The legal dangers of transitioning to contracting


At a time when the difference between employment and contracting is becoming murkier, the law is ruling harshly on organisations exploiting the confusion.

We all know the business world is changing at an exponential pace. Entrepreneur David S. Rose summarised this dilemma aptly when he stated that any company designed for success in the 20th century is doomed for failure in the 21st. But what to do when your industrial relations system is founded on traditional ideals of employment? Prepare to walk the balance beam.

To ensure Australian companies remain internationally competitive, employers need to balance the flexibility and convenience of employing a contingent workforce with the stringent nature of the Australian industrial relations system. Awareness, responsiveness and creativity will be key factors for  employers who want to successfully navigate the industrial landscape in the years to come.

As employment relationships continue to evolve, an area that is gaining prevalence in the compliance space is sham contracting. What exactly does this involve? Well, as the court put in Re Porter (1989) 34 IR 179 at 184 “the parties cannot create something that has every feature of a rooster, but call it a duck and insist everybody call it a duck.”

In a time where the features of an employee are becoming less evident this tends to raise concern. Especially since, the Fair Work Act gives statutory force to this sentiment through the operation of the sham contracting provisions. More specifically, the Act expressly prohibits organisations from representing employment relationships as independent contracting relationships when they are in fact employment relationships. Further, it prohibits organisations from dismissing current employees so that they can re-engage them as independent contractors.

(Are you new to HR? Consolidate your foundational HR skills and knowledge with AHRI’s BSB41015 Certificate IV in Human Resources course. Enrolments for the 12-month course close 4 August.)

Third party workaround

The courts do not shy away from penalising individuals and companies found to be in breach of these provisions. In Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (No 4) [2017] the Federal Court recently ordered Quest South Perth Holdings Pty Ltd to pay $54,450 for three respective breaches. The individual involved was personally fined $4,290 for being “involved in” a contravention of the Act.

The Quest decision arose from the matter being remitted to the Federal Court, following the Fair Work Ombudsman’s successful appeal to the High Court of Australia. Here, it was unanimously found that the sham contracting provisions extend to triangular arrangements. That is, an employer cannot avoid the application of the Act by introducing a labour hire company as a third party vehicle to re-engage employees without their usual entitlements and protections.

The court found that Quest’s actions of dismissing their employees and re-engaging them via a labour hire company to perform the same work as contractors were “deliberate and conscious acts designed to circumvent industrial relations legislation and the protections they provide”. This was supported by the fact that the labour hire company expressly advised Quest that they s “would no longer be governed by IR law and no longer need to worry about employment related issues including penalty and overtime rates, unfair/unlawful dismissal and sick leave.”

The decision serves as reminder to organisations and individuals involved in workforce planning and change management projects. Any transition to a contingent workforce should stem from the genuine operational needs of a business and a willingness or desire of individuals for such flexibility – perhaps to pursue the emerging trend of “portfolio careers”. It is not an opportunity to re-characterise current arrangements to circumvent protections and entitlements afforded by the Act. As this case shows, any attempts to do so will be closely scrutinised and penalised.

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The legal dangers of transitioning to contracting


At a time when the difference between employment and contracting is becoming murkier, the law is ruling harshly on organisations exploiting the confusion.

We all know the business world is changing at an exponential pace. Entrepreneur David S. Rose summarised this dilemma aptly when he stated that any company designed for success in the 20th century is doomed for failure in the 21st. But what to do when your industrial relations system is founded on traditional ideals of employment? Prepare to walk the balance beam.

To ensure Australian companies remain internationally competitive, employers need to balance the flexibility and convenience of employing a contingent workforce with the stringent nature of the Australian industrial relations system. Awareness, responsiveness and creativity will be key factors for  employers who want to successfully navigate the industrial landscape in the years to come.

As employment relationships continue to evolve, an area that is gaining prevalence in the compliance space is sham contracting. What exactly does this involve? Well, as the court put in Re Porter (1989) 34 IR 179 at 184 “the parties cannot create something that has every feature of a rooster, but call it a duck and insist everybody call it a duck.”

In a time where the features of an employee are becoming less evident this tends to raise concern. Especially since, the Fair Work Act gives statutory force to this sentiment through the operation of the sham contracting provisions. More specifically, the Act expressly prohibits organisations from representing employment relationships as independent contracting relationships when they are in fact employment relationships. Further, it prohibits organisations from dismissing current employees so that they can re-engage them as independent contractors.

(Are you new to HR? Consolidate your foundational HR skills and knowledge with AHRI’s BSB41015 Certificate IV in Human Resources course. Enrolments for the 12-month course close 4 August.)

Third party workaround

The courts do not shy away from penalising individuals and companies found to be in breach of these provisions. In Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (No 4) [2017] the Federal Court recently ordered Quest South Perth Holdings Pty Ltd to pay $54,450 for three respective breaches. The individual involved was personally fined $4,290 for being “involved in” a contravention of the Act.

The Quest decision arose from the matter being remitted to the Federal Court, following the Fair Work Ombudsman’s successful appeal to the High Court of Australia. Here, it was unanimously found that the sham contracting provisions extend to triangular arrangements. That is, an employer cannot avoid the application of the Act by introducing a labour hire company as a third party vehicle to re-engage employees without their usual entitlements and protections.

The court found that Quest’s actions of dismissing their employees and re-engaging them via a labour hire company to perform the same work as contractors were “deliberate and conscious acts designed to circumvent industrial relations legislation and the protections they provide”. This was supported by the fact that the labour hire company expressly advised Quest that they s “would no longer be governed by IR law and no longer need to worry about employment related issues including penalty and overtime rates, unfair/unlawful dismissal and sick leave.”

The decision serves as reminder to organisations and individuals involved in workforce planning and change management projects. Any transition to a contingent workforce should stem from the genuine operational needs of a business and a willingness or desire of individuals for such flexibility – perhaps to pursue the emerging trend of “portfolio careers”. It is not an opportunity to re-characterise current arrangements to circumvent protections and entitlements afforded by the Act. As this case shows, any attempts to do so will be closely scrutinised and penalised.

Leave a reply

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More on HRM