Overview

Sham contracting is an issue that is currently attracting a great deal of attention not only from the media but more significantly from the Government bodies charged with ensuring compliance with industrial laws. Leigh Johns, ABC Commissioner has very recently expanded on his proposal for a sham contracting inquiry and roundtable, indicating the process could lead to a code of conduct and practice for labour hire in the building and construction industry. The Construction Forestry Mining and Energy Union (CFMEU) has also called for a round table to address the issue of sham contracting.

The predecessor to the Fair Work Ombudsman (FWO) was recently successful in its first prosecution under the sham contracting provisions. Not only was the FWO successful in securing a finding against the company involved but also against the director and owner and the Human Resources Manager personally under the accessorial liability provisions. The FWO will be targeting this area in the future as no doubt will unions.

Are you sure that your organisation is compliant?

The Centennial case

(Fair Work Ombudsman v Centennial Financial Services Pty Ltd & Ors [2010] FMCA 863 (15 November 2010))

In or around January 2007, the HR Manager, on the instructions of the owner and director, recruited a number of employees as "corporate associates", to perform sales work for the company. However, by around April of 2007 the owner and director advised the HR Manager that the company was in financial difficulty and that the sales team would have to be restructured. The owner and director and HR Manager then met with the sales team in late April 2007 and told them that they would be moving on to a consultancy arrangement on a "commission only" structure and that they had seven days to read and return the consultancy agreements. After that date they were treated as independent contractors.

Federal Magistrate Cameron held that the workers were in fact employees including during the period after April 2007 and not independent contractors.

By representing that the workers were engaged as independent contractors when in reality they were employees, the company had breached the relevant legislation. It was also found that the conduct at the meeting in April 2007 amounted to constructive dismissal of the employees and the company had underpaid the employees by not paying them the entitlements they were due as employees.

Accessorial Liability

It was found that the owner and director had procured many of the contraventions of the legislation as he was the mind behind the change in the nature of the employment relationship.

Of particular interest, however, were the findings in respect of the HR Manager, who was found to have been "knowingly concerned", in the company's contraventions by his:

  1. participation in the April 2007 meeting, where his contribution was in furtherance of the company's plan to move the individuals from employees to contractors and that he was an intentional participant in that contravention
  2. awareness of what the Independent Contractors Agreement contained, that he typed it, and explained it clause by clause in the April 2007 meeting, and
  3. knowledge that after April 2007 the individuals would not be paid a wage.

It was found that it was therefore irrelevant whether or not he understood that the legal effect of what the owner and director said amounted to a dismissal or whether he was aware of the illegality of the arrangement more generally.

Penalty

Although penalties have not yet been determined in this case, the maximum penalty for each breach is $33,000 for a company and $6,600 for an individual.

Action required

To ensure that you and your organisation are not at risk you should:

  • check that when independent contractors are being engaged that they are truly independent contractors genuinely operating their own business
  • document all contractor arrangements properly
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  • regularly review any contractor arrangements in place in the organisation to ensure that circumstances have not changed since the arrangement was put in place, and
  • get advice if you are unsure.

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.