted back to a single Court Judge to determine the issue of whether there was a contract of service between the employee, McDonald, and his employer's client on the particular facts of the case. If the Court finds in McDonald's favour, he will be allowed to pursue an unjustifiable dismissal claim against the client company based on its termination of his placement, and seek reinstatement there if he is successful.

Steps for end user companies to minimise risk of unintended employment

Prudent steps to consider include:

  • Reviewing and amending contractual documentation with labour providers to expressly state that the parties intend all individuals performing the work should be employees of the provider alone and not the end user. A third party provider could be required as part of a commercial arrangement to make employment agreements conditional on workers' acceptance (having obtained legal advice) that they will not be or become employees of the end user;
  • Convening a tripartite meeting between labour provider end user and worker at the outset of the relationship to discuss and confirm contractual arrangements between each of the parties. The parties could sign a tripartite document recording these discussions, and in particular the nature of respective relationships between the parties as agreed;
  • Allowing workers to be assigned to other entities during a placement rather than requiring their services on an exclusive basis;
  • Taking care to avoid any conduct or communications that could give rise to an express or implied contract of service with the worker. Where possible, any issues regarding the terms of a worker's placement, and their pay, management, discipline and dismissal should be dealt with by the employer provider and not the end user. Avoid requesting workers to undertake work which has not been directed or arranged by the employer. Equipment should be provided, where possible, by the worker or employer (except for any specialist safety equipment which the end user company should supply).

McDonald employed by Allied Workforce and assigned to Ontrack

Allied Work Force provided labour hire services to clients to cover their temporary work requirements. It employed McDonald under a written employment agreement for casual staff and assigned him to work for Ontrack to assist in repairing railway lines. McDonald was one of two Allied Workforce employees working in a team of eleven on the railway. The other ninemembers were Ontrack employees.

McDonald worked on the Ontrack project for approximately eight months until the placement was terminated. He claimed that during the course of the placement, an implied employment agreement came into existence between him and Ontrack, and that termination of the placement amounted to his unjustifiable dismissal.

Allied Workforce and Ontrack argued that there was no employment agreement or contract of any nature between Ontrack and McDonald. He was an employee of Allied Workforce alone, and therefore had no right to pursue a grievance against Ontrack under the ERA.

Was there a contract of service between McDonald and Ontrack?

The Court approached the issue of whether an employment relationship existed between McDonald and Ontrack by applying the statutory definition of "employee" under section 6 of the ERA.

Section 6 requires the Court to look at the "real nature of the relationship" between the parties. To determine this, the Court must consider "all relevant matters" including those indicating the intentions of the parties.

The fundamental question to be determined was whether there was a contract at all between McDonald and Ontrack. The parties accepted that if there was, it was a contract of service.

The Court held that the starting point was the contractual documentation in place at the outset of the placement, although that would not be determinative of the matter. The parties' communications and/or actions evidencing their intentions could render the real nature of the relationship something different.

The Court considered that a contract of service could arise by mutual assent of the parties where they demonstrated an intention to create contractual relations. For example, the English Employment Appeal Tribunal found a contract of service existed between an agency worker and end user client where a month into the placement the end user offered the worker another position and negotiated regarding pay, all without involving the agency.

However, the Court was cautious not to develop any formal doctrine of implied triangular employment relationships. It commented that the issue as to whether a contract of service existed was an intensely factual one, and each case should be determined accordingly.