Sham contracts: If it looks and sounds like a sham, it is a sham.

By Adam Foster

Wednesday’s decision from the High Court of Australia reminds us that employers need to be careful that they are not misleading individuals into believing that they are independent contractors when in fact they are employees.

Contracting vs. employment has again entered into the spotlight in the High Court decision on 2 December 2015 of FWO -v- Quest South Perth Pty Ltd.

In that case, the Fair Work Ombudsman was appealing a decision of the Full Federal Court decision that found that an individual was an independent contractor instead of an employee.

The facts of the case were:

Quest operated serviced apartments and had engaged two individuals as housekeepers. Some time later, Quest entered into an agreement with Contracting Solutions (“CS”), in which CS purported to engage the two employees as contractors. CS than provided the two employees to Quest under a Labour Hire Agreement between Quest and CS. Quest then represented to the employees that they were contractors. Critically, the roles of the two employees never changed and they continued to provide housekeeping to Quest.

In considering these matters, the Court determined that the meaning of a representation as to employment under section 357 of the Fair Work Act should be interpreted as follows:

1. Whether the representation concerns the character of the contract, which exists between the employee and employer.
2. Whether the content of the representation is that the contract of employment is or would be a contract for services under which the employee performs or would perform work as an independent contractor.

This was determined on the basis that the purpose behind these provisions is to ensure that an employee is not mislead as to the nature and status of their employment or workplace rights.

The take home message for all employers is that they need to be sure that when they contract out the services to a third party, and that third party takes on the employer’s old employees, if the role is still the same, the Court and indeed the Ombudsman will likely construe this contracting arrangement as a sham contract and subject to penalties under the Fair Work Act 2009 (Cth).

If you would like some advice on your contracting/employment arrangements, please contact Chris Morey, Director of Dispute Resolution or Adam Foster, Associate, Dispute Resolution and Employment Law on (03) 9629 9629.