ABCC Inquiry into Sham Arrangements and the Use of Labour Hire
in the Building and Construction Industry
Submission by Andrew Stewart* and Cameron Roles#
Defining ‘Sham Contracting’
One of the problems in any debate over ‘sham contracting’ in the labour market is the lack of an
accepted definition of that term.1 It is helpful, we suggest, to identify at least three different
meanings. (To be clear, what follows is not intended to encompass ordinary labour hire
arrangements, to which we return in a later section.)
The narrowest definition is that adopted by the common law, which treats a transaction as a ‘sham’
when it is a ‘disguise’ or a ‘facade’ that is deliberately constructed in order to conceal a ‘real’
transaction.2 According to Lockhart J in Sharrment Pty Ltd v Offıcial Trustee in Bankruptcy:3
A ‘sham’ is ... something that is intended to be mistaken for something else or that is not really what
it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or
true, but something made in imitation of something else or made to appear to be something which it
is not. It is something which is false or deceptive.
On this basis, an arrangement to engage a worker as an independent contractor would only be a
‘sham’ if the parties really wanted to create an employment relationship (the ‘real’ transaction), but
sought to try and disguise it as something else by adopting an arrangement that did not genuinely
reflect their intentions. Examples of such blatant deception would be rare; though one instance may
be where there is a token attempt to convert an existing employment relationship into something
else by paying the worker through a personal company. In such a case it may be considered that the
payment arrangement is simply a ‘facade’ to conceal the existing relationship.4 However, experience
suggests that the parties do generally intend to create a non-employment relationship when
structuring an arrangement as a contract for services – or at least, one of them so intends, and the
other is prepared to acquiesce.5
* John Bray Professor of Law, University of Adelaide; Consultant, Piper Alderman.
#
Lecturer, ANU College of Law.
1
A point discussed – but not resolved – by the House of Representatives Standing Committee on Employment,
Workplace Relations and Workforce Participation in Making it Work: Inquiry into Independent Contracting and
Labour Hire Arrangements, Commonwealth, Canberra, 2005, paras 5.126–5.148.
2
See Scott v Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265 at 279.
3
(1988) 18 FCR 449 at 454. This description has been widely adopted in subsequent cases: see eg Raftland Pty
Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516 at [111]–[112].
4
See eg Hartnett v Aardvark Security Services Pty Ltd (1998) 85 IR 315; Kitchen Design Systems Pty Ltd v Moran
(2007) 165 IR 127.
5
Compare recent cases in Britain, in which some courts have taken a broader view of the notion of a ‘sham’:
see eg Firthglow Ltd v Szilagyi [2009] ICR 83; A Bogg, ‘Sham Self-Employment in the Court of Appeal’ (2010)
126 Law Quarterly Review 166.
A second and slightly less narrow definition would regard sham contracting as an unsuccessful
attempt to disguise an employment relationship as an independent contracting arrangement. The
parties (or at least one of them) intend to create a contract for services, but the arrangement is
subsequently determined to have the legal characteristics of a contract of employment. This may
happen even where the employer has gone to some trouble to draft formal terms that present the
relationship as one of principal and contractor and that are signed by the worker to acknowledge as
much.6 But perhaps more commonly in the building industry, it occurs where a worker is hired on a
more or less informal basis to provide their labour, and simply assumes or is told that they are a
contractor. In such cases, little may be done (other than perhaps getting the worker to invoice for
their work and quote an ABN) to establish that the relationship is not one of employment.7
The third and broadest approach would see ‘sham contracting’ as encompassing any attempt to
disguise an employment relationship, whether successfully or unsuccessfully. That this is the
approach taken in the ABCC’s Discussion Paper is evident from the description of the term on p 3,
which notes that it may for instance include ‘interposing an entity that contracts with the business,
rather than the worker in his or her personal capacity’. As explained in the source to which the paper
refers,8 the careful establishment of such an arrangement must necessarily mean that the worker is
not an employee of the business for whom they are effectively working.9 They have been
successfully disguised as a non-employee of that business, where if directly engaged they might have
been treated as an employee. The same can be said where (again quoting from p 3) a contract for
the supply of labour is structured ‘to emphasise features of a contracting arrangement rather than
an employment relationship’, and that contract survives the scrutiny of a court or tribunal.10
Identifying the Problem
If we disregard the common law notion of a ‘sham’ as unduly restrictive, that leaves the second and
third meanings of sham contracting, which we will term the ‘narrow’ and ‘broad’ views respectively.
What we suggest is that there is a critical link between the identification of the problem, and the
adoption of an appropriate policy response to that problem.
Is there a problem at all? Constraining the ‘freedom’ to work as a contractor
There are some who would argue that there is no ‘problem’ of sham contracting at all. Given the
substantial evidence as to disguised employment arrangements collected or referred to in the
6
See eg Whitehead v WorkCover/Employers Mutual Ltd (2007) 168 IR 443.
7
See eg Plexvon Pty Ltd v Brophy (2006) 158 IR 221; Victorian WorkCover Authority v Game (2007) 16 VR 393;
Wesfarmers Federation Insurance Ltd v Wells [2008] NSWCA 186; CFMEU v Nubrick Pty Ltd (2009) 190 IR 175.
Compare Yaraka Holdings Pty Ltd v Giljevic (2006) 149 IR 339, where a builders labourer engaged on an
informal basis was found to be an independent contractor.
8
See A Stewart, ‘Redefining Employment? Meeting the Challenge of Contract and Agency Labour’ (2002) 15
Australian Journal of Labour Law 235 at 256–7; and see also B Creighton and A Stewart, Labour Law, 5th ed,
Federation Press, Sydney, 2010, pp 184–5.
9
See eg Richtsteiger v Century Geophysical Corp (No 3) (1996) 70 IR 236; Blake v Sitefate Pty Ltd (1997) 74 IR
466; Zoltaszek v Downer EDI Engineering Pty Ltd (No 2) [2010] FMCA 938.
10
See eg Tobiassen v Reilly (2009) 178 IR 213, where a builder working exclusively for one firm was found to be
a contractor on the basis of a carefully drafted contract describing him as such.
2
Discussion Paper, it should be evident that those advocating such a view are really arguing in favour
of an unfettered (or largely unfettered) freedom to engage workers as contractors when they might
otherwise be employees. They may indeed view the common law test for determining employment
status as unduly restricting that freedom. After all, that test (which, in the absence of any express
provision to the contrary, effectively determines the reach of the Fair Work Act 2009 (FW Act) and
many other labour statutes) does sometimes mean that a worker is characterised as an employee in
the face of a clear intent to avoid that status.11
There will undoubtedly be submissions to this inquiry that seek to frame such a ‘freedom’ in terms
of the right of workers to ‘choose’ to be self-employed. We accept that there are workers in the
building industry who would like to have that choice – although we would question how many fully
understand the entitlements they forego when being hired as contractors, or appreciate the way in
which their income and expenses should properly be treated under the personal services income
(PSI) provisions in the Income Tax Assessment Act 1997. But what we invite the ABCC to consider is
that arguments in favour of such a freedom are almost invariably advanced by business groups, or by
organisations established and funded by business groups. There are clear benefits – or more
particularly cost savings – for businesses who can engage workers as contractors rather than
employees, yet maintain an employer-like control over those workers. So these are not arguments
based on any great concern for the welfare or liberty of the workers concerned – they are squarely
grounded in self-interest.
In any event, we would strongly argue that the freedom to choose to work or be engaged as a
contractor rather than as an employee must be constrained, if the integrity of our labour law system
is to be protected. The law does not permit an employee to agree – no matter how voluntarily, and
no matter how well-informed they might be – to work for less than award wages, or to forego any
right to take personal or carer’s leave, or not to bring an unfair dismissal claim. So why then should it
be lawful to achieve such outcomes by contriving a worker to appear to be a contractor, even if the
worker consents to (or even initiates) the arrangement?
It is sometimes said that if businesses are denied the freedom to engage workers as contractors,
valuable ‘flexibility’ will be lost. But if this is suggesting that an employment relationship is inherently
less flexible that an independent contracting arrangement, that argument can be (and often is)
considerably overstated. In terms of the ease of ‘hiring and firing’, or of varying hours of work, there
may be little to choose between a contractor and a casual employee. More often than not, in our
view, a business that is seeking ‘flexibility’ is really endeavouring to avoid minimum conditions
(whether in a statute, award or a collective agreement that the business itself has negotiated) which
it regards as being inconvenient or costly. Which brings us back to the real point of principle –
whether it should be possible to contract out of labour standards.
Implications of the narrow view of sham contracting
The narrow view of sham contracting effectively accepts the existing common law test for
determining employment status, and identifies the problem as being what to do about cases where
11
See eg Hollis v Vabu Pty Ltd (2001) 207 CLR 21; Roy Morgan Research Pty Ltd v Commissioner of Taxation
(2010) 184 FCR 448.
3
parties ‘get it wrong’ by creating a relationship that they assume or intend not to be one of
employment, but in fact turns out to meet the common law description of employment.
From this perspective, the most obvious policy response is to consider what might be done to
uncover such arrangements and ensure that those concerned comply with the obligations that arise
as a result of the worker being an employee. In other words, the issue is primarily one of
enforcement. This could most obviously be addressed through organisations such as the ABCC, FWO
and ATO taking greater steps to inform parties of their obligations, audit businesses or workers for
compliance, and initiate prosecutions where appropriate. We make no particular submissions in that
regard, other than to note that steps have already been taken by both the ABCC and FWO to take a
more active interest in the issue.
Beyond doing more to detect ‘sham arrangements’ of this type and to ensure that workers receive
their proper entitlements, the further question is whether there should be some additional sanction
for entering into such an arrangement in the first place, beyond any civil penalties that might flow
for failing to comply with the NES or awards, maintain employment records, pay out leave
entitlements, and so on. We will return to that issue when considering the ‘sham arrangement’
provisions in Division 6 of Part 3-1 of the FW Act.
The broad view of sham contracting
In our view, it is appropriate to adopt a broad view of sham contracting: to see the problem as being
one of both unsuccessful and successful attempts to avoid employment. For reasons outlined more
fully in previous submissions,12 there is a fundamental flaw in the common law principles that
determine whether a person is working as an employee. That flaw is that they can be manipulated to
produce the desired result. Arrangements can be structured so that a person is to all practical
intents and purposes working as an employee, yet is not treated as such.
To be clear, we are not objecting to the idea of a worker choosing to run their own business and hire
out their services to clients as a contractor. But if that worker is genuinely self-employed, there
should be something to suggest that they really are running a business: that they employ their own
staff, or advertise their services, or work for a range of clients at any time. The challenge is how to
ensure that workers who are contracted to perform work, but who are not genuinely running a
business, are appropriately treated as employees.
Meeting the Challenge
We would oppose any suggestion that some or all of the rights and protections afforded to
employees should necessarily be extended to ‘dependent contractors’, in the sense in which that
term is used in the Discussion Paper. This is because, while many dependent contractors can fairly
be regarded as disguised employees, this is not invariably true. Some contractors may quite clearly
be running their own business, yet be in the habit of working for only one client at a time, or secure
a major contract that for a while occupies all of their time and attention. In saying this, we do not
12
See the submissions by Andrew Stewart to both the Cole Royal Commission and the ‘Making it Work’
Inquiry.
4
mean to suggest that it is inappropriate for certain rights and protections to be afforded to
contractors, whether dependent or independent. For example, it is entirely reasonable that an
organisation comply with health and safety obligations in relation to anyone who it engages to
perform work, whether as an employee or contractor. But we do not see that the challenge of sham
contracting is most appropriately met by extending statutes such as the FW Act to cover dependent
contractors – because some of those contractors can genuinely claim to be self-employed.
We would also reject some of the other solutions that have been put forward for dealing with this
issue. Statutory provisions that deem certain types of worker to be employees, or allow industrial
tribunals to do so, may be both too broad and too narrow in their scope. A provision that deemed all
plasterers (for example) to be employees would plainly be too wide, in that some plasterers are
genuinely self-employed. But at the same time, a deeming provision operates by reference to a class
of worker, when in fact any type of worker can be disguised as a non-employee.
As for unfair contract provisions, of the type presently found in Part 3 of the Independent
Contractors Act 2006, they rely on individuals going to the time and trouble of initiating potentially
expensive litigation in the courts. It is no surprise that few cases have been brought over the years to
complain about receiving remuneration that would be less than an employee would get for doing
the same work, or to argue that the very purpose of engagement as a contractor was to take the
worker outside the scope of the award system.
What we propose instead is that the term ‘employee’ be redefined so that, as far as possible,
workers cannot be treated as contractors unless they are genuinely running their own business. This
definition could be included in any legislation which uses the term ‘employee’. The Discussion Paper
notes (at pp 22–3) one possible definition that might be adopted.13 For ease of reference, that
definition is set out in the Appendix. It would be possible to adopt elements of the definition that
would ameliorate the present position, even if the whole package were not taken up. For example, it
would make a difference just to adopt the first element:
A person (the worker) who contracts to work for another is to be presumed to do so as an
employee, unless it can be shown that the other party is a client or customer of a business
genuinely carried on by the worker.
This could be supplemented (adapting elements of the proposed definition in the Appendix) by any
or all of the following:
In determining whether a person (the worker) who contracts to supply their labour to
another is an employee, a court or tribunal must:
(a) have regard to the practical reality of the relationship, and not merely any formally
agreed terms;
(b) have regard to the degree to which the worker is or is not economically dependent on the
other party; and
13
See Stewart, ‘Redefining Employment?’, above at 270–5.
5
(c) disregard any provision that the work in question may be delegated or sub-contracted by
the worker to others, unless that power may be exercised without the other party’s
consent, and has been or is likely in practice to be exercised .
It has sometimes been suggested that provisions of this kind would render the law uncertain. But
the law is already uncertain – that is why there so many decisions every year that are required to
rule on the status of a worker.
As for the point made in the Discussion Paper (on p 23), that the proposed definition would involve
‘importing a standard definition from one sphere of regulation to another’, this massively overstates
the reliance in the original proposal on elements drawn from the PSI provisions. As clearly explained
when the proposal was originally advanced, the PSI rules cannot simply be adopted and used in
other contexts, because they involve a retrospective assessment of what has happened over the
course of a financial year. That approach cannot readily be used to say what a person’s status is at
any given point in that year, or at least not without potentially having them flicker in and out of
employment status.
At any event, it is open to the ABCC to recommend that a modified version of the proposed
definition be adopted, along the lines suggested above. Such an approach would make it harder for a
worker to be directly engaged as a contractor, unless they were genuinely self-employed. But it
would leave open the tactic of having workers contract through their own personal companies, or
through partnerships that are formed purely to supply labour to one particular business. If such
‘interposed entity’ tactics are to be countered, then something like the following is necessary:
Where:
(1)
an arrangement is made to supply the labour of a person (the worker) to another
party (the ultimate employer) through a contract or chain of contracts involving
another entity (the intermediary), and
(2)
it cannot be shown that the intermediary is genuinely carrying on an independent
business in relation to that labour,
the worker is to be deemed to be the employee of the ultimate employer.
Labour Hire
In our opinion, labour hire is a legitimate business that should not be equated with ‘sham
contracting’ – except where it involves artificial arrangements that are designed to allow workers to
be engaged to perform work without the protection of labour laws.
Most of the larger and more reputable agencies employ the workers they hire out to their clients. As
employees (albeit often casual employees), such workers enjoy the rights and protections offered by
statutes such as the FW Act. Where this is the case, we do not see the need for some general
doctrine of ‘joint employment’ to be adopted, as opposed to (say) permitting unfair dismissal claims
6
to be launched in some cases against ‘host’ firms that are effectively responsible for an agency
worker losing their job. As it was put in an earlier submission:14
There may indeed be merit in certain contexts of allocating responsibility jointly between agency and
host firm, for example in relation to the rehabilitation of injured workers. However in relation to
many other obligations, such as the provision of leave or the payment of superannuation
contributions, the practical difficulties associated with giving the worker simultaneous rights against
two separate and unrelated entities seem manifest.
On the other hand, we do see a need to intervene in the case of agencies using the ‘Odco’ system, or
something like it. It is true that in a number of cases such agencies have failed to establish that the
workers they hire out are independent contractors.15 Nevertheless, it is still possible for agencies to
adopt arrangements that preclude such a finding: for example by requiring their workers to form
personal companies to contract with and be paid by the agency.16 In our view, agencies should not
be able to evade the obligations of an employer.
What we propose then is that labour statutes provide as follows:
An employment agency which contracts to supply the labour of a person (the worker) to
another party (the client) is to be deemed to be that person’s employer, except where this
results in a direct contract between the worker and the client.
An ‘employment agency’ is an entity whose business involves or includes the supply of
workers to other unrelated businesses or organisations, whether through a contract or a
chain of contracts.
This type of deeming provision, it should be emphasised, is already found in many workers
compensation or payroll tax statutes.17
The Sham Arrangement Provisions in the Fair Work Act
Whether or not action is taken to counter the successful disguise of employment arrangements
(sham contracting in the broader sense), there is still a place for provisions that seek to impose
sanctions on persons or organisations that are responsible for seeking to disguise employment as
independent contracting. In this section, therefore, we review the efficacy of the current provisions
in Division 6 of Part 3-1 of the FW Act.
The Discussion Paper contains (at pp 46–50) a useful summary of ss 357, 358 and 359, and the
limited case law which has grown up around them. In our view each of those provisions is in need of
reform. We set out our reasons and recommendations below.
14
A Stewart, Submission to ‘Making it Work’ Inquiry, 2005, pp 13–14 (footnote omitted).
15
See eg Drake Personnel Ltd v Commissioner of State Revenue (2000) 2 VR 635; Country Metropolitan Agency
Contracting Services Pty Ltd v Slater (2003) 124 IR 293; Staff Aid Services v Bianchi (2004) 133 IR 29; Forstaff v
Chief Commissioner of State Revenue (2004) 144 IR 1.
16
For a recent example, see Informax International Pty Ltd v Clarius Group Ltd [2011] FCA 183.
17
See eg Accident Compensation Act 1985 (Vic) s 9; Payroll Tax Act 2007 (Vic) Pt 3 Div 8.
7
Before addressing these specifics, we would like to deal with one matter raised in the Discussion
Paper concerning the overall scope of the provisions. In highlighting the modest litigation under
Division 6 and its predecessors, the Discussion Paper notes that the provisions only apply ‘in
circumstances where an employer has misled or dismissed an employee’ (p 48). Simply being party
to a sham arrangement attracts no penalty, other than the payment of the normal entitlements
associated with employment.
An obvious question is whether the provisions should be expanded to capture the notion of being a
party to a sham arrangement. In our view they should not, for two reasons.
In the first place, if simply being a party to a sham arrangement triggered liability, workers could find
themselves facing civil penalties, as they would be regarded as a ‘party’ to a sham arrangement. This
would be inappropriate, as it is usually the employer who decides the form of relationship between
it and its workers. Even if, as sometimes happens, it is the worker requesting to work as an
independent contractor, it is usually the employer that prepares the contract, often in consultation
with its professional advisers. Employers too are generally in a better position to understand, or at
least obtain advice on, the true legal position. Accordingly it is the employer, if anyone, who should
be held responsible in the event that the arrangement is found to be a sham.
Secondly, it is important that the sham arrangements provisions be aimed at those who attempt to
disguise employment as independent contracting, rather than those employers who genuinely try to
establish an independent contracting relationship with their workers. Given the uncertainty
surrounding the application of the tests for employment to particular fact situations, employers can
sometimes quite unwittingly, and without any criticism of their conduct, find themselves a party to a
‘sham’ arrangement. It would be inappropriate to penalise all employers in this situation, regardless
of their culpability – especially since there are in any event likely to be adverse consequences from a
finding of employment status, such as a liability to make superannuation contributions, provide (or
pay out) leave entitlements, and so on.
In our view the sham arrangements provisions should continue to target particular employer
conduct which either involves misrepresenting employment relationships as independent
contracting, or which involves the re-engagement of employees as independent contractors
performing the same or similar work.
Section 357: Misrepresenting Status as a Contractor
Section 357(1) provides:
A person (the employer) that employs, or proposes to employ, an individual must not represent to
the individual that the contract of employment under which the individual is, or would be, employed
by the employer is a contract for services under which the individual performs, or would perform,
work as an independent contractor.
8
A defence is available under s 357(2) if the employer can prove that it did not know, and was not
reckless as to whether, the contract was one of employment rather than an independent contracting
arrangement.18
In our view, s 357 provides inadequate protection against ‘sham’ arrangements, even in the narrow
sense of that term. This inadequacy arises because the provision provides an employer with a
defence which is both ambiguous and inappropriately generous.
The scope of the s 357(2) defence
We have two criticisms of the drafting of the s 357(2) defence:

the term reckless does not have a clear or universal common law meaning in a civil context,
and it is therefore impossible for employers to know what standard of conduct they must
meet; and

the two limbs of the defence apply a subjective test
The defence was first introduced as part of ss 900 and 901 of the Workplace Relations Act 1996 (WR
Act), the forerunner of the present s 357. When these provisions were added to the WR Act in 2006,
the government claimed that: ‘Recklessness will take its common law meaning as the
Commonwealth Criminal Code does not apply to the civil remedy provisions in the WR Act’.19
This is problematic, as the term ‘reckless’ has no universal definition at common law, at least in
relation to civil matters. In the criminal context, by contrast, the meaning of reckless at common law
is well settled, and is characterised by the notion of conscious risk taking. The element of
recklessness will be made out in all common law offences, except murder, if an accused realises the
possibility that a particular outcome may occur as a result of their engaging in prohibited conduct
but nevertheless engages in that conduct.20
In the civil context the term is defined differently depending upon the cause of action. This was
highlighted by Justices Gummow, Hayne and Heydon in the High Court of Australia when their
Honours made the following observations in Banditt v R:21
The term ‘reckless’ has various uses as a criterion of legal liability … When ‘reckless’ is used in
applying the principles of the tort of negligence, the yardstick is objective rather than subjective. On
the other hand, to sustain an action in deceit, fraud is proved when it is shown ‘that a false
representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly,
careless whether it be true or false’. But (3) is but an instance of (2) because, as Lord Herschell put it
in Derry v Peek:
18
Note that the defence is not available to a manager or director who is found to be ‘involved’ (within the
meaning of s 550) in a contravention of s 357 by the organisation for which they work: see Fair Work
Ombudsman v Centennial Financial Services Pty Ltd [2010] FMCA 863 at [275].
19
Supplementary Explanatory Memorandum, Workplace Relations Legislation Amendment (Independent
Contractors) Bill 2006, p 4.
20
R v Coleman (1990) 19 NSWLR 467 at 475–6.
21
(2005) 224 CLR 262 at [1]–[2] (footnotes omitted).
9
‘[O]ne who makes a statement under such circumstances can have no real belief in the truth
of what he states.’
This reasoning is akin to that which supports the evidentiary inference explained by Lord Esher MR as
being that one who wilfully shuts his eyes to what would result from further inquiry may be found to
know of that result.
This lack of clarity as to the meaning of reckless in a civil context is of more than academic interest.
In the first prosecution under the sham arrangements provisions, CFMEU v Nubrick Pty Ltd,22 Federal
Magistrate Turner considered the meaning of ‘reckless’ in the context of s 901(2) of the WR Act.
Both parties proposed different definitions. After initially contending that the definition in the
Commonwealth Criminal Code applied,23 the CFMEU ultimately relied on a definition taken from the
context of insurance policies,24 being:
When the insured could see the risk that harm may be caused from doing the act or omission and
proceeded to act or commit the omission, not caring about or being indifferent to averting that risk.
Nubrick relied predominantly on the material in Banditt v R set out above, but it is not clear whether
Nubrick ultimately put forward a definition as such. In any event, Federal Magistrate Turner was not
required to decide the meaning of ‘reckless’, because he held that whichever test was applied,
Nubrick had not been reckless.25
This lack of certainty surrounding the meaning of ‘reckless’ makes it an inappropriate touchstone
against which an employer’s conduct should be measured.26
A further problem with the defence in s 357(2) is that it is framed in subjective terms. Unless
admissions are made,27 employers who genuinely believe that they have engaged workers as
independent contractors should have no real difficulty in showing that they did not know that the
agreements in question were in reality employment contracts. This will particularly be the case if the
employer is prudent enough to obtain professional advice.
Notwithstanding the confusion surrounding the term, at common law, in both the civil and criminal
contexts, ‘recklessness’ generally involves a subjective element. Taking one of the tests expounded
in Nubrick as an example, in order to be regarded as reckless there would need to be knowledge on
the part of the employer of the possibility that the independent contractor agreement might be an
employment contract, without caring as to whether that possibility was correct. Recklessness is only
22
(2009) 190 IR 175.
23
See Criminal Code Act 1995 (Cth) s 5.4.
24
(2009) 190 IR 175 at [19], citing Mead v Allianz Australia Ltd [2006] NSWSC 366.
25
(2009) 190 IR 175 at [20]–[21].
26
It should be noted that in both of the successful civil penalty proceedings conducted to date by the FWO
under the sham arrangement provisions, recklessness on the part of the employer was not contested, or at
least not effectively so: see Fair Work Ombudsman v Land Choice Pty Ltd [2009] FMCA 1255, where
recklessness was admitted; and Fair Work Ombudsman v Centennial Financial Services Pty Ltd [2010] FMCA
863, where although it was argued that the employer had not been reckless, no relevant evidence was
presented to that effect.
27
See eg Fair Work Ombudsman v Land Choice Pty Ltd [2009] FMCA 1255.
10
likely to be found in the most egregious of cases, and the defence should be easily made out in most
circumstances.
Given these observations, we are of the view that actual knowledge combined with a requirement of
recklessness provides employers with an unreasonably generous defence.
How should the s 357(2) defence be framed?
In our view the defence under s 357(2)(a) (concerning lack of knowledge) should be retained. Given
that the section is concerned with representations made by an employer, a requirement that the
employer be unaware that such representations were incorrect seems logical. However it should
also be necessary for an employer to show that it could not reasonably have been expected to know
that the contract in question was in reality an employment contract.
This recommendation is consistent with the original form the provisions took when put to the
Parliament in the Workplace Relations Amendment (Independent Contractors) Bill 2006. The Bill was
amended by the then Government to introduce a requirement of recklessness, on the basis that it
would ‘achieve greater consistency with other similar provisions in the Workplace Relations Act
1996’.28
While it is certainly true that some provisions in the WR Act29 and their FW Act successors30 apply
the standard of recklessness to employer conduct, there are instances where the standard of
reasonableness has been applied to conduct under the FW Act, particularly in the case of powers to
be exercised by inspectors and the FWO.31 Use of the objective standard of reasonableness in
relation to these powers is evidence that an objective standard can be effectively used to balance
the interests of employers and employees. Whilst legislative consistency is important, it is no
substitute for clarity and certainty. Given the difficulties set out earlier concerning the term
‘reckless’, the paramount consideration should be the practical workability of s 357, rather than
notions of legislative consistency.
Incorporating a requirement of reasonableness has the advantage of introducing an objective
element to what is currently a subjective test. The concept of the reasonable person is also well
known to the law and to commercial stakeholders, and is used in a variety of civil contexts. Examples
include the objective standard of the reasonable person in the law of negligence32 and in provisions
concerning a director’s duty to prevent insolvent trading by a corporation.33 In our view a
touchstone of reasonableness strikes an effective balance between protecting the rights and
interests of employees, and ensuring that the sham contractor provisions do not punish employers
who have tried to properly engage their workers.
28
Supplementary Explanatory Memorandum, Workplace Relations Legislation Amendment (Independent
Contractors) Bill 2006, p 2.
29
See eg WR Act ss 357, 365, 366, 401.
30
See eg FW Act s 345, which in broad terms is the successor to s 401 of the WR Act. See also FW Act s 349.
31
See eg FW Act ss 707, 708, 711, 715, 716 and 718.
32
See eg Civil Law (Wrongs) Act 2002 (ACT) s 42.
33
Corporations Act 2001 (Cth) s 588G.
11
Section 358: Dismissing an Employee to Re-engage as a Contractor
Section 358 of the FW Act makes it unlawful for an employer to dismiss or threaten to dismiss an
employee for the purposes of re-engaging the employee as an independent contractor to perform
the same or similar work.
Our concern with s 358 is its focus on dismissal or threatened dismissal. While ‘dismiss’ is not
defined in the FW Act,34 it can be taken to mean a termination at the initiative of the employer.35 It is
likely too that ‘dismiss’ includes what is known as a constructive dismissal, where an employer, by a
course of conduct, effectively gives an employee no real choice but to resign their employment.36
This was certainly the view adopted by Federal Magistrate Cameron in Fair Work Ombudsman v
Centennial Financial Services Pty Ltd.37
But the focus on ‘dismissal’ does not necessarily protect an employee from more subtle forms of
pressure to agree to resign and be re-engaged as an independent contractor performing the same or
similar work. A resignation or an agreed termination would generally not be regarded as a
‘dismissal’.38 The section should be amended to capture such conduct. We suggest amending s 358
to encapsulate not only dismissal or threatened dismissal, but also the application of undue
influence or undue pressure to resign from employment or to agree to its termination.
We would not, on the other hand, support extending s 358 to cover all situations in which an
employee resigns and is then re-engaged to perform the same or similar work. For example, an
employee might choose to establish a business and retain their old employer as their first client.
Provided this was an entirely voluntary move, with no influence or pressure from the employer, this
should not expose the employer to liability.
Section 359: Misrepresentations as to Re-engagement as a Contractor
Section 359 makes it unlawful for an employer to knowingly make a false statement to an employee
to persuade or influence them to become an independent contractor, performing the same or
substantially similar work to that previously performed by them as an employee.
Our criticism of this provision is that it requires the employer to have actual knowledge that a
statement is false. Given this requirement, it will be very difficult to establish a contravention.
We suggest inserting the words ‘or ought reasonably to know’ after the word ‘knows’ in s 359. As
with s 357, this would have the advantage of inserting a well recognised objective test into the
provision, and would require employers to exercise an appropriate level of caution when making
statements concerning entry into independent contractor arrangements.
34
The term ‘dismissed’ is defined in s 386, but the context makes it clear that this applies only for the purpose
of determining eligibility to bring an unfair dismissal claim under Part 3-2 of the Act.
35
As to the equation of the terms ‘dismissal’ and ‘termination of employment at the initiative of the
employer’, see eg Fryar v Systems Services Pty Ltd (1994) 1 IRCR 246 at 254; Advertiser Newspapers Pty Ltd v
Industrial Relations Commission of SA (1999) 74 SASR 240 at 259.
36
See eg Mohazab v Dick Smith Electronics Pty Ltd (No 2) (1995) 62 IR 200.
37
[2010] FMCA 863 at [296]–[299].
38
See eg Birch v University of Liverpool [1985] ICR 470; FSU v Commonwealth Bank of Australia [2004] FCA 257.
12
Appendix
A Possible Definition of ‘Employee’
The following definition was proposed by Andrew Stewart to the ‘Making it Work’ Inquiry in 2005:
(1)
A person (the worker) who contracts to supply their labour to another is to be presumed to
do so as an employee, unless it can be shown that the other party is a client or customer of a
business genuinely carried on by the worker.
(2)
A contract is not to be regarded as one other than for the supply of labour merely because:
(3)
(4)
(a)
the contract permits the work in question to be delegated or sub-contracted to
others; or
(b)
the contract is also for the supply of the use of an asset or for the production of
goods for sale; or
(c)
the labour is to be used to achieve a particular result .
In determining whether a worker is genuinely carrying on a business, regard should be had to
the following factors:
(a)
the extent of the control exercised over the worker by the other party;
(b)
the extent to which the worker is integrated into, or represented to the public as part
of, the other party’s business or organisation;
(c)
the degree to which the worker is or is not economically dependent on the other
party;
(d)
whether the worker actually engages others to assist in providing the relevant
labour;
(e)
whether the worker has business premises (in the sense used in the personal services
income legislation); and
(f)
whether the worker has performed work for two or more unrelated clients in the past
year, as a result of the worker advertising their services to the public.
Courts are to have regard for this purpose to:
(a)
the practical reality of each relationship, and not merely the formally agreed terms;
and
(b)
the objects of the statutory provisions in respect to which it is necessary to determine
the issue of employment status.
13
(5)
An employment agency39 which contracts to supply the labour of a person (the worker) to
another party (the client) is to be deemed to be that person’s employer, except where this
results in a direct contract between the worker and the client.
(6)
Where:
(a)
an arrangement is made to supply the labour of a person (the worker) to another
party (the ultimate employer) through a contract or chain of contracts involving
another entity (the intermediary), and
(b)
it cannot be shown that the intermediary is genuinely carrying on a business in
relation to that labour that is independent of the ultimate employer, on the basis of
factors similar to those set out in (3) above,
the worker is to be deemed to be the employee of the ultimate employer.
39
That is, an entity whose business involves or includes the supply of workers to other unrelated
businesses or organisations, whether through a contract or a chain of contracts.
14