The recent decision of the High Court in CFMMEU v Personnel Contracting Pty Ltd (Construct) has challenged the business model of labour hire firms nationwide and across industries. Labour hire firms should urgently review their contracting arrangements or risk underpayment claims from independent contractors now seeking payment as employees.
Odco: a recap
Odco arrangements describe a labour hire company entering into a contract with a host company to provide labour, and then entering into a contract with workers to provide that labour. There is no contract between the worker and the host company. The term "Odco" stems from a Federal Court decision in 1989 where this arrangement was affirmed as valid (Odco Pty Ltd v Building Workers Industrial Union of Australia [1989] FCA 483).
In Odco arrangements, the worker is often engaged by the Labour Hire Provider as an independent contractor, meaning they are not an employee of either the host company or labour hire company, and therefore have no employee entitlements such as paid sick or annual leave, or protections under the Fair Work Act 2009 (Cth).
The Construct arrangement
The Construct decision centred on whether Mr McCourt, a 22 year old backpacker providing unskilled labour on building sites, was an independent contractor or an employee of Construct. Construct had a Labour Hire Agreement with Hanssen, a building company, describing Construct as an "administrative services agency" who provided "self-employed contractors" as labourers to Hanssen building sites.
Construct also had an "administrative services agreement" with Mr McCourt. This agreement described Construct as "[liaising] between" builders and self-employed contractors to provide labour to builders and “financial administrative services” to contractors. Construct was responsible for determining where, when and how Mr McCourt would provide labour; finding opportunities for Mr McCourt and paying him. In return, Mr McCourt had to tell Construct if he negotiated a pay rise and “co-operate in all respects with Construct and the builder…”.
This arrangement is below:
The decision – or, how Odco died
The High Court reviewed Construct’s arrangements and determined that, despite the attempt to paint him as an independent contractor, Mr McCourt was an employee of Construct and not an independent contractor. There were two key features in the contract leading the High Court to this decision.
The first was that the Court decided Mr McCourt was not running an independent business, which is a feature of an independent contractor. The Court pointed to Construct’s contractual right to determine Mr McCourt’s hourly rate, pay his wage, and terminate the agreement if he failed to co-operate with them. In a more chilling assessment for labour hire companies, the High Court held that “there would be no reason for the existence of such obligations if Construct were not in the business of labour hire, but rather in the business of ‘introducing’ suppliers of labour to builders and leaving those parties to sort their own affairs”. Ultimately, the Court concluded that Mr McCourt was not running his own independent business as a labourer but was working as part of Construct’s business in providing labour.
The second feature was that Construct retained control over Mr McCourt. Construct argued that it did not control Mr McCourt’s work, and he performed his duties under the direction and control of Hanssen. However, the Court noted that under the contract it maintained a right to control the work, including where Mr McCourt performed the work and what he was paid. The Court also placed weight on the clause in the agreement which stated that Mr McCourt would “co-operate in all respects with Construct and the builder”. The Court concluded that, in effect, the worker had no discretion over what work he performed or how he performed it. They also reasoned this is inherent to the labour hire business model, as that business model depends on the ability to supply compliant labour to businesses and is the primary asset of labour hire businesses.
What this means for labour hire companies
While the High Court decision focused on the contract between Mr McCourt and Construct, their reasoning strikes at the heart of Odco arrangements, calling into doubt whether there is any contractual work-around. As the Court observed, the contractual features which made Mr McCourt an employee and not an independent contractor (such as Construct’s requirement to pay him, set his wage and direct him to perform work for a specific builder, as well as the requirement for him to cooperate with them), are inherent features of the labour hire business model.
The risk will be significantly lower if labour hire agencies are engaging workers directly as employees, rather than as independent contractors.
Labour hire companies should urgently seek legal advice to review contracts with independent contractors, specifically aiming to minimise their role and any control they hold. If this can’t be avoided, they should ensure their contracts have a strong indemnity clause and review their agreements with host companies to determine if there is flexibility in the model they are using to engage workers.