Sham contracts (Employee v Contractor) and a recent High Court decision

The Decision

The High Court of Australia handed down a decision with the effect that an “employer” cannot avoid the sham contracting provisions in the Fair Work Act simply by introducing a third party (such as a labour hire company) into its contractual arrangements with its workers.

The previous position as found by the Full Court of the Federal Court in March this year, was to the effect that if an “employer” interposed another person (or entity) between it and the “employee”, such that the “employee” was providing work as an independent contractor under a contract for services made with this other person (or entity), an action under the sham contracting provisions of the Fair Work Act was not actionable.

The Facts

Two housekeepers were employed by Quest South Perth Pty Ltd (Quest) to provide cleaning services. Quest entered into a triangular contracting arrangement whereby Contracting Solutions Pty Ltd (Contracting Services) provided the services of the housekeepers to Quest and the two housekeepers were engaged by Contracting Solutions as independent contractors. Contracting Solutions represented to Quest that the key difference between the old and new arrangement was that Quest would not have to pay penalty rates.

Quest represented to the housekeepers that they were performing work for it as independent contractors of Contracting Solutions and not as employees of Quest.

The housekeepers continued to perform exactly the same work pursuant to their contracts with Contracting Services… the work was performed at Quest and in exactly the same way as they had prior to becoming “contractors”.

The High Court found that the housekeepers had never become independent contractors and, in truth, remained employees of Quest under implied contracts of employment between Quest and each of the housekeepers.

The effect of the High Court’s decision is that the previous narrow approach taken by the Courts to section 357 of the Fair Work Act is no longer, and the reach of that sham contractor provision extends to triangular arrangements where a third party is interposed between an “employer” and an “employee”.

The Lesson

Understand the difference between a worker who is an employee and one who is an independent contractor, and engage the worker correctly – i.e, if an employee … use an employment contract .. and take advice if necessary.

If in doubt, the most prudent thing to do would be to engage the worker as an employee. If that cannot be achieved for some reason then do whatever you can to ensure that the relevant workers are paid at least the minimum they would be entitled to receive pursuant to the relevant industrial instrument if they were an employee of yours.