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High Court makes emphatic decision on sham contracting
8 December 2015
The case of Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd is the first to examine the ODCO system in the context of the Fair Work Act 2009 (Cth) (FW Act) sham contracting provisions. We have previously reported on the Full Federal Court decision in this case.
Background
This long running and high profile case concerned the decision by Quest South Perth (Quest) in 2009 to engage Contracting Solutions Pty Ltd (CS) to convert Quest employees to independent contractors and provide their services back to Quest. Quest contracted with CS for the services of the newly converted independent contractors, and in return CS met all the relevant legislative requirements including superannuation and workers compensation insurance.
The arrangement utilised the so-called ‘ODCO system’ of contracting where workers are engaged via contracts for service rather than employment contracts (contracts for service). The ‘ODCO system’ interposes a corporate entity meaning there is no direct contractual relationship between the worker and those for whom the work is done.
The FW Act sham contracting provisions prohibit the misrepresentation of an employment relationship as an independent contractor arrangement (sections 357 and 359).
In 2013 the Fair Work Ombudsman (FWO) prosecuted Quest alleging the ODCO arrangement contravened the sham contracting provisions. Justice McKerracher of the Federal Court found that there had been no misrepresentation by Quest in contravention of section 357 because Quest was not a party to the misrepresented contract with the worker. It could only apply to CS as the party to the contract. On this basis, His Honour found section 357 could not apply to Quest.
The Full Federal Court Decision
The FWO appealed this finding of Justice McKerracher to the Full Federal Court. The FWO argued the sham arrangement provisions should be read widely so as to apply to tripartite arrangements such as the ODCO arrangement in order to give substance to the provisions. The Full Court, in its 2015 decision, rejected this and upheld the decision at first instance. The Full Court found Quest had not misrepresented to the workers that its relationship with them was one of independent contract rather than employment.
However, the Full Court found that although the claim of sham contracting had not been proven, the true nature of the relationship between Quest and the workers was one of employment, and it implied the existence of an employment contract. The FWO appealed this decision to the High Court.
The High Court Decision
In its December 2015 decision, the High Court agreed the relationship was one of employment but disagreed with the Full Court by finding the arrangement was a sham arrangement.
Their Honours unanimously and emphatically held Quest had clearly misrepresented the relationship as one of independent contractor when it was an employment relationship.
In finding there was a sham arrangement, their Honours emphasised that the purpose of the sham arrangement provisions is to protect individuals who are actually employees from being misled into thinking they are independent contractors and therefore denying them the workplace rights of an employee. The High Court found there was no basis for restricting the sham contracting provisions to contracts between two parties, finding that they also applied to the tripartite ODCO arrangements. That is, the actual employer would be liable for misleading the employee, regardless who the employer told the employee they were engaged as an independent contractor by.
Key take-away points
Following the Full Court case we indicated that while the Full Court found that the FWO had not raised an actionable claim for a sham arrangement, other employers using similar arrangements may not get the same outcome in the future.
The High Court’s decision in this case confirms that the ‘ODCO system’ will not be automatically seen by courts as a legitimate independent contracting arrangement. Rather, the courts will look at the substance of the relationships within the particular ODCO arrangement and decide whether the worker is an independent contractor or employee. The courts are likely to penalise an employer using a contracting arrangement to cloak an employment relationship as an independent contractor relationship to avoid paying employment entitlements.
The current economic climate is increasing pressure on businesses to explore different options for engaging workers, including outsourcing arrangements to labour hire and other third party labour providers. Businesses should exercise caution when engaging independent contractors to ensure that such arrangements do not in fact involve employment relationships.
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Contacts: Kathy Reid, Principal; Craig Boyle, Principal.