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Employment Law Case Alert | Engaging Contractors

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Employment Case | FWO v Quest South Perth - An Important Lesson for Those Who Engage Contractors

JUNE 2017

  • The Federal Court of Australia has fined a provider of serviced apartments $54,450 after its involvement in sham arrangements with staff.
  • A General Manager has also been fined $4,290 for his "intimate" involvement in attempting to purportedly convert the workers from employees to contractors.
  • Employers who engage individuals as contractors are strongly advised to undertake an urgent audit of their contracting arrangements.

Background

After a protracted legal dispute which went all the way to the High Court of Australia (HCA) late last week, Quest South Perth Holdings Pty Ltd (Quest)
and a General Manager (GM) were fined $54,450 and $4,290 respectively for their involvement in sham arrangements.

Sham contracting or “sham arrangements” occur when an employer:

  • misrepresents an employment relationship as an independent contracting arrangement; or
  • dismisses or threaten to dismiss an employee to engage them as an independent contractor; or
  • knowingly makes a false statement to persuade or influence an employee to become an independent contractor.

In late 2009 the GM of Quest contacted a contract labour hire company Contracting Solutions Pty Ltd (Contracting Solutions). After various meetings
involving the GM and Contracting Solutions representatives, Contracting Solutions was engaged to implement its contracting system for Quest’s housekeeping and reception staff.

Correspondence between Quest and Contracting Solutions suggested that one of the motivations of this new arrangement was so that Quest need not concern itself with employment law protections such as minimum entitlements, penalty rates and unfair/unlawful dismissal.

After implementing the contracting system, two of Quest’s existing housekeeping employees signed contracting agreements with Contracting Solutions. Subsequently, these employees continued to perform the same housekeeping work they had as employees and remained under the direct control of Quest.

A receptionist of Quest did not feel comfortable with the new contracting arrangement. The GM was found to have told the employee that if she did not complete the agreement, she would not be paid. In response, the employee completed the contracting agreement. However, the employee was afterwards told that there was no work remaining for her.

Decision

After the HCA appeal, the matter was referred to the Federal Court to rule on the question of penalty.

Quest was fined $16,500 for each misrepresentation to the contractors, and $21,450 in relation to the threatened dismissal. The maximum possible penalty for each of these contraventions is $33,000.

The GM was held personally responsible for his deliberate involvement in the threatened dismissal of Quest’s receptionist. He was fined $4,290 with a maximum possible penalty being $6,600.

Why were the penalties significant? In general terms, the Court held the contracting system was deliberately implemented to circumvent the protection of employee’s rights and entitlements and as a result, the affected employees suffered financial and non-financial loss. This was not mere inadvertence or mistake.

It is important to recognise that the Court treated each misrepresentation in relation to the housekeeping employees as distinct courses of conduct to be treated separately in the determination of penalties.

Implications for Employers

In our experience, it is rare for employers to actively take steps to “convert” employees to an independent contractor arrangement, and even rarer to find an employer actively pressuring a worker to do so.

However, an employer need only “misrepresent” an employment relationship to potentially contravene the sham arrangement provisions. Even then, the risks with misclassifying employees as contractors are not limited to sham arrangements, but can give rise to penalties and liabilities arising under laws relating to superannuation, minimum wages, payroll tax, annual and long service leave and others.

Importantly:

  • the indicators relevant to whether a relationship is that of employment or a contract for services, are largely assessed on how the relationship works in practice;
  • although a written contract is critical, the best contract in the world cannot avoid all liability nor certain obligations on an employer to pay minimum entitlements;
  • individual managers are increasingly being found to be personally responsible for their involvement in contraventions of the Fair Work Act 2009 (Cth); and
  • when in doubt seek legal advice.

Further Questions

If you have any questions about the issues raised in this article, please contact one of our Workplace Relations, Employment and Safety team specialists below.

Disclaimer

The content of this newsletter is for general information purposes only and should in no way be treated as formal legal advice.