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The High Court has overturned the decision of the Full Court of the Federal Court (“FCAFC”), putting the final ‘nail in the coffin’ for sham contracting arrangements. If you have (or are considering having) ‘independent contractors’ providing work for your business under similar arrangements to that of employees, or work previously provided by employees, you should obtain specialist advice.

In a recent decision, FCAFC examined a case where two housekeepers employed by Quest agreed to enter into an independent contractor relationship with a third-party contracting company, to then be on-hired back to Quest.1   The effect of that decision was summarised in EMA Note Issue 16 2015.

While the contractors were found to be employees (and that element of the decision was not appealed), the FCAFC found that the employer had not breached the ‘sham contracting’ provisions of the Fair Work Act 2009 (Cth) because Quest had not ‘mischaracterised’ the employment relationship, as the contract for services existed between the employee(s) and a third party instead of Quest. The Fair Work Ombudsman appealed this element of the decision and the High Court has allowed the appeal, ruling that the employer did in fact breach the sham contracting provisions.

High Court Decision

The High Court held that the approach taken by the FCAFC was too narrow and therefore incorrect, and that the misrepresentation by Quest ‘fell squarely within the mischief’ of the sham contracting provisions and were therefore caught by its terms.2

Lesson for Employers

The decision of the High Court puts the final ‘nail in the coffin’ for using contracting arrangements to avoid responsibility for employment-related obligations. If the employer misleads an employee in any way to falsely think that the employee is an independent contractor, the resultant denial of workplace rights will be the same. This will be the case regardless of whether the sham ‘contract for services’ exists with the employer or with a third party, as was the case in Quest.

The High Court restated the long-accepted principle that the parties ‘cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.’3 Where it does so, the employer will likely be found in breach of the sham contracting provisions which can attract penalties of up to $54,000 per breach.

In addition to being in breach, if such persons are found to be employees, the employer will also be responsible for liabilities such as underpayments of wages and other entitlements such as penalties, allowances, overtime, and unpaid superannuation. In addition, any underpayments could constitute a breach of award or the Fair Work Act 2009, potentially attracting up to the maximum penalties per breach.

Require further information/assistance?

 If you require further information or advice, please contact your local Consultant at either our Adelaide or Melbourne offices.

 

Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] FCAFC 3.

2 Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] GCA 45 (2 December 2015) at 22.

3  As above, at 21.

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