Housekeepers 'converted' into contractors: the High Court says no

What happened

Ms Margaret Best and Ms Carol Roden had worked as housekeepers at the Quest on Arlington serviced apartments in South Perth since 2007. In 2009 the hotel's general manager contacted a labour hire business, Contracting Solutions, which ran a system for turning staff into independent contractors.

In October 2009 the arrangement began. The housekeepers signed a 'Contractor Application' with Contracting Solutions, which then supplied their services back to Quest under a labour hire agreement. On paper, they were no longer Quest's employees but contractors of the labour hire firm.

Nothing about the job changed. The High Court recorded that they "continued to perform precisely the same work for Quest in precisely the same manner as they had always done". What changed was the pay: Contracting Solutions paid them a flat rate with nothing for overtime, weekends or public holidays.

The scheme had been pitched to Quest on the basis that the hotel would "no longer 'be governed by IR law'". A receptionist was also put through the 'conversion'. The Court found the manager told her that if she did not fill out the paperwork, "you won't get paid". As soon as she signed, Quest told the labour hire firm it no longer needed her.

The claim

The Fair Work Ombudsman sued Quest in the Federal Court in May 2011 for sham contracting. Sham contracting means disguising an employment relationship as an independent contracting arrangement. Section 357(1) of the Fair Work Act 2009 (Cth) says an employer must not represent to an employee that their contract of employment is a contract for services under which they work as an independent contractor. Section 358 separately prohibits dismissing, or threatening to dismiss, an employee in order to re-engage them as a contractor for the same work.

The trial judge found that Quest and its manager had breached s 358 over the receptionist, but dismissed the s 357 claims about the housekeepers. The Full Court of the Federal Court dismissed the Ombudsman's appeal, on a point first raised in that Court. It accepted that the housekeepers had remained Quest's employees, but read s 357 narrowly: the employer had to misdescribe the job as a contract for services between the worker and the employer itself. Because Quest said the housekeepers were contractors of a different company, the Full Court held there was no breach, although it said it would otherwise have found one.

What the High Court decided

On 2 December 2015 the High Court, five justices sitting together, unanimously allowed the Ombudsman's appeal. Its answer to the Full Court's reading was blunt: "We disagree." It declared that Quest had breached s 357 in its dealings with each housekeeper, and sent the case back to the Federal Court to set penalties.

The Court pointed out that the narrow reading would make the law easy to dodge. An employer who said "you are employed by me as an independent contractor" would be liable, but one who said "you are employed by X as an independent contractor" would not, "even if X were entirely fictitious". Either way the worker is misled and loses the same rights.

Why: the legal test

Section 357 asks two questions. First, is the worker in truth an employee of the business making the statement? Second, did that business represent, by words or conduct, that the worker was an independent contractor under a contract for services?

On the first question, the Court accepted that the housekeepers had never really stopped being employees: they "remained employees of Quest under implied contracts of employment". On the second, Quest, by its conduct, had told them they now worked as contractors of Contracting Solutions. The High Court held the law is "silent as to the counterparty", so it did not matter who the supposed contract was with. The purpose of s 357 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".

The section also gave employers a defence if they proved they did not know, and were not reckless about, the true nature of the contract. Quest did not take part in the hearings and did not prove that defence.

The penalties

On 7 June 2017 Justice Gilmour ordered Quest to pay $16,500 for each housekeeper and $21,450 for threatening the receptionist, $54,450 in all. The manager was personally ordered to pay $4,290 for his part in the threat. The judge found Quest's breaches were "deliberate and conscious acts designed to circumvent industrial relations legislation".

What this means for you

If you have been asked to get an ABN, or to sign up with an agency or labour hire firm, but you would keep doing the same job for the same business under the same supervision, it is worth getting advice before you sign. A change of paperwork does not by itself make you a contractor, and being an employee is what gives you award pay, penalty rates, paid leave and unfair dismissal rights. If a 'conversion' ends with you losing your job, keep in mind that an unfair dismissal or general protections dismissal claim must be lodged within 21 days of the dismissal.

For employers, labour hire and contractor models can be lawful, but they cannot be used to re-badge existing employees.