Sham contracting: the High Court will not call a rooster a duck
The High Court provides reminder that employers must be careful about the characterisation of independent contracting relationships
A High Court decision has proved a timely reminder that employers must be careful about the characterisation of independent contracting relationships, particularly where a contractor is engaged in a labour hire arrangement.
The High Court was unanimous in its decision in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd  HCA 45, handed down on 2 December 2015. The decision confirmed that the prohibition contained in s 357(1) of the Fair Work Act 2009 (FW Act) will not be confined to a misrepresentation made in the context of an employment relationship, but will extend to situations where an employer engages ‘independent contractors’ from a labour hire company to perform work.
The upshot of the decision is that employers who represent to an individual engaged via a labour hire agency that they are an ‘independent contractor’, when in practical terms they are an employee, will be caught by the provisions and liable for penalties of up to $54,000 per breach for a body corporate and $10,800 per breach for an individual.
The decision comes at a time of increased scrutiny by state government and regulatory authorities on the accountability of employers using contracting, labour hire and ‘insecure labour’ arrangements. To date, the Victorian, South Australian and Queensland governments have launched inquiries in this space and the Fair Work Ombudsman has prosecuted a number of high profile cases with significant media attention.
The case involved two cleaners employed by Quest South Perth Holdings Pty Ltd (Quest) as housekeepers for a number of years. Quest terminated their employment, and then purported to engage them as independent contractors under a service agreement with Contracting Solutions Pty Ltd (Contracting Solutions). The cleaners then continued to perform the work they had always done at Quest.
The High Court decision
The High Court found that Quest, by its conduct, represented to the cleaners that they were independent contractors of Contracting Solutions, when in reality the cleaners remained employees under implied contracts of employment.
The decision overturns the Federal Court finding that the prohibition in the FW Act was confined to a mischaracterisation of a relationship between an employee and an employer, and not to 'triangular contracting arrangements', as existed with Quest and Contracting Solutions.
In its ruling, the High Court had specific regard for the purpose of the general protections in the FW Act and associated legislation governing independent contractor arrangements. The bench agreed that employees in ‘disguised employment relationships should have appropriate remedies available to them’.
The High Court also referred to previous cases where it was found that the parties ‘cannot create something which has every feature of a rooster, but call it a duck and insist that everybody recognise it as a duck’.
The High Court’s finding has broad implications for employers who seek to use a third party provider to ‘cloak a work relationship to falsely appear as an independent contracting arrangement in order to avoid legal entitlements due to employees’.
Lessons for employers
The decision is a reminder for employers that the sham contracting provisions prohibit a range of conduct, and employers should:
- exercise caution when engaging independent contractors, in particular regarding statements made to those contractors about their employment status
- ensure that your human resources function has a clear understanding of the test applicable to the employer/employee versus employer/independent contractor relationship
- provide appropriate training to in-house recruitment functions regarding the sham contracting provisions and status of workers
- audit procurement arrangements to identify any areas of risk and ensure that appropriate arms-length commercial arrangements are in place with labour hire providers
- seek advice on structuring outsourcing arrangements.
The case will now be listed in the Federal Court for a penalty hearing.
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