Australia: 'Sham contracting’ in the spotlight

• The Full Court held that the key factors that point toward an employment relationship include where there is no capacity for the worker to delegate their work to third parties, and where the worker is paid for time worked rather than for achieving a particular outcome.
• Importantly, the parties’ characterisation of the relationship (including the arrangements made for tax, superannuation and insurance) is not determinative, and ‘employers’ must ensure that the parties’ conduct throughout the engagement actually reflects the intended relationship (i.e. whether employer/employee or principal/contractor). This is important even where workers are engaged via a corporate entity, as a court may ultimately find that the worker in truth has a contract with the ‘employer’ directly.

Regulatory focus on sham contracting

On 21 December 2012, Fair Work Building and Construction (the FWBC) released its response to ‘Working Arrangements in the Building and Construction Industry – Further Research resulting from the 2011 Sham Contracting Inquiry’. On behalf of the FWBC, Leigh Johns (Chief Executive of the FWBC) said:

With the finding that around 13% of self-defined contractors in the building and construction industry are possibly misclassified it confirms that a regulatory response is indeed justified.

The regulatory response that Mr Johns referred to is already in full swing, with seven civil penalty proceedings having been commenced since October 2010 (and a further 11 currently being considered). The proceedings have resulted in nearly $100,000 worth of civil penalties being imposed.¹

The FWBC’s interest in sham contracting follows an audit by the Fair Work Ombudsman (FWO) in 2011 of contracting practices in various industries including cleaning services, hair and beauty and call centres. Of 91 businesses audited, FWO determined that 23% had misclassified employees as independent contractors.²

Response by employers

In light of this renewed regulatory focus (particularly in the building and construction industry), savvy ‘employers’ are being increasingly proactive in taking steps to reduce ‘sham contracting’ risks. Such steps include:

1. undertaking reviews of their existing ‘contractor’ arrangements to identify risk areas; and
2. developing rigorous on-boarding processes and templates for managers to follow when deciding whether to engage a worker as an employee or contractor.

A recent example of the potential for exposure is the decision of the Full Court in ACE Insurance Limited v Trifunovski [2013] FCAFC 3 (ACE) in which the court found that five insurance sales agents that had been engaged as contractors were, in truth, employees. The court ordered the ‘employer’ to pay over $500,000 in unpaid annual leave and long service leave entitlements.

Importantly, the Full Court held:

• Caution should be exercised in relying on past decisions of courts for guidance, as different types of cases focus on different issues. For example, ‘employers’ who are trying to determine their liability to workers for employment entitlements such as annual leave should be cautious in relying on authority that deals with vicarious liability for a worker’s conduct, or liability to the ATO for taxation. The weight that a court attributes to different factors in the circumstances will depend on the nature of the dispute.
• How the parties characterise their relationship is not determinative. This means that the arrangements applied by the parties in relation to taxation, superannuation and insurance will carry little weight, as such arrangements are really only a function of what the parties consider the relationship to be.
• The key factors that point toward there being an employment relationship include where there is no capacity for the worker to delegate their work to third parties (as was the case here), where the worker is held out to third parties as part of the employer’s business, and where the worker is paid for time worked rather than for achieving a particular outcome.
• Engaging workers through a labour hire entity (or other corporate vehicle) will not necessarily prevent a finding of an employment relationship. A court may look past the corporate entity to find (as it did in this case) that a contract exists between the ‘employer’ and the worker.
• A court is permitted to look at the subsequent conduct of the parties to determine the nature of the relationship.

Risk prevention: what ‘employers’ can do

1. Review existing contractor arrangements – Review any existing arrangements to determine if there are any contractors engaged by the business that may in truth be employees. Strategies can then be developed to rectify these issues without expensive litigation.
2. Ensure that the conduct of the parties is consistent with the intended relationship – Despite what the contracts might say, the true character of the relationship will largely be determined by how the parties behave. Ensure managers are behaving consistent with a contractor relationship if that is the intention. Training and reasonable audit processes are the key.
3. Develop on-boarding processes and templates – Fix the problem once and for all. Developing rigorous on-boarding processes will ensure that the appropriate engagement method is used on each occasion. Sometimes, it might be more appropriate to engage a worker as an employee – this should be determined before the engagement offer is made.

This article was written by Rohan Doyle, Senior Associate, and Gabrielle Hayward, Solicitor, Melbourne.

Endnotes

1. FWBC response to the “Working Arrangements in the Building and Construction Industry – Further Research resulting from the 2011 Sham Contracting Inquiry” p.4. 
2. Fair Work Ombudsman, “Sham Contracting and the Misclassification of Workers in the Cleaning Services, Hair and Beauty and Call Centre Industries: Report on the Preliminary Outcomes of the Fair Work Ombudsman Sham Contracting Operational Intervention” November 2011. 

More information

For information regarding possible implications for your business, contact a member of the Employment, Pensions and Incentives Team.