Spotlight on sham contracting in Australia

Key takeaways

Australian courts and regulators are targeting employers who engage workers as contractors to avoid employee entitlements. We consider two highly publicised sham contracting investigations as well as a decision of the High Court of Australia that highlights the consequences of sham contracting. These cases are a timely reminder for corporates to review their existing contractor arrangements to assess their exposure, and also to ensure, as far as practicable, compliance by sub-contractors with Australian labour laws.

Underpayments

The labour regulator, Fair Work Ombudsman (FWO), is empowered to enforce Australian workplace laws and can conduct investigations and prosecutions against corporates on behalf of employees.

A recent FWO investigation into the convenience store franchise, 7-Eleven, identified systemic underpayments to workers and false record-keeping practices. While a number of individual franchisees are being investigated by the FWO, the spotlight has been on the 7-Eleven Chairman and Founder to rectify the problem. The investigation has received significant media scrutiny and has been the subject of a parliamentary inquiry due to concerns about the exploitation of workers.

The FWO also investigated the labour procurement processes of the Australian poultry processor, Baiada Group (Baiada). The FWO exposed numerous incidents of non-compliance, including significant underpayments by Baiada’s contractors. Even though direct responsibility for non-compliance rested with Baiada’s contractors, Baiada entered into an arrangement with the FWO to pay $500,000 to rectify the underpayments.

In addition to significant publicity, 7-Eleven and Baiada may be exposed to penalties of up to $54,000 per breach of the Fair Work Act 2009 (FW Act) and industrial instruments. Further, directors and officers of the companies and other individuals involved in the contraventions may be subject to penalties of up to $10,800 per breach.

Sham contracting

In Australia, engaging individuals as contractors instead of employees can result in claims for underpayment and liability for payment of compensation and penalties. 

In the recent decision, Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45, Australia’s highest court of appeal, the High Court of Australia, held that an employer engaged in sham contracting by asking two housekeepers employed by Quest South Perth Holdings Pty Ltd (Quest) to sign contracts with a labour hire provider to do the same work for Quest.

The High Court held that the housekeepers remained employees of Quest under implied contracts. As a result, Quest contravened the sham contracting provision that prohibits employers making misrepresentations to employees regarding their employment status. Quest could face penalties of up to $54,000 per contravention.