02 Dec 2015

High Court extends sham contracting provision to triangular arrangements

An employer cannot avoid the sham contracting provision in section 357 of the Fair Work Act 2009 (Cth) by introducing a third party (such as a labour hire company) into the contractual arrangements, following today's High Court of Australia decision in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45. Clayton Utz acted for the Fair Work Ombudsman (FWO).

Quest attempt to "convert" its employees into independent contractors

The two housekeepers were employed by Quest South Perth Pty Ltd (Quest) to provide cleaning services. Quest purported to "convert" the employees into independent contractors through a triangular contracting arrangement wherein a company known as Contracting Solutions Pty Ltd provided the services of the housekeepers to Quest pursuant to a contract between Contracting Solutions and Quest, and the housekeepers were engaged by Contracting Solutions as independent contractors under contracts for services.

Quest represented to the housekeepers that they were performing work for Quest as independent contractors of Contracting Solutions under a contract for services, not as employees of Quest. They continued to perform precisely the same work at Quest in exactly the same way as they had always done. The housekeepers never became independent contractors and were, in truth, employees of Quest under an implied contract of employment between Quest and each of the housekeepers.

The FWO applied to the Federal Court of Australia alleging that Quest contravened section 357 of the Fair Work Act.

Previous position: section 357 could be avoided with a third party

Under section 357(1), "a person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor."

The Full Federal Court of Australia construed section 357 in such a way that the employer (Quest) could avoid the sham contracting provision by introducing a third party (Contracting Solutions) into the contractual arrangement between the employer and the person who was, in truth, the employee.

To explain the "mischaracterisation" requirement, it sought to rely on the fact that section 357(1) is concerned with misrepresentations about "the" contract of employment between the employer an employee. On the Federal Court's interpretation of the provision, an employer could easily circumvent the operation of the provision and it would not capture more elaborate sham arrangements.

New position: section 357 extends to triangular arrangements

The High Court accepted the FWO's argument that the Full Federal Court's narrow construction of section 357(1) is not supported by the text of the sub-section.

The High Court said that "Who might be the counterparty to the represented contract for services, and whether that counterparty might be a real or fictional entity, is correspondingly immaterial to the operation of the provision."

The effect of the High Court's decision is that the narrow approach to section 357 is no longer applicable and its reach will extend to employers who interpose a third party into the sham arrangement.

Lessons for employers: know the true nature of the employment relationship

Employers should be conscious that they do not misrepresent employment as an independent contracting arrangement. The High Court has made it clear that section 357 can no longer be easily avoided simply by introducing a third party to disguise the true employment relationship.

Understanding whether an individual is an employee or an independent contractor is not always a simple exercise. We urge employers to get legal advice to ensure that the minimum safety net of entitlements is provided to all individuals who are employees at law.

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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.