Sham Contracting – Employer and Director Fined

In a recent decision, the Federal Court of Australia has imposed significant fines against an employer and one of its Directors due to it engaging in “sham contracting” arrangements. This  provides further confirmation of the strict approach and penalties the Court is willing to impose on employers engaging in sham contracting arrangements.

Background

The employer, Maclean Bay Pty Ltd (Maclean) operated, amongst other resorts in Australia, a tourist resort on the East coast of Tasmania (the Resort). Approximately 13 personnel were employed at the Resort.

During the months leading up to the contraventions, Ms Wells, a director of Maclean, advised Ms Robinson – General Manager of the Resort, that she wanted to terminate the Resort’s employees and make them independent contractors, similar to the other sites that she was responsible for. She sought to do this to avoid making payments of superannuation, tax or payroll tax.

Under the then Workplace Relations Act 1996 (Cth) (the Act), it was an offence to:

• misrepresent an employment or proposed employment relationship as an independent contractor arrangement; or
• terminate an employee for the purpose of engaging them as an independent contractor; or
• make false statements to influence or persuade an employee to enter into a contractor arrangement for the same, or substantially the same, work.

Penalties may also be sought against persons who are involved in a contravention through either:

• aiding, abetting, counselling, procuring or inducing a contravention; or
• being knowingly concerned or party to a contravention; or
• conspiring to effect a contravention.

Similar provisions apply under the current Fair Work Act 2009 (Cth).

Ms Williams

Ms Williams commenced employment with Maclean on 4 April 2008 as a casual Receptionist. On Friday 28 November 2008, Ms Robinson advised Ms Williams that all casual staff at the Resort were to be engaged as independent contractors and she would need to obtain an ABN as she would be “running her own business”. Ms Williams stated she would think about it but indicated she did not wish to be engaged on an independent contractor basis.

On Ms William’s return to work the following Monday, she received a telephone call from Ms Wells who, after clarifying that Ms Williams was not willing to become an independent contractor, dismissed her.

About a week later, Ms Robinson again contacted Ms Williams and offered her a contractor agreement. The duties required under the contractor agreement were the same as those she previously performed as Receptionist. Ms Williams declined the offer.

In reviewing the matter, the Court found that Maclean contravened the Act by dismissing Ms Williams for the dominant purpose of re-engaging her as an independent contractor to undertake the same or substantially the same work as that she undertook as an employee.

Justice Marshall found that “This was nothing more than a cost cutting exercise engaged in by Maclean Bay without any regard to the reality that it intended to re-engage Mrs Williams as an employee and direct and control her work. As well as seeking to effect a sham arrangement, Maclean Bay was engaged in a gross abuse of power as an employer over a vulnerable, non-unionised regular casual employee. It is farcical in the extreme to consider that a receptionist in Mrs Williams position would be “running her own little business” and should have to provide her own workers compensation insurance.”

Ms Wells was found to have accessorial liability for Maclean’s breach as she was Maclean’s “moving force” and held actual knowledge of the contravention given that she;

• authorised the offer of the contractor agreement;
• had knowledge of and provided the contractor agreement to Ms Robinson;
• knew that the duties under the contractor agreement were the same as those undertaken by Ms Williams when she was an employee and would be subject to the same direction and control as when she was an employee; and
• sought to effect it on behalf of Maclean.

Mr Golding

Mr Golding commenced employment with Maclean as a casual gardener/maintenance person on 17 March 2008. During November and December of 2008, Ms Robinson held discussions with Mr Golding regarding the prospect of him becoming an independent contractor. Mr Golding was reluctant to do so.

Mr Golding was provided with a contractor agreement entitled “Contract for Services” which he tore up and put in the bin. Mr Golding’s employment was terminated shortly afterwards. The reason given for his termination was that the “herb garden” was in an “absolutely disgusting condition”.

Maclean was found guilty of a further breach of the Act by terminating Mr Golding for the purposes of making him an independent contractor. Ms Wells was found as accessorily liable.

Ms Smith

Ms Smith was engaged by Maclean from 12 December 2006 on a casual basis, and from September 2007 to 12 February 2009 on a full time basis in the reception and restaurant areas.

Ms Smith resigned from her employment but noted in her resignation letter that she would consider regular part-time work. After Ms Smith ceased employment, Ms Robinson confirmed that she could come back to work but only as an independent contractor.

From 19 February 2009 to 9 April 2009, Ms Smith worked at the Resort and completed time sheets and recorded the number of hours she worked. Ms Robinson provided her with weekly invoices of the hours worked, instructed her regarding when she was required to work and what work was required to be completed. Ms Smith performed the same duties she undertook prior to her resignation and wore the same uniform that she previously worn as an employee.

Maclean was found guilty of making representations that the contract Ms Smith was re-engaged under was one of an independent contractor, when in reality, she was engaged as an employee.

The Kubanks

Jan and Alison Kubank (the Kubanks) commenced employment in the Resort’s laundry in  November 2004 on a casual basis. Jan and her daughter Alison (who suffered a intellectual disability) worked an average of 15 to 25 hours per week respectively.

In about March 2009, Ms Wells approached Jan and suggested that they should both go on independent contractor arrangements because it was only fair as everyone else who worked for Mrs Wells worked as a contractor. Mrs Wells advised the Kubanks they would need to obtain an ABN.

The Kubanks were provided with unsigned contractor agreements and for six days in April 2009,  were engaged as independent contractors and paid according to invoices generated by Ms Robinson on behalf of Maclean. During this period, the Kubanks performed exactly the same work that they undertook as casual employees. On 27 April 2009, Ms Wells then advised the Kubanks that they were back on wages and were no longer independent contractors.

The Court found that through the discussion with Ms Wells, the provision of the independent contractor agreements and the generation of the invoices, Mclean represented the relationship as a principal and independent contractor when in fact, it was one of employer and employee.

Housekeepers/Cleaners

During the period 2006 to 2008, Maclean employed three casual housekeepers and a Head Housemaid (who had been employed since 1992). All the housekeepers were engaged on a regular and systematic roster and held a reasonable expectation of continuing employment.

In October 2008, Ms Wells informed Ms Robinson that the housekeeping/cleaning duties would be outsourced to a cleaning contractor and the housekeeping staff would no longer be required.

In around November 2008, Ms Robinson and the Head Housemaid had a conversation where Ms Robinson said:

“Wendy has told me that all of the cleaning staff have to get ABN numbers and become contract workers. Wendy has said that if cleaning staff don’t become contractors, they will lose their jobs.”

In early December 2008, the housekeepers requested a meeting with Ms Wells to discuss the future for housekeeping at the Resort. At the meeting, Ms Wells informed the housekeeping staff that the cleaning work was to be contracted out. She further advised that she would provide staff details to the new contractor for it to decide if it wished to engage them. The contractor had been arranged to start the following week. The housecleaning staff then left the Resort and did not return.

The Court determined that the Maclean;

• terminated the housekeepers for a prohibited reason as it altered the position of the employees to their prejudice by informing them that they would be required to become independent contractors to remain working at the Resort. Ms Robinson’s discussion with the Head Housemaid was sufficient evidence of the breach as Ms Robinson was acting on the authority of Maclean and at the direction of Ms Wells to give effect to the strategy that all casual staff were to become contractors;
• terminated the housekeepers for a prohibited reason - to deny the employees of the benefit of an industrial instrument ie the relevant Notional Agreement Preserving a State Award (NAPSA) or the then Australian Fair Pay and Conditions Standards (ie annual leave and superannuation).

Orders

In total it was found that Maclean’s conduct resulted in:

• two contraventions involving dismissing an employee for the purposes of engaging them as independent contractors (Ms Williams and Mr Golding);
• one contravention of misrepresenting a proposed employment relationship as a proposed independent contractor arrangement (Ms Williams);
• three contraventions of misrepresenting an employment relationship as an independent contracting arrangement (the Kubanks and Ms Smith);
• six contraventions of dismissing or threatening to dismiss an employee for a prohibited reason or reasons including a prohibited reason (Ms Williams; Mr Golding and the housekeepers);
• four contraventions of altering the position of an employee to the employee’s prejudice (the housekeepers);
• six contraventions of failing to pay superannuation contributions in accordance with the relevant NAPSA for six employees; and
• two contraventions of failing to pay accrued annual leave on termination in accordance with the relevant NAPSA.

Ms Wells was found accessorily liable with Marshall J describing her conduct as “nothing short of disgraceful”. She was found accessorily liable in the contraventions by Maclean for being a person involved in the:

• two contraventions of dismissing an employee for the purposes of engaging them as independent contractors (Ms Williams and Mr Golding); and
• one contravention of misrepresenting a proposed employment relationship as a proposed independent contractor arrangement (Ms Williams).

Marshall J was particularly scathing of the treatment of Ms Williams stating that “Her treatment by Maclean Bay was disgraceful and showed a complete lack of care for the dignity of a hard-working, loyal employee. To force an employee to accept a sham arrangement where she and her employer are to pretend that she is a contractor and have her lose all her rights as an employee (such as entitlement to the rights afforded by the NAPSA) is conduct which deserves a high range of penalty . Maclean Bay needs to have it driven home that its conduct was unacceptable by community norms of decency and respect for fellow human beings, as well as a breach of this country’s labour laws.”

The Court imposed a combined penalty against;

• Maclean of $280,500; and a
• against Ms Wells of $13,860.

The decision confirms the current approach of the Fair Work Ombudsman and the Court towards employers who seek to avoid their responsibilities through implementing sham contracting arrangements. Where employers seek to engage independent contractors, significant care should be taken, especially prior to engagement of the contractor. Where in doubt, employers should seek legal advice to confirm that the relationship does not form a sham contracting arrangement and the risk of significant penalties and costs.

If you would like more information about sham contracting, other potential contraventions under the Fair Work Act 2009 (Cth) or other related matters 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.