Why using “contractors” without proper advice won’t save you money in the long run

Increasingly, businesses are approaching us for advice in relation to their use of contractors and labour hire arrangements to meet their labour needs. Of course we appreciate the advantages of such arrangements for businesses. However, businesses who engage in any arrangements which illegitimately classify employees as contractors, now - more than ever, are running the gauntlet.

In a recent decision, the Federal Circuit Court sent a clear message on this issue, fining an employer and its sole director a total of $124,000 for sham contracting and associated legal breaches.

Photography / Cimexus

Photography / Cimexus

Our tips are:

  • As an HR professional, manager or director, it is vitally important that you understand the legal differences between contractors and employees.
  • Review the employment arrangements in place in your business (including your supply chain).
  • If unsure, seek proper advice.
  • Don’t take short cuts. It is no longer good enough to say “it’s someone else’s risk”.
  • Work with your lawyer to rectify or minimise any legal risks.

Fair Work Ombudsman v Australian Sales & Promotions Pty Ltd & Anor [2016] FCCA 2804

Australian Sales & Promotions Pty Ltd (ASAP) engages fundraisers who collect donations for charities. Mr Paul Ainsworth is the sole director of ASAP and responsible for its management. The Fair Work Ombudsman prosecuted ASAP for:

  • falsely representing to a fundraiser that he was an independent contractor, rather than an employee;
  • failing to pay the fundraiser his minimum rates of pay and casual loading;
  • requiring the fundraiser to use some of the money paid to him for business expenses; and
  • failing to keep employee records.

The Ombudsman also prosecuted Mr Ainsworth on the basis that he had accessorial liability for ASAP’s contraventions of the Fair Work Act.

In this case, the fundraiser was a UK citizen working in Australia on a working holiday visa and was engaged by PMA Unit Pty Ltd (PMA), the sole shareholder of ASAP. Mr Ainsworth was also a director of PMA. The parties filed an agreed statement of facts where they agreed that the fundraiser was an employee of ASAP and not an independent contractor. This was for various reasons including that the fundraiser:

  • was subject to the day to day control of and supervision of ASAP;
  • was required to wear a uniform supplied by ASAP which identified the charity he collected for;
  • was required to attend at ASAP’s premises each morning and work set hours;
  • personally performed his work and was not able to delegate work to third parties; and
  • was paid on a weekly basis and did not create invoices.

The Court accepted that the fundraiser was an employee as a matter of law and therefore entitled to minimum rates of pay and casual loading. The Court also accepted that the fundraiser could not lawfully be required to spend his income on business expenses and that as an employer, ASAP had an obligation to maintain employee records in compliance with the Fair Work Act.  This case follows a string of recent cases where the Court then looked at the conduct of Mr Ainsworth and the question of accessorial liability.

The Fair Work Act provides that a person who is involved in a contravention of the Act is also taken to have contravened the Act.  A person will be involved in a contravention of the Act if the person:

  • has aided, abetted, counselled or procured the contravention; or
  • has induced the contravention, whether by threats or promises or otherwise; or
  • has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention;
  • has conspired with others to effect the contravention.

The Court accepted that Mr Ainsworth, as the controlling mind and ultimate manager of ASAP, was involved in the contraventions, but went one step further and had regard to the fact that ASAP was prosecuted by the Fair Work Ombudsman for similar breaches in 2012.  The Court accepted that the existence of the previous prosecution suggested Mr Ainsworth was fully aware that the fundraiser was not an independent contractor and was entitled to applicable employee entitlements. The Court was also prepared to infer that the fundraiser was ‘engaged’ by PMA in order to create some form of labour-hire arrangement that would distance ASAP from any potential employment relationship and said that “… the absence of an arm’s length relationship between ASAP and PMA meant that the arrangement could not be characterised in that way”. Accordingly, a penalty of $24,000 was imposed on Mr Ainsworth personally for his role in the contraventions.

This case shows the importance of properly characterising employees and independent contractors, paying employees their proper entitlements and the risks for managers and directors who are involved in breaches of the Fair Work Act. The 2015 – 16 Fair Work Ombudsman Annual Report noted that:

“Encouraging businesses to take responsibility for their supply chains and networks, and fully utilising our accessorial liability provisions are essential tools in building a culture of compliance with workplace laws. Nearly every matter we filed in court—92%—roped in an accessory (a party other than the employer who played a role in the exploitation of workers). In 2015–16 this included accountants and human resource managers.

By pursuing accessories, we can seek penalties from individuals involved in the conduct, irrespective of whether the corporate employer is still operating, or has money in the bank. And after the recent precedent-making case of FWO v Step Ahead Security Service Pty Ltd & Anor, we can now also recoup back-payments from accessories, making them directly accountable for underpayments in which they were involved”

This is an area than employers can expect the Fair Work Ombudsman to focus on and managers and directors would be wise to review the employment arrangements in place in the businesses they manage, seek advice if unsure about the proper application of laws and take steps to rectify any deficiencies.

The copyright in this blog is owned by The Workplace – Employment Lawyers Pty Ltd.  The content is general information only and is not intended to constitute, or be relied upon as, legal advice.  The use of this blog by any person or company does not create any solicitor-client relationship between the person or company and The Workplace – Employment Lawyers Pty Ltd.