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Employment, IR & Workplace Safety News Alert: Is it worth it? The cost of sham contingent labour

News Alert 24 June 2014

A Roy Morgan Group company has been ordered to pay over $460,000 for its engagement in ‘sham’ contracting arrangements. Below are more details on the case, as there are a number of important ramifications from this Federal Circuit Court decision with key lessons for the contingent labour industry.

What are the facts?

In December 2013, the Federal Circuit Court ruled that Linkhill Pty Ltd (Linkhill) had entered into sham contracting arrangements with ten independent contractors. The workers were initially engaged by Linkhill to undertake renovations of properties it (and its associated entities) leased in Melbourne’s CBD.

The following were central considerations in the Court’s findings that the workers were employees, not independent contractors:

  1. Written Terms: the workers’ contracts did not indicate decisively against the relationship being one of employment.
  2. Control: the organisation and allocation of work to the workers was consistent with an employment relationship. For instance, Linkhill directed when, where and what work was undertaken and had the right to suspend or dismiss workers.
  3. Conducting a business: while the workers provided ABNs at the commencement of their engagement, the workers performed labour exclusively for Linkhill, and were not conducting a business of their own.
  4. Remuneration: the workers performed set hours of work and were remunerated on an hourly basis, rather than being paid on result.
  5. Tools: Linkhill provided the tools and materials required to perform the work.
  6. Totality of the relationship: the day to day relationship between Linkhill and the workers was considered to be consistent with an employment relationship.

It is interesting to note that the Court also considered the workers to be “complicit” in these sham arrangements in order to gain tax benefits. Despite this, the Court still made adverse findings against Linkhill.

What was the outcome?

On 20 June 2014, the Court handed down its decision in relation to penalties. Linkhill was ordered to pay $313,500 on the ground that it engaged in sham contracting arrangements, and more than $150,000 to rectify underpayments in wages and entitlements for the period between 2007 and 2010.

In handing down this decision, the Court stated that it would be wrong to treat the Respondent as a small business where imposing fines would cause undue hardship. The “contraventions were deliberate and senior management directed the conduct.” The Court found 139 contraventions were committed by the respondent and stated that the maximum penalty it could have imposed was $4.5 million.

What lessons should I take from this?

  1. Assess the relationship: Identify the appropriate characterisation of a worker at the outset. Where there is uncertainty about the correct classification of a worker, seek legal advice regarding this and the preparation of appropriate contractual terms.
  2. Document the arrangement: Document the relationship accurately and appropriately through written contractual terms. This is the first place the regulator or a court will look to determine the true nature of the relationship.
  3. Don't leave it to the worker: No defence exists that a worker willingly entered into a contracting arrangement for their own benefit.
  4. Take responsibility: Substantial penalties can be imposed for engaging in sham contracting arrangements, and liability can extend beyond an organisation. For instance, a decision-maker can be held independently liable for engaging in sham contracting. This means you could be joined with your organisation in any prosecution by the regulator.

Peta Tumpey, Partner

News Alert 24 June 2014
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