Sham Contractor Arrangements – A Lesson from Quest’s Case

Companies need to be careful not to hire individuals in circumstances that could be deemed as a sham contractor arrangement.

Representing an individual as a contractor when that individual is really an employee will lead to penalties under the Fair Work Act 2009.

There have been some recent developments in this area of law when the High Court of Australia handed down a decision in Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd. In that case, two house-keepers were hired by Quest South Perth to undertake cleaning work. Quest then had an idea of ‘converting’ these two workers into independent contractors by using a third party, Contract Solutions Pty Ltd.

The way it worked was:

1. Quest terminated the employment of the house-keepers.
2. Contract Solutions engaged the two house-keepers as independent contractors.
3. Contract Solutions then entered into a service agreement with Quest to provide house-keeping services to Quest.

The house-keepers were effectively doing this same work under the new arrangement as under the old one.

The Fair Work Ombudsman commenced contravention provision against Quest in the Federal Court of Australia for alleging a breach of section 357 of the Fair Work Act, by entering into a sham contractor arrangement.

Initially the Federal Court reached the view that Quest did not infringe section 357 because it had introduced a third party, being Contract Solutions. Many companies use labour hire arrangements for this purpose.

The decision was appealed to the High Court and the High Court changed the law dramatically in this area. The High Court said that the company cannot avoid liability under the sham contractor provisions by introducing a third party, in the manner that Quest did.

The ATO has a decision tool to assist in deciding whether an individual is a genuine contractor or not. Factors that are taken into account include:

• how much control the individual has over the work they do;
• how the individual is supervised;
• whether the individual brings their own tools to work;
• whether the individual can hire another person to under the work;
• whether invoices are issued;
• whether the individual has an ABN;
• whether the individual is running their own business;
• whether the individual is wearing the insignia of the principal.

It is sometimes difficult to decide whether an individual is a true independent contractor or not. We are able to provide advice on this issue.