Sham contracting and labour hire arrangements – When is a contractor not a contractor?

In the recent case of Fair Work Ombudsman v Quest South Perth Holdings Pty Limited [2015] HCA 45 the High Court considered the question of whether serviced apartment company Quest South Perth Holdings Pty Limited (‘Quest’) had breached the ‘sham contracting’ provisions of the Fair Work Act.

Background

Quest’s main business was to operate and provide serviced apartments. 2 of its employees, Ms B and Ms R, had worked as housekeepers for Quest for a number of years.

Quest approached a business known as Contracting Solutions Pty Limited (‘Contracting Solutions’) and entered into an agreement where Ms B and Ms R would become independent contractors of Contracting Solutions.

In turn, Contracting Solutions would provide Ms B and Ms R back to Quest to help clean their serviced apartments. By being classed as contractors, Ms B and Ms R would lose a significant amount of entitlements such as long service leave and sick pay.

After making the agreement, Quest told Ms B and Ms R that they were now contractors for Contracting Solutions, however nothing in their day to day duties changed and they continued to work solely in the Quest apartments.



Proceedings

The Fair Work Ombudsman took Quest to court alleging that they had breached section 357 of the Fair Work Act which prohibits ‘sham contracting’ arrangements – where employers assert that individuals who are properly employees are independent contractors in an attempt to avoid their obligations to pay proper employee entitlements.

The Fair Work Ombudsman argued that Ms B and Ms R were in fact still employees of Quest, even though they had been shuffled from one company to another.

The Court was then tasked with determining whether Ms B and Ms R were still employees or had been successfully converted to independent contractors.

Outcome

Looking at the work arrangements of Ms B and Ms R, the Court found that for all purposes they were still acting in the capacity of employees. It did not matter that Quest had re-classed them as contractors or that Contracting Services had agreed to take the housekeepers from Quest.

The fact remained that nothing in their actual work arrangements had changed to treat classify the housekeepers as anything but employees.

As a result, Quest was found to have misrepresented to the housekeepers that they were contractors and so had breached s357 of the Fair Work Act.

Penalties against Quest are now being determined.

It can be a fine line when determining if a worker is an employee or a contractor and getting it wrong can be very costly for businesses. If in doubt, contact Kells so that the right legal advice can be provided.