The sham contracting provision in the Fair Work Act 2009 (Cth) and what you need to look out for as an employer, employee or an independent contractor

An employer cannot convert employees into independent contractors using a third party company. This method, known as “triangular contracting”, was recently analysed by the High Court in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45 and found to be in breach of section 357(1) of the Fair Work Act 2009 (Cth).

Known as the sham contracting provision, section 357(1) of the Fair Work Act provides that an employer must not represent to an employee that his or her employment (contract of services) is an independent contracting arrangement (contract for services). In effect, the purpose of the provision is to protect an individual who is in truth an employee from being misled by his or her employer about his or her employment status. 

Until the date of the High Court’s decision, there was no prohibition against employers avoiding the sham contracting provision using triangular contracting. Under this arrangement, the employer uses a third party company to hire employees but only as “independent contractors”.

In the case before the High Court, Quest South Perth dismissed two of its employees (housekeepers) in order to enter a triangular contracting arrangement with Contracting Solutions Pty Ltd. Under this arrangement, the two housekeepers would be engaged as independent contractors by Contracting Solutions Pty Ltd while performing the same housekeeping work for Quest South Perth. Accordingly, the housekeepers were no longer employees of Quest South Perth. The Fair Work Ombudsman appealed to the High Court from a decision of the Full Court of the Federal Court of Australia.

In conclusion, the High Court held that section 357(1) of the Fair Work Act prohibited the misrepresentation of an employment contract as a contract for services under which independent contractors would be engaged by a third party, such as Contracting Solutions Pty Ltd in this instance.

The effect of the High Court decision is that employers can no longer escape the sham contracting provision by disguising the employment relationship as an independent contracting arrangement through a third party.

Accordingly, employers, employees and independent contractors should ascertain the nature of their contractual relationship and seek expert advice regarding sham arrangements and contracts of employment generally.

Disclaimer: This blog contains general information only and is not intended to be a substitute for obtaining legal advice.