A duck is still a duck if it is not a rooster; sham contracts in employment law

The High Court has today confirmed that the reach of the sham contracting provisions of the Fair Work Act extends to render an employer liable for misrepresentations to the effect that a contract of service between the employer and the employee is in fact a contract for services between the employee and a third party, and in doing so has pointed out that in the case in question despite the protests of the employer that it was not the employer, the surrounding facts implied that it was. The Full Federal Court had previously held in the case which was appealed to the High Court that the employer was only liable for breaching the Act where the misrepresentation was by a party to the effect that there was a contract for services between another party and the employee.

“The prohibition in s 357(1) is against an employer making a particular representation to an employee or prospective employee. The prohibited representation concerns the character of the contract, which exists or would exist between the employer and the employee as a contract of employment, under which the employee performs or would perform work. The content of the prohibited representation is that the contract of employment is or would be a contract for services under which the employee performs or would perform work as an independent contractor.
Nothing in the language of s 357(1) warrants the construction that the representation prohibited by the provision is confined to a representation that the contract under which the employee performs or would perform work as an independent contractor is a contract for services with the employer. The reference in the provision to “the contract of employment under which the individual is, or would be, employed by the employer” is a reference to the object of the prohibited representation. It is not a reference to the content of the prohibited representation. The content of the prohibited representation is expressed in terms which require nothing more than that the contract which is the object of the representation “is a contract for services under which the individual performs, or would perform, work as an independent contractor”. The provision is silent as to the counterparty to the represented contract for services. Who might be the counterparty to the represented contract for services, and whether that counterparty might be a real or fictional entity, is correspondingly immaterial to the operation of the provision.
To confine the prohibition to a representation that the contract under which the employee performs or would perform work as an independent contractor is a contract for services with the employer would result in s 357(1) doing little to achieve its evident purpose within the scheme of Pt 3-1. That purpose is to protect an individual who is in truth an employee from being misled by his or her employer about his or her employment status. It is the status of an employee which attracts the existence of workplace rights.
To confine the prohibition in that way would, moreover, be to give the provision a capricious operation. An employer would be liable to pecuniary penalty if the employer said to an employee “you are employed by me as an independent contractor”. The same employer would act with impunity if the employer said to the same employee “you are employed by X as an independent contractor”. That would be so even if X were entirely fictitious. Either way, the employee would be misled by the employer to think that the employee was an independent contractor, and the extent of the practical denial of workplace rights would be the same.
The legislative history contains nothing to compel the conclusion that the provision should be so confined. The explanatory memorandum for the Act explained s 357(1) as intended to restate in simplified terms the effect of ss 900 and 901 of the Workplace Relations Act 1996 (Cth) (“the 1996 Act”). Those sections, which were introduced into the 1996 Act by the Workplace Relations Legislation Amendment (Independent Contractors) Act 2006 (Cth) (“the 2006 Act”), dealt respectively with an employer making a prohibited representation to an employee and a prospective employer making a prohibited representation to a prospective employee. The prohibited representation was expressed in each of those sections in materially identical terms. The terms in which the prohibited representation was expressed reflected, without resolving, the present issue of construction.
The explanatory memorandum for the Bill for the 2006 Act is similarly inconclusive. There is a statement in the explanatory memorandum for the 2006 Act on which the Full Court placed weight. The statement is that, in order to contravene s 900, a person “would need to have entered into a contract with an individual and have made a representation to that individual that the contract was a contract for services under which the individual would perform work as an independent contractor”. That statement does not say, and does not suggest, that the person would need to have made a representation that the contract was a contract for services with that person as distinct from with someone else.
The explanatory memorandum for the Bill for the Independent Contractors Act 2006 (Cth), which was enacted as part of the same legislative package as the 2006 Act, on the other hand, provides a strong indication that the purpose of the prohibition was to prevent misrepresentation as to the nature of the contract under which an employee performed work irrespective of who might be represented to be the counterparty to that contract. It will be remembered that the heading of the Division into which s 357 falls is “Sham arrangements”. Sections 900 and 901 fell within a Part introduced into the 1996 Act by the 2006 Act which had the same heading.
Under that same heading in the explanatory memorandum for the Bill for the Independent Contractors Act, the relevant concept of a “sham arrangement” was explained to encompass “an arrangement through which an employer seeks to cloak a work relationship to falsely appear as an independent contracting arrangement in order to avoid responsibility for legal entitlements due to employees”. It was recorded that courts had held that parties “cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck”. “Employees in disguised employment relationships”, it was said, “should have appropriate remedies available to them”.
The misrepresentation attributed to Quest was squarely within the scope of the mischief to which the prohibition in s 357(1) was directed and is caught by its terms.”

Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (2015) HCA 45 delivered 2 December 2015