Sham contracting = high risk exposure. Court warns "think twice"

The Federal Circuit Court (the Court) has again reaffirmed that harsh penalties will apply to employers found to engage employees under sham contracting arrangements.

Background

At the heart of the matter were 10 individuals engaged by Linkhill Pty Ltd (Linkhill) to undertake construction work on sites located in Melbourne.

In the main, when the individuals were engaged, they were advised they were independent contractors and not employees and that they were required to obtain an ABN to commence work.

In the majority of cases the individuals were:

• not required to provide their own tools as these were provided by Linkhill;
• told by Linkhill when they were required to work, when their break times would be and their pay rate;
• worked an average of 40 hours per week;
• undertook work as directed by and supervised by Linkhill;
• required to provide Linkhill of notice of any intended leave and did not supply a replacement to undertake their work during the leave period; and
• required to provide invoices for work undertaken (often through the supervisor) and did not charge GST.

Some of the individuals had been provided warnings in relation to their work. Others were not liable for defects found in their work - rather they were paid to remedy it.

On about 15 July 2010, the majority of the individuals contracts were terminated and employment contracts with Linkhill offered on terms and conditions not substantially different.

On about 20 October 2011, the Fair Work Building Industry Inspectorate commenced proceedings against Linkhill on the basis that it:

• had undertaken sham contracting arrangements by engaging the individuals as employees but representing to them they were independent contractors; and
• contravened various award and statutory minimum conditions including annual leave, annual leave loading, personal leave, wages and allowances, redundancy and superannuation guarantee payments.

Finding

The Court weighed up the relevant indicia drawing the conclusion that the totality of the relationship between Linkhill and the individuals was that of employer and employee and not independent contractor and principal.

Further, Linkhill had engaged in sham contracting by representing to the individuals that they were independent contractors and utilising an "orchestrated pattern of conduct over a sustained period" in imposing the system of engagement upon the individuals.

The director of the Company had received prior legal advice of a general nature making distinctions between contracts of employment and independent contractors before the initial contracts were entered into with the 10 individuals. Consequently the director ought to have been aware there was a real risk that the contracts with the individuals were in fact, contracts of employment.

Penalties of $313,500 were imposed on Linkhill.

In making its judgement the Court noted:

"In my view, it would be wrong to treat the respondent as some minor small business in which the imposition of fines on which would cause hardship. As noted above the contraventions were deliberate and senior management directed the conduct. There is no evidence that the respondent has taken corrective action to rectify the contraventions."

Conclusion

This case supports a growing line of authorities in which large penalties are imposed upon employers (and persons knowingly involved - for instance directors or human resource management professionals) who engage in sham contracting arrangements.

Employers should carefully review their arrangements to ensure compliance with the law and avoid potential risk exposure and hefty penalties.

If you would like more information about the case, or contracting arrangements generally, please contact National Workplace Lawyers on +61 2 9233 3989.

National Workplace Lawyers

Note — this is for information purposes only and does not purport to be comprehensive or to render legal advice.