The Federal Court has found that setting up an “internal” labour hire arrangement to move employees to a different employer once they reached 40 hours of work in a week, was a “sham” arrangement designed to avoid paying overtime.

The employer was a family trust which owned a fruit farm in Queensland. Two additional companies were set up, with each of the farmers’ two sons acting as sole director and shareholder of each of those additional companies. The Court accepted that to pay overtime would impact on already low profit margins in the business and that employees wanted to work as many hours as they could. It was also accepted that in the industry, many employers did not pay employees overtime.

Justice Collier considered a range of factors that clearly showed that the true employer was the family trust. Such factors included that:

  • the employees considered the parents (ie the directors and shareholders of the family trust) to be “the bosses” with the capacity to fire and hire;

  • the employees had limited knowledge of the additional companies and believed they worked for the farm owned by the trust;

  • the employees were not aware that any hours above 40 hours per week were for a different employer; and 

  • it was clear that the additional companies existed only to provide services to the family trust. As such, Justice Collier held that it was very clear that the additional companies were created “to obviate the legal requirements of [the employer] to pay overtime for more than 40 hours work.” 

Key point for employers: 

  • Despite business rationale, or engrained industry practice, in circumstances where a company is clearly set up for an ulterior purpose, such as avoiding obligations to pay overtime, the arrangement will be considered a “sham”.

A link to the decision can be found here: Fair Work Ombudsman v Eastern Colour Pty Ltd (No 2) [2014] FCA 55 (11 February 2014)