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Published: 08 December 2015
Author: Penny Savidis

High Court rules Contract a sham

Why a rooster can only ever be a rooster, and a duck only ever a duck

A company seeking to escape its obligations to its employees by shifting them onto "sham" third party contracts has been found by the High Court to be in breach of anti-sham laws.

The High Court of Australia last week ruled on an appeal by the Fair Work Ombudsman against a Full Federal Court decision involving Quest South Perth Holdings Pty Ltd ("Quest") and others.

The two employees concerned, Ms Best and Ms Roden, had initially been directly employed by Quest as housekeepers at its business of providing serviced apartments. Quest and a third party labour hire business called Contracting Solutions Pty Ltd ("Contracting Solutions") then entered into a "triangular contracting" arrangement. Under this agreement, Contracting Solutions agreed to engage the women to perform housekeeping work for Quest as independent contractors working under contracts for services with Contracting Solutions. Contracting Solutions also entered into a labour hire agreement with Quest, agreeing to provide them with Ms Best and Ms Roden’s services.

The Full Federal Court had agreed with the single judge of the Federal Court who earlier dismissed that part of the proceedings that related to the claim that the Quest had misrepresented to Ms Best and Ms Roden that they were independent contractors. Link: Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (No 2) [2013] FCA 582.

The question that arose was whether Quest had contravened the Fair Work Act by misrepresenting to the employees that they were engaged as independent contractors by Contracting Solutions, when in fact they were employed by Quest.

The High Court unanimously allowed the appeal.

The issue raised by the appeal was whether the Fair Work Act prohibited Quest from misrepresenting the alleged independent contract between its employees and Contract Solutions, or the Act was confined to a situation in which Quest misrepresented an independent contract between the employees and Quest itself.

Sham contracting exposed

The High Court found that Quest breached the Fair Work Act (Cth) general protections provisions dealing with sham arrangements.

The Fair Work Act makes it unlawful for an employer who employs, or proposes to employ, an individual to represent that the contract of employment under which s/he is, or would be, employed is a contract for services (an independent contract agreement) when it is actually an employment contract.

As the High Court stated, the purpose of the provision 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."

The High Court found that Quest had by its conduct misrepresented to Ms Best and Ms Roden that they were engaged as independent contractors to perform housekeeping work for the Contracting Solutions labour hire company. It found that, despite the purported triangular contracting arrangement, "[i]n fact, Ms Best and Ms Roden continued to perform precisely the same work for Quest in precisely the same manner as they had always done". The High Court held that the women "never became independent contractors" and had really "remained employees of Quest under implied contracts of employment."

A rooster cannot be a duck

The High Court referred to the explanatory memorandum for the Bill for the Independent Contractors Act 2006 (Cth) and an old industrial case known as Re Porter which explained "sham arrangements" as:

"an arrangement through which an employer seeks to cloak a work relationship to falsely appear as an independent contracting arrangement in order to avoid responsibility for legal entitlements due to employees". It was recorded that courts had held that 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'".

The Court decided that it made no difference that Quest misrepresented the independent contract as between the employees and Contract Solutions rather than between the employees and Quest itself.

The matter has been remitted by the High Court to the Federal Court to hear and determine the issue of pecuniary penalty.

The High Court decision highlights the problems many employees face when presented with sham independent contracting arrangements, especially when multiple parties are involved. Unfortunately, not all workers challenge their arrangements, often leaving them with fewer protections as contractors than would be available as employees.

Victorian Government labour hire inquiry

The Victorian government is currently conducting an Inquiry into the Labour Hire Industry and Insecure Work.

Amongst other things, the Inquiry is investigating the practices of labour hire companies, insecure work and sham contracting to avoid workplace laws and undermine minimum employment standards: Llink: https://engage.vic.gov.au/inquiry-labour-hire-industry-and-insecure-work.

The Inquiry us accepting written submissions until 11 December 2015 and is due to deliver its final report by 31 July 2016.

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