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Last Wednesday the High Court ruled unanimously that an employer breached the sham contracting provisions of the Fair Work Act by misrepresenting an employment relationship with its workers as an independent contractor arrangement.

Quest South Perth Holdings Pty Ltd (‘Quest’) terminated the employment of two housekeepers. These workers were then re-engaged to perform the same duties at the same location as independent contractors of a third party, a labour hire company called Contracting Solutions. Contracting Solutions then provided the services of the housekeepers back to Quest under a labour hire agreement.

These types of arrangements, known as the ODCO system, are designed to provide for the engagement of labour where neither the host employer nor the labour provider enter into an employment contract with the worker. They are popular in industries where workloads fluctuate such as construction and agribusiness.

Surprisingly, a Full Court of the Federal Court had previously decided that the arrangement between Quest and Contracting Solutions did not breach the sham contracting laws because that would require the misrepresentation to be about a contract for services applying directly between the employer and the employee. The High Court clearly rejected this view, confirming that the involvement of a third party won’t enable parties to avoid the operation of the sham contracting provisions.

This decision serves as a warning to businesses not to unquestioningly handball responsibility for the engagement of labour to third parties. This includes third parties operating as traditional labour hire providers that employ their staff and as labour ‘introduction agencies’ which engage staff as contractors.

Lessons for employers

Remember that utilising such services does not relieve a business of responsibilities to workers including health and safety and anti-discrimination obligations. Businesses which ought to be aware that their contractors are underpaying workers can be held liable for that conduct. Participation in sham contracting arrangements can result in costly fines as well as unbudgeted liability for employee entitlements for workers incorrectly classified as contractors.

Labour hire providers offer varying levels of sophistication however it is important for you to protect your interests by undertaking your own due diligence. If you utilise these types of services, review the terms on which workers are engaged. If concerns arise regarding involvement in potential sham contracting or other breaches of industrial legislation, then seek the services of a specialist employment lawyer.