Fair work ombudsman eyeballs sham contracting

  • 22 Sep 2016
  • Labour hire arrangements that aren’t genuine are on the Fair Work Ombudsman’s radar.
  • Asking workers to obtain ABNs and submit invoices doesn’t guarantee they won’t be found to be employees.
  • Courts won’t tolerate deliberate exploitation of employees.
  • Employers using labour hire or independent contractors should obtain legal advice to avoid expensive litigation.

A recent Federal Court of Australia decision again shows that the Fair Work Ombudsman (FWO) has sham contracting arrangements in its sight, especially when such arrangements are an attempt to avoid legitimate employer obligations to employees.

In her judgment handed down on 26 August 2016, Justice Katzmann described Fair Work Ombudsman v Grouped Property Services [2016] FCA 1034 as “a case about the calculated exploitation of a vulnerable workforce”.

In this case, 51 individuals purported to be contractors to a cleaning business were found to be employees. As a result, the employer now faces potentially harsh penalties including fines and compensation for those affected.

To read more about this case click the following link: http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/2016fca1034

Sham contracting is on the fair work ombudsman’s radar

A contract cleaning business, Grouped Property Services Pty Ltd (GPS), employed cleaners from mostly non-English speaking backgrounds – many of them were overseas nationals. After receiving a number of complaints from employees, the FWO commenced an investigation into the business.

The FWO sued Grouped Property Services (GPS) and two brothers, Enrico, a director of the company, and Rosario, the Chief Operating Officer, for multiple breaches of the Fair Work Act 2009 (Cth) (the Act). More than 30 contraventions of the Act were pleaded, involving 51 employees.

The breaches related to sham contracting arrangements as well as underpayments of statutory and award entitlements, adverse action, contraventions in record keeping, failing to provide pay slips and unfair dismissal.

In response to the sham contracting allegations, GPS denied it was the employer of the 51 employees, maintaining the individuals concerned were employed by other entities, including a company known as National Contractors that in turn supplied labour to GPS. The FWO argued the labour hire agreement was not genuine.

Evidence was provided by a large number of employees, clients of GPS and tendered documents produced under subpoena. The respondents did not appear at the hearing so the evidence was unchallenged.

In order to ascertain the true nature of the employment relationship Justice Katzmann relied on long established indicia that provide a strong basis for determining the legitimacy of an employment arrangement.

In this case the individuals had little or no control over the work they performed. They were directed when and where to work, with start and finish times recorded in a log book. They didn’t supply their own materials or equipment and didn’t delegate work to others. Nor did they advertise their services or take out their own insurance.

This evidence supported a conclusion that the designation of the individuals as contractors was merely a device to enable GPS to avoid its legal obligations.

Many of the workers were also asked to obtain ABN’s and submit invoices. However, the court found this of itself did not make them contractors. In fact many of the workers did not know what an ABN was. Just by stating that the individual was an independent contractor was not enough to make them one.

The court found GPS had represented through contracts and tenders to clients that it did not sub-contract its services. Invoices it issued for labour supply made no reference to sub-contracting and no relationship with National Contractors was mentioned in any GPS company material.

The evidence demonstrated National Contractors did not function as an independent business, but rather as an instrument of GPS. There was no evidence to show it was an independent supplier of labour. The employees only learned of the existence of National Contractors after they were hired.

Her Honour found National Contractors had none of the features of an independent business and generated little or no income. She was well satisfied each of the 51 individuals was an employee, not an independent contractor and that GPS was their true employer, stating:

“the evidence discloses that despite some clumsy attempts to create relationships of principal and contractor, the inherent character of the relationship in each of the 51 cases was one of employer and employee”.

The Ombudsman asked for penalties to be imposed for the contravening conduct and for compensation for the affected employees. The court will determine these matters on a later date, but given the severity of penalties available under the Act, it may prove very expensive for GPS.

To avoid exposure to penalties and expensive litigation employers considering using labour hire or independent contractor arrangements are well advised to seek independent legal and financial advice.

Post by Felicity Howell and Sarah Jones 

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