High Court finalises position on sham contracting in triangular contracting arrangement

The High Court has determined that the sham contracting provisions in the Fair Work Act protect employees engaged by third party contractors and performing services to their former employer. The decision serves as a warning to employers attempting to disguise employment relationships as independent contractor arrangements under triangular contracting arrangements.

The facts

In the recent decision of Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd & Ors [2015] HCA 45, the Fair Work Ombudsman (FWO) commenced proceedings alleging that Quest South Perth Holdings Pty Ltd (Quest) had misrepresented to two employees that they performed services as independent contractors under an engagement through a third party cleaning contractor.

The employees had been engaged by Quest as employees to perform cleaning services. Quest then entered into an arrangement with a third party cleaning contractor which resulted in the employees being engaged as independent contractors by the cleaning contractor to perform cleaning services to Quest. Importantly, the services performed by the employees to Quest as independent contractors were the same services they performed previously as employees when directly employed by Quest.

Section 357(1) of the Fair Work Act provides that an employer who employs an individual must not represent to that individual that the contract of employment under which the individual is employed by the employer is a contract for services under which the individual performs work as an independent contractor.

Federal Court

The FWO commenced proceedings against Quest claiming penalties for Quest’s contraventions of section 357 of the Fair Work Act. At first instance the Federal Court dismissed the proceedings.

On appeal to the Full Federal Court, the Court found that while the effect of the conversion of the employees to independent contractors did not vary the services they performed for Quest (apart from the employees receiving payment of wages from the third party) the proceedings were dismissed on the grounds that a contravention of the sham contracting provisions under section 357 of the Fair Work Act had not been established because:

• the employees were not forced to enter into the contracting arrangement; and
• there had to be a representation made by the ‘employer’ (i.e. Quest) to the employees about the mischaracterisation of the contract of employment. Here, the contract for services was made between the employee and the third party cleaning contractor and did not include Quest.

High Court

The High Court overturned the Full Court’s decisions and held that section 357(1) of the Fair Work Act prohibits an employer from misrepresenting to an employee that an employee performs work as an independent contractor under a contract for services with a third party.

Importantly, the High Court found:

• that there was a ‘triangular contracting’ arrangement entered into by Quest whereby a third party engaged the employees as independent contractors and the employees performed the exact same services for Quest but as independent contractors;
• the purpose of the sham contracting provisions under the Fair Work Act are to protect individuals who are in truth employees from being misled as to their employment status; and
• the misrepresentation by Quest to the employees as to their employment status was squarely within the scope of the mischief to which the prohibition in section 357(1) was directed.

This is an important decision for employers to ensure that their employment and contracting arrangements are lawful.

This article originally appeared in Cooper Grace Ward’s Workplace Relations & Safety Risk Management Adviser – December 2015. Click here to download the full newsletter.