The Sham Of It All!

Surely I can save money by terminating the employment of a worker and then re-engage them as an independent contractor?

Not so fast….

Recently the Federal Court of Australia imposed a significant financial penalty against a company after that company was found to have breached the sham contracting provisions of the Fair Work Act 2009 (Cth) (“the Act”).

Section 357 of the Act protects genuine employees from “sham” arrangements in which they are portrayed as being independent contractors whereas in reality they are genuine employees.

Genuine employees are entitled to a range of rights and benefits (including sick leave, holiday pay and superannuation) whereas independent contractors do not enjoy these same benefits.

A sham self-employment contract arises in circumstances where a person is engaged to undertake certain work and/or provide certain services ostensibly as an independent contractor when the true situation is that they are not actually an independent contractor at all but an employee.

Cases where employers have misrepresented employees as being independent contractors have become more prevalent primarily because there is a financial benefit in doing so.   It is often less expensive to engage an independent contractor than to engage the services of an employee and, further, very often there are not the same risks associated with terminating an independent contract as there are in terminating the services of an employee.

On 2 December 2015 the High Court of Australia handed down its decision in the matter of Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (2015) HCA 45, which was a case in which in 2009 Quest South Perth Holdings Pty Ltd, through the services of an independent  staffing agency, terminated the employment of two housekeepers and then immediately re-hired them but allegedly as independent contractors to perform the same duties.  The Fair Work Ombudsman commence legal proceedings against Quest South Perth Holdings Pty Ltd alleging that this arrangement was in breach of the sham contracting laws set out in Section 357 of the Act.

Initially the proceeding commenced by the Fair Work Ombudsman in the Federal Court of Australia was unsuccessful. However, in a subsequent Appeal to the High Court of Australia, the Court held that Quest South Perth Holdings Pty Ltd had breached the sham contracting provisions of the Act by misrepresenting an employment relationship with the the two housekeepers as that of independent contracting. The High Court of Australia said that the two housekeepers continued to perform precisely the same work for Quest South Perth Holdings Pty Ltd in precisely the same manner as they had always done. The Court said that in law, the two housekeepers had never become independent contractors.

The Federal Court of Australia when it initially rejected the argument of the Fair Work Ombudsman found that the sham contracting provisions of the Act had not been breached because the arrangements had been made through the services of a third party (an independent labour hire firm) and not directly between Quest South Perth Holdings Pty Ltd and the two housekeepers. However this finding was rejected by the High Court of Australia and the fact that the arrangement was conducted through the services of the labour hire firm did not mean that the sham contracting provisions of the Act had been circumvented and not breached. Indeed the High Court of Australia went on to say that the misrepresentation by Quest South Perth Holdings Pty Ltd was exactly the type of activity which was intended to be caught by Section 357 of the Act.

The High Court of Australia referred the matter back to the Federal Court of Australia for it to impose appropriate penalties.  The Federal Court of Australia has recently dealt with the issue of penalty and imposed  a fine of  $59,000 against the company for breaching the sham contracting provisions of the Act.

This case highlights the difficulties faced by those who engage the services of workers and those workers themselves in determining whether a particular relationship is one of employer and employee or, alternatively, one of principal and contractor. This distinction can have significant financial and other consequences for all involved.  The Courts have developed a series of key indicators to assist in determining whether a particular relationship is one of employer and employee or, alternatively, one of principal and contractor.   None of these indicators is alone determined in a true and ultimately it is for the Court to decide based on all of the evidence before it.

Perhaps the more significant feature of this decision is that it highlights that the sham contracting provisions of the Actcannot be avoided by utilising a labour hire firm through which to engage the worker.

In order to minimise the risk of being caught in a sham contracting situation, employers should:

1. ensure that the relationship with their workers is what they have assumed them to be.   If in doubt, they should seek competent legal advice;
2. ensure that they do not misrepresent the nature of relationship to workers otherwise they will face prosecution and potentially significant penalties, for breaching the Act;
3.  if engaging workers through a third party such as a labour hire firm, continually examine the relationship and implement risk management strategies.   If an employment relationship is later found to exist instead of one of contractor, the employer can be liable for significant back payment of entitlements in addition to any penalties that may be imposed for breaching the Act.