Mark Branagan

High Court slams sham

Mark Branagan

15 December 2015

Employment Contracts Employment Policies

In a stirring endorsement of the ‘sham contract’ provisions of the Fair Work Act 2009 (FW Act), the High Court has allowed an appeal by the Fair Work Ombudsman (FWO) for penalty orders against Quest South Perth Holdings Pty Ltd (Quest).

Quest operated a serviced apartment business in Perth. In 2009, Quest told two employee housekeepers that they must sign new contracts with a labour hire business, Contracting Solutions, and keep working for Quest under those new contracts. Despite doing the same jobs, the housekeepers were told by Quest that they had become ‘independent contractors’ by virtue of their new contracts with Contracting Solutions.

Section 357 of the FW Act prohibits a person from making misrepresentations about the nature of a contract, i.e. whether the worker is an employee or an independent contractor. The FWO prosecuted Quest in the Federal Court for a breach of s 357, but the case was dismissed. Quest succeeded in running a technical argument in the Federal Court that the prohibition in s 357 did not extend to misrepresentations about the status of a contract with a third party such as Contracting Solutions.

The FWO appealed and eventually succeeded in the High Court.  The High Court found that s 357 did apply to the misrepresentations made by Quest. When analysing s 357 in the context of the broader ‘General Protections’ and ‘Workplace Rights’ provisions of the FW Act, the High Court emphasised that the purpose of these laws

‘is to protect an individual who is in truth an employee from being misled by his or her employer about his or her employment status. It is the status of an employee which attracts the existence of workplace rights.’

The High Court also noted that, when the sham contracting laws were first introduced to Parliament in 2006, the Explanatory Memorandum declared that:

employees in disguised employment relationships should have appropriate remedies available to them.’

This decision reinforces the FW Act’s sham contracting prohibitions with a broad approach to their application and enforcement.  It is also a cautionary tale for businesses proposing to outsource services that have historically been performed on an employer/employee basis.  While there is still a place for legitimate labour hire or contracting arrangements, this outcome highlights the need for specialist advice when restructuring workforces or proposing to enter into contracting arrangements.

In the last two years, the FWO has obtained substantial penalties in excess of $200,000 to $300,000 against businesses engaging in sham contracting arrangements.