Australia: Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd: triangular contracting

Last Updated: 15 December 2015
Article by Ashleigh Mills

Most Read Contributor in Australia, September 2017

The High Court has yesterday handed down its decision in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45. This case concerned the effectiveness and legality of triangular contracting arrangements in the context of the sham contracting provisions of the Fair Work Act 2009 (Cth) (the Act). The decision resolved an appeal, by special leave, from a 2013 decision of the Full Federal Court of Australia.

Quest South Perth Holdings Pty Ltd (QSP) had engaged Contracting Solutions Pty Ltd (Contracting Solutions) to convert two of its housekeeper employees into independent contractors. Under the arrangement, independent contractors were be supplied back to QSP by Contracting Solutions. The housekeepers carried on the same work as before with the exception that they would be paid by Contracting Solutions rather than QSP. The FWO claimed this conduct constituted a breach of the Act's sham contracting provisions.

Sham contracting provisions and the Act

Sham contracting refers to attempts to disguise an employment relationship as an independent contracting arrangement. The concern with such behaviour is that it seeks to avoid responsibility for employee entitlements. Section 357 focuses on this conduct and provides that:

'A person that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment [...] is a contract for services under which the individual performs, or would perform work as an independent contractor.'

In order to establish a contravention of section 357 in this case, the FWO had to establish firstly that the housekeepers were, at all relevant times, employees and not independent contractors; and secondly, that the phrase 'the contract of employment' as it was used in section 357 extended to include agreements with third parties such as Contracting Solutions.

In Quest, the majority of the Full Federal Court of Australia reiterated the principles enunciated in previous decisions 1, urging a focus on 'the real substance, practical reality or true nature of the relationship' when called upon to make the distinction between employment and independent contractor relationships.

The majority judges held that a hallmark, 'if not the primary hallmark' of an independent contractor was their running of a business in pursuit of profit. 'In pursuit of a profit, the independent contractor will not merely seek remuneration commensurate with the value of the personal services provided, the entrepreneur providing commercial services will want to be remunerated by making a profit', they said.

In analysing the triangular arrangement, the Full Federal Court could not identify any indication the housekeepers were operating their own business or were interested in making a profit, despite them signing the 'Hiring Agreement' documentation supplied to them by Contracting Solutions. At all times during the course of their engagement they wore QSP uniforms, used QSP supplies and worked under the complete direction and supervision of QSP. The Full Federal Court held these factors, and the fact, the workers were engaged in unskilled labour, meant that the housekeepers were at all times employees of QSP. This conclusion was reached even though the housekeepers paid public liability insurance and received payment via Contracting Solutions (the quantum of which had been determined by Contracting Solutions).

The FWO's claim was, however, dismissed on the basis the terms of section 357 did not cover a representation by an employer about a contract, or future contract, with another person. In other words, the majority judges read the prohibition in section 357 as being confined to an employer who makes representations about an employment contract existing between themselves and the employee. As there was no dispute by the Full Federal Court that the representation in issue related to the housekeeper's engagement with Contracting Solutions, there could not be a contravention of section 357. The FWO appealed this decision, on the basis this construction of section 357 was not supported by the text or purpose of the section and would constitute an unjustified loophole in the sham contracting provisions of the Act.

High Court Decision

Yesterday the High Court agreed with the FWO in holding that s357(1) does cover a representation by an employer about a contract, or future contract, with another person and that such an interpretation is consistent with the structure and purpose of the Act. In a short and unanimous judgment, the High Court held that the misrepresentation attributed to Quest in these circumstances fell 'squarely within the scope of the mischief to which the prohibition in s357(1) was directed and is caught by its terms'. The Bench considered that the reference to 'contract of employment' in section 357 should be construed as the object of, rather than the content of, the prohibited representation. In other words, there does not need to be a represented a direct contractor relationship between the employer and the individual. In the High Court's view, the primary purpose of the section was to prohibit an employer from misrepresenting the true nature of an individual's employment status and that this should be taken to include circumstances where third parties are involved.

Quest was held to have prohibited section 357(1) of the Act, and the matter was remitted to a Federal Court judge to be heard on the issue of pecuniary penalties.

Note: R v Foster [1952] HCA 10; Hollis v Vabu Pty Ltd [2001] HCA 44; Damevski v Guidice [2003] FCAFC 252; ACT VMOA v AIRC (2006) 232 ALR 69.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed. c

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