High Court hands down decision on third party sham contracting

Independent contracting has been a hot topic this year and we predict that it will be for some time to come. Last week, the High Court added another layer to this discussion after handing down its decision in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45 (Quest Decision).

The Quest Decision was an appeal from the Full Federal Court about sham contracting and the operation of s357(1) of the Fair Work Act.

Sham contracting occurs when an employer makes a misrepresentation to an employee characterising their employment contract as a contract for services (identifying that person as an independent contractor, rather than an employee).

In the Quest Decision, two housekeepers who were employees of Quest were moved onto independent contractor agreements with Contracting Solutions Pty Ltd, a labour hire company. Quest then entered into a labour hire agreement with Contracting Solutions through which Contracting Solutions provided the services of the two housekeepers to Quest.

Quest made a representation to the housekeepers that they would continue working for Quest, but would be engaged as independent contractors through Contracting Solutions. In reality, the housekeepers continued to perform exactly the same work as they had always done and were, in fact, always employees.

The Full Federal Court previously dismissed any argument that Quest could get caught up in a contravention of s357(1) for sham contracting because the representation it made was about the contracting arrangements of the workers with another person (namely, Contracting Solutions), not with Quest. Therefore, it was not an employer mischaracterising an employment contract to which it was a party, because it was not contracting directly with the workers when the representation was made.

The High Court disagreed with this construction and said that “The misrepresentation attributed to Quest was squarely within the scope of the mischief to which the prohibition in s 357(1) was directed and is caught by its terms.”

It was held by the High Court that whether the misrepresentation was made by Contracting Solutions or by Quest, it was made to an employee with the result of misleading that employee about their employment contract. The High Court further reasoned that the relevant provisions of the Fair Work Act (of which s357(1) is a part) are directed to the protection of employee rights, so no matter by whom the misrepresentation was made, the denial of workplace rights would be the same for the employee and accordingly, that misrepresentation will still be the type of mischief that s357(1) is intended to catch.

The Quest Decision is just the latest in a series of decisions and FWO investigations that highlight the pitfalls of poorly conceived independent contracting arrangements. In our view, there are two main lessons to take away from the Quest Decision:  

·       Firstly, labour hire companies engaging workers as independent contractors should be aware of the ways in which placing workers with former employers can give rise to workers’ rights.

·       Secondly, employers engaging labour through a labour hire company would be wise to make enquiries about the contracting/employment arrangements under which the labour hire company engages their people or, like Quest, they could be facing unforeseen liability.