Australia: High Court rules on triangular sham contracting - 4 December 2015

Last Updated: 9 December 2015
Article by Andrew Tobin and Troy Wild

The High Court has unanimously found that an employer, in entering into a "triangular contracting" arrangement with its former employees and a labour hire company, breached the Fair Work Act's sham contracting provisions by misrepresenting an employment relationship as one of independent contracting.

On 2 December 2015, the High Court in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd & Ors [2015] HCA 45 unanimously allowed an appeal from the Full Court of the Federal Court of Australia, and held that an employer breached the sham contracting provisions at section 357(1) of the Fair Work Act 2009 (Cth) (FW Act) by misrepresenting an employment relationship as one of independent contracting. The decision centres on the employer entering into a "triangular contracting" arrangement, or "Odco" style of contracting, with its former employees and a labour hire company.

Background

Quest South Perth Holdings Pty Ltd (Quest) operated a business of providing serviced apartments. Contracting Solutions Pty Ltd (Contracting Solutions) operated a labour hire business.

In 2009, through the very simple mechanism described below, two housekeepers and a receptionist of Quest were moved onto what are commonly known as "Odco" triangular style independent contracting arrangements with Contracting Solutions 1.

Contracting Solutions met with the Quest employees and provided them with "contractor applications" which indicated that if the employees completed the form they would be:

"an independent contractor for [Quest] rather than an employee. Nothing will change in terms of your roster of shifts and you will all get work at [Quest]. The pay rates are going to change so you'll get one flat rate whenever you work but it will be higher than the base rate now."

The Fair Work Ombudsman (FWO) commenced proceedings in the Federal Court claiming, amongst other relief, pecuniary penalty orders against Quest for contraventions of section 357(1) of the FW Act. Section 357(1) prohibits a person from misrepresenting employment as an independent contracting arrangement.

At first instance the Federal Court (in 2013) rejected the FWO's argument that the Odco style arrangements were a sham under section 357(1) of the FW Act. An appeal from that order was later dismissed by the Full Court (in March 2015). In dismissing the appeal the Full Court held that section 357(1) did not cover a representation by an employer about a contract, or future contract, with another person. The majority judges said:

"a representation made by an employer to its employee that he or she is providing work as an independent contractor under a contract for services made with another person is not actionable".

High Court decision

By grant of special leave, the FWO appealed to the High Court. The FWO argued that the Full Federal Court's "restrictive construction" of section 357 does not reflect its wording; is "contrary to its obvious purpose and is plainly wrong" and "allows for the provision to be easily circumvented through third party contracts". The FWO said that the Full Federal Court's ruling revealed a potential loophole in the application of section 357 to the triangular relationship of labour hire company, worker and "end-user" employer.

The High Court unanimously allowed the appeal, holding that section 357(1) prohibited the misrepresentation of an employment contract as a contract for services with a third party. The Court declared that Quest contravened section 357(1) by representing to the employees that the contracts of employment under which they were employed by Quest were contracts for services under which they performed work as independent contractors.

Odco system

The "triangular contracting" arrangement the subject of the High Court appeal in the Quest decision reflects what has become known as the "Odco" system of contracting. The Odco system is a method of engaging workers through commercial contracts (contracts for services) as opposed to employment agreements (contracts of service). Under the system, there is an interposed third entity and as such there is no direct contractual relationship between the worker and the person or entity for whom or which the work is performed. The Odco system is now licensed Australia wide by Labour Force Australia Pty Ltd.

Until now, the legitimacy of this type of arrangement had the endorsement of a 1991 decision of a Full Bench of the Federal Court of Australia in Building Workers Industrial Union of Australia & Ors v Odco Pty Ltd (1991) 29 FCR 104 (from which the "Odco" system takes its name).

The brief facts were that Odco Pty Ltd (Odco) supplied contract carpenters, labourers, shopfitters and other construction workers to the commercial building industry in Melbourne. The workers supplied were self-employed contractors and not employees of either Odco or Odco's client builders.

Odco met with opposition from building unions, who opposed Odco workers from entering building sites. Odco brought proceedings in the Federal Court against the then Building Workers Industrial Union (BWIU) (now the CFMEU). That action alleged that the union had breached section 45D of the then Trade Practices Act 1974 (Cth), in that their actions in requiring builders to remove Odco contractors from building sites were secondary boycotts. The core decision which the Federal Court was required to make was whether, at common law, Odco workers were contractors or employees.

The Court determined that the Odco workers were contractors and not employees of anyone. The BWIU appealed the decision, however, the Full Federal Court unanimously dismissed the appeal. The BWIU then sought special leave to appeal to the High Court. Special leave was unanimously refused.

Implications for employers

The High Court's decision now makes it clear that an employer cannot avoid the FWA's sham contracting provisions merely through use of third party labour hire contracts.

The decision is significant for any Australian business which has adopted the Odco style of contracting. While some, perhaps many, of those arrangements will retain their legitimacy as arrangements untouched by any suggestion of a "sham", we have no doubt at all that, like the arrangements in Quest, some such arrangements will contravene not only the sham contracting provisions of the Fair Work Act, but also a host of other employment related regulation.

Think compliance with awards, tax, super and workers' compensation regulation; but each case will turn on its own facts.

It is also important not to overlook the facts that:

  • at first instance in the Federal Court, Quest faced difficulties independently of the prohibition against misrepresenting an employment arrangement to be something it wasn't;
  • there it was found that a threat by Quest to dismiss one of the staff involved, a receptionist, in order for her to be re-engaged as a contractor, itself involved a contravention of section 358 of the FW Act. Section 358 prohibits dismissal or threatened dismissal of a person working as an employee in order to re-engage them, to perform the same work, as a contractor. That finding was unaffected by the subsequent appeal decisions; and
  • even though the Full Federal Court found no contravention by Quest of section 357(1) of the FW Act, it ruled that the so called conversion of two housekeepers from employees to contractors had been ineffective. They continued to be employees of Quest. That outcome is unaffected by the High Court decision.

In light of the Quest decision, businesses operating an Odco contracting system should seek advice as to whether they may, potentially, be in breach of not only FWA's sham contracting provisions but the myriad other regulation applicable to employment, rather than contracting, relationships.

Footnote

1Named for the decision in Building Workers Industrial Union of Australia v Odco Pty Ltd (1991) 29 FCR 104. See the further discussion following.

© HopgoodGanim Lawyers

Award-winning law firm HopgoodGanim offers commercially-focused advice, coupled with reliable and responsive service, to clients throughout Australia and across international borders.

2015 AFR Beaton Client Choice Awards:
Best Law Firm (revenue $50m - $200m)
Best Professional Services Firm (revenue $50m - $200m)

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Andrew Tobin
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.