Spotlight on Sham Contracting Arrangements

In two recent cases that proceeded to the High Court of Australia it has been found that the companies in each contravened the ‘sham contracting’ provisions of the Fair Work Act 2009 (Cth) (FW Act).

The essence of sham contracting is that a company has disguised a relationship with a worker which is truly an employment relationship as an independent contracting arrangement.

Proceedings seeking civil penalties or other orders (such compensation or an injunction) for alleged sham contracting arrangements can be instituted by Fair Work Inspectors, including from either the Fair Work Ombudsman or Fair Work Building and Construction, not only affected employees or industrial organisations.

The arrangements in each of these cases were very different, but in each it has been found that the company contravened the sham contracting provisions by misrepresenting the nature of workers’ employment status. In the first case, the workers were not paid statutory entitlements (such as superannuation or annual leave). In the second case, the employer was found to have contravened the provisions even though the workers were highly paid (well in excess of the award).

Labour hire relationships – Fair Work Ombudsman v Quest South Perth Holdings [2015] HCA 45

The Fair Work Ombudsman commenced proceedings in the Federal Court seeking penalties against Quest, the proprietor of serviced apartments.

Contracting Solutions, a labour hire organisation, purported to engage two housekeepers who had previously been employed directly by Quest as independent contractors by entering into contracts for services with them.

The housekeepers performed precisely the same duties exclusively for Quest in precisely the same manner as they had done before entering into the contract for services.

Quest arranged a meeting between the housekeepers and Contracting Solutions. The Full Federal Court found that Quest represented to the housekeepers that upon entering into the contract for services with Contracting Solutions, they would continue to perform work at Quest, but would do so as independent contractors of Contracting Solutions and not as employees of Quest. The High Court found that this amounted to a representation that the housekeepers remained employees of Quest under implied contracts of employment.

Quest was found by the Full Federal Court not to have contravened the sham contracting provisions of the FW Act.

The Fair Work Ombudsman appealed to the High Court who granted the regulator its application for special leave.

The High Court went on to reject the Full Federal Court’s decision that Quest did not contravene the sham contracting provisions. The Full Court adopted a narrow interpretation of these and found that to contravene the provisions, a representation to an employee must mischaracterise the contract of employment that exists between the employer and employee as a contract for services between them. The High Court disagreed and found that contracts for services between workers and other parties (such as labour hire companies) also have the potential to mislead a person as to their employment status. If the prohibition on sham contracting only applied to contracts with employers and not labour hire companies and third parties, this would defeat the object of the provisions by allowing similar labour hire arrangements to continue and deprive workers of their legal entitlements.

The High Court remitted the proceedings to the Federal Court to assess pecuniary penalties (up to $54,000 per breach).

Labour hire arrangements have become increasingly popular and the High Court’s decision should serve as a warning to companies who engage workers who are not running their own business as true independent contractors. Employers should obtain advice as to whether their independent contracting arrangements are compliant with the FW Act.

Overpayments – Linkhill Pty Ltd v The Director of the Fair Work Building Industry Inspectorate [2015) HCA Trans 340

The High Court refused an application for special leave from a decision from the Full Federal Court of Australia in which the Linkhill Pty Ltd was found to have contravened the sham contracting provisions.

Linkhill contended that it paid contractors engaged by it well in excess of award rates, but the Federal Court held that the workers were employees such that it had underpaid them by not paying their legal entitlements as employees and also imposed a significant penalty of $313,500.

The High Court considered that the circumstances of this case did not warrant the consideration of these issues by a grant of special leave. In declining special leave, the High Court did not take the opportunity to address conflicting decisions regarding the treatment of over award payments in sham contract cases. The issue to be resolved is whether an hourly rate paid to a contractor which is higher than the award, can be offset against the value of the award and/or statutory entitlements.[1] The High Court’s approach leaves companies exposed to a liability to compensate workers for entitlements even though the amount they are paid as contractors exceeds their global entitlements under the applicable award/statute.

Companies should carefully review their independent contracting arrangements and obtain advice from an experienced employment practitioner as to whether changes are required, even where the workers appear to be happy with the arrangements, because as is demonstrated by the Linkhill decision this may not prevent the risk that Fair Work Inspectors may pursue them for contravening the sham contracting provisions of the FW Act.

[1] Where the contractor is found to be an employee.

For more information, please contact:
Patrick Walsh

Patrick Walsh
p.  +61 8 8124 1941
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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