Australia: Transport employer and sole director face significant penalties for Sham Contracting

Last Updated: 27 August 2013
Most Read Contributor in Australia, September 2016

Happy Cabby Pty Ltd (Company) and Mr Graham Paff, the Company's sole director and company secretary, have recently been ordered significant penalties for sham contracting and underpayment and payslip contraventions of the Fair Work Act 2009 (FW Act): over $250,000 for the company and approximately $50,000 to Mr Paff. The Company and Mr Paff were also ordered to pay relevant employees' outstanding award entitlements of approximately $25,000.


The Company operated a transportation business transporting people from the Newcastle area to Sydney and Newcastle Airports. The Company engaged several drivers for the purpose of that work and treated those drivers as independent contractors and not employees.

The Company exercised control over the manner in which the drivers performed their duties including processing passenger bookings, scheduling, van and fare payments and the provision of run sheets. The Company also owned and maintained all equipment used by the drivers. At all material times the drivers publically presented themselves as a manifestation of the Company including, wearing a blue polo shirt bearing the Company's logo. The Company also provided the drivers with signage bearing the Company's logo to display when waiting for arriving passengers. The Company determined the level and form of remuneration. The drivers did not sub-contract their duties, however, each of the drivers were required to provide an ABN to the Company.

Fair Work Ombudsman Passenger Vehicle Industry Audit

In 2009, the Fair Work Ombudsman (FWO) wrote to Happy Cabby and Airport Transport Pty Limited (the Company's predecessor) regarding an audit of the passenger vehicle industry in the Hunter region in 2010.

In January 2010, the FWO conducted an onsite visit of Happy Cabby and Airport Transport Pty Limited. Later in January 2010, the Company was registered and replaced Happy Cabby and Airport Transport Pty Ltd. The FWO was not notified of that change and as a result, its correspondence continued to be addressed to Happy Cabby and Airport Transport Pty Limited between January 2010 and November 2010.

Complaints to the FWO and NTPs issued

In 2010, there were various workplace complaints raised by the Company's workers to the FWO regarding their working conditions. In July 2010, a Notice to Produce (NTP) documents in relation to alleged contraventions of the FW Act was served on the company. The Company notified the FWO that Happy Cabby and Airport Transport Pty Ltd was in the process of dealing with a matter with the Australian Taxation office regarding superannuation payments and that it was being dealt with before the Administrative Appeals Tribunal. The Company then sought legal representation and sought and obtained a deferral of the NTP from the FWO. In November 2010, the AAT resolved in favour of the ATO's position on the superannuation issue.

Letter of Caution issued

In January 2011, the company was issued with a Letter of Caution (LOC) which stated that the FWO had conducted an investigation, the Company had contravened provisions of the FW Act regarding misrepresenting the employment of workers as independent contracting and also referred to the terms and conditions of relevant transport industry awards.

Further Complaints to the FWO

Notwithstanding the issuing of the LOC, further complaints by the Company's workers were made to the FWO regarding workplace entitlements. In April 2010, the FWO wrote to the Company and stated that it had been selected as part of a sham contracting national compliance campaign. A further visit was made to the Company's premises and an offer was made to interview Mr Paff which was subsequently declined. In June 2011, the FWO was informed by the Company that it was planning to enter into new workplace arrangements in response to the LOC. In late June 2011, the Company asserted on the basis of advice that its independent contracting arrangements were legitimate.

Further NTPs issued by the FWO

Three further notices to produce were issued by the FWO and documents were provided in response. In early March 2012 the FWO determined that there had been no change in the Company's workplace arrangements following the issuing of the LOC and several workers remained underpaid of their award entitlements. In March 2012, the FWO wrote to all potential misclassified employees to advise them that it intended to commence proceedings against the Company and Mr Paff. Shortly thereafter the Company invited all of its staff to attend an onsite meeting where the attendees were encouraged to sign a document entitled "Independent Contractor Agreement".

Sham Contracting under the FW Act

Misrepresenting an employment relationship as an independent contracting arrangement can give rise to penalties under the FW Act (then $33,000 and now $51,000 for a company and then $6,600 and now $10,600 for an individual).

Court Hearing

The FWO commenced proceedings before the Court and with the consent of the Company and Mr Paff, the Court made declarations that the Company and Mr Paff had contravened relevant provisions of the FW Act. The Court then considered what penalties should be ordered. The Court considered various factors to determine penalty including whether there was a single course of conduct of the contraventions, the nature and extent of the contraventions, the circumstances in which the conduct took place, the nature and extent of loss or damage, similar previous conduct, deliberateness of the breaches, whether the Company and/or Mr Paff had exhibited contrition and specific and general deterrence. The Court was satisfied that in all of the circumstances, the penalties sought by the FWO were appropriate in the circumstances and penalties of $250,000 for the company and approximately $50,000 to Mr Paff were ordered.

Lessons for Employers

This case evidences very important lessons for employers when implementing independent contract arrangements at workplaces and managing investigations by the workplace regulator:

  • always seek prior written advice before implementing independent contract arrangements: incorrectly classifying workers as independent contractors may lead to contraventions of the sham contracting provisions of the FW Act as well as contraventions of awards and other minimum legal obligations including the national Employment Standards. If the prior written advice states that independent contractor arrangements are legitimate, the advice may be used as an absolute defence to allegations of sham contracting; and
  • always seek advice on regulator investigations and co-operate with the relevant authority during investigations: this does not necessarily mean agreeing to everything that the regulator requires but not frustrating or obstructing the investigation and compliance with notices to produce and letters of caution unless there is a sufficient reason not to do so.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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