20 Mar 2014

Labour hire or legal fiction? Successfully managing labour hire workers

by Fiona Austin, Shae McCartney

Businesses using labour hire workers need not be alarmed by recent developments in independent contracting law if they understand the distinction between managing labour hire contractors and other independent contractors.

Businesses that use labour hire workforces can reduce legal risk if they heed the lessons of a recent Fair Work Commission decision which clarifies the legal circumstances required to give rise to an employer-employee relationship in the context of labour hire (FP Group Pty Ltd v Tooheys Pty Ltd [2013] FWCFB 9605).

The labour hire workers' claim against Tooheys

Labour hire workers employed by FP Group Pty Ltd took action against the brewer Tooheys in the context of dismissal claims to establish that Tooheys was their employer. FP Group had previously been established by and employed former Tooheys employees. FP Group had a contract with Tooheys to provide labour hire services to it.

The Full Bench of the Fair Work Commission found that Tooheys' practical administration of its contract with FP Group meant there was no employer-employee relationship with the labour hire workers, despite a high degree of control over their daily work.

Although Tooheys provided all tools and training and supervised the workers and their performance on a day-to-day basis, on matters such as recruitment and selection, payment, discipline and termination, Tooheys had not crossed the line to create a direct employment relationship. FP Group was carrying on a genuine independent business which offered services to other businesses as well as Tooheys.

The Full Bench also declined to find that FP Group and Tooheys were joint employers, finding the concept of joint employment is not currently supported by the Australian common law.

Why is the decision important?

For businesses that routinely use labour hire workers, there are financial and other potentially serious consequences where an employer-employee relationship is found to arise. As well as making the business accountable for employment-related benefits and protections, if the business is found to have employer status, some risk and liability shift to the employing business. The business can be held accountable for certain tortious, contractual and statutory breaches by the employee. Some businesses and management personally have also been heavily penalised for engaging in "sham contracting" when they have misrepresented the nature of the relationship.

The lessons from Tooheys, if applied, will help businesses avoid findings that their labour hire workers are their employees. However this does not mean that there is never any exposure from labour hire arrangements: the courts have held that labour hire workers are employees of the host business, because a direct or implied contract was found to exist between the business and the labour hire workers. This can be because of a pre-existing relationship, a documented intent to create legal relations directly, or a lack of genuine independence in the enterprise of the labour hire entity.

How to minimise legal risk in labour hire situations

Businesses can limit their legal exposure if their management of labour hire workers is consistent in practice with a genuine labour hire arrangement, and does not create a direct contractual relationship with the worker.

Some important practical considerations:

  • Businesses should avoid integrated or dependent labour hire entities. They should enter into commercial arm's length arrangements with labour hire businesses which also supply services to other entities in the industry.  
  • The decision whether to employ a particular worker should be made by the labour hire entity, not the host employer. While it may be appropriate for a business to interview or select from a panel of proposed workers for an assignment, decisions about employment must generally be made by the labour hire entity. Direct or dependent offers should be avoided.  
  • Language used by the business should be consistent with labour hire arrangements. Selection of workers for "assignments" is appropriate; reference to "selection for a position or role" may not be. 
  • Pay should be generally negotiated directly between the labour hire entity and the worker. The host business does not need to know anything other than the rates it has negotiated with the labour hire entity. Employment records should not be visible to the host employer.  
  • Leave requests and arrangements should generally be administered directly by the labour hire entity. Long-term benefits such as health benefits and gym memberships should also be reserved for direct employees rather than labour hire workers. 
  • Any rewards, warnings or discipline for conduct or performance should generally fall to the labour hire entity. Businesses can continue to directly supervise the day-to-day work of labour hire workers and give feedback on their performance. Ultimately however the business should report on the workers' overall performance to the labour hire entity.  
  • Training should be site-specific. Businesses can also offer training in requirements specific to their work sites, but ideally it should not involve providing up-skilling or new qualifications. 
  • Communication and consultation about the work and ongoing employment should remain matters for the labour hire employer. Businesses may decide that a worker is no longer required in its operations, but generally it should not consult or liaise with the worker about this issue or be concerned in the employment consequences.

In light of these developments, businesses should look closely at their labour hire arrangements to identify potential high-risk scenarios. Management systems can be modified for long-term solutions and individual fixes negotiated on a case-by-case basis.

With the right procedures in place and an understanding of the legal issues associated with independent contracting, the flexibility of labour hire arrangements remains a commercial solution for businesses to meet their labour needs.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.