The concept of “disguised employment”

Contracts of service vs contracts for services;

“It is important to bear in mind that there can be no employment without a contract. Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555 at 587; R v Brown; Ex parte Amalgamated Metal Workers and Shipwrights’ Union (1980) 144 CLR 462 at 475. In order to determine whether a contract has come into being, the common law requires that there be agreement, consideration, and an intention to create legal relations. Whether or not there is agreement is determined by the rules of offer and acceptance. However, the rigidity of offer and acceptance is sometimes ill suited to what people actually do. As McHugh JA (with whom Hope and Mahoney JJA agreed) said in an often cited passage from Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd:  (1988) 5 BPR 11,110 at 11,117-8

“It is often difficult to fit a commercial arrangement into the common lawyers’ analysis of a contractual arrangement. Commercial discussions are often too unrefined to fit easily into the slots of “offer”, “acceptance”, “consideration” and “intention to create a legal relationship” which are the benchmarks of the contract of classical theory. In classical theory, the typical contract is a bilateral one and consists of an exchange of promises by means of an offer and its acceptance together with an intention to create a binding legal relationship…

Moreover, in an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions which might be too uncertain or too illusory to enforce at a particular time in the relationship may by reason of the parties’ subsequent conduct become sufficiently specific to give rise to legal rights and duties. In any dynamic commercial relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed.”

The existence of an intention to create contractual relations, offer, acceptance and consideration may be evinced from conduct, with post–contractual conduct being admissible on the question of whether a contract was formed. Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] FCAFC 37; (2015) 228 FCR 346 (Quest) at [158]4

An employment relationship involves a wage/work bargain in which the time, skill and effort of a natural person is provided to and paid for by another.  Quest at [134]. However, not every circumstance in which a natural person provides his or her labour to another in exchange for payment involves the creation of an employment relationship. Labour can legitimately be provided by one person to another in a range of other circumstances. Quest at [134]. For example, a person may be self-employed in his or her own business and through that business provide their labour to another person, or a triangular contracting arrangement may be used to provide labour or services to end-users. Quest at [134]-[136]. The use of such arrangements may be real or artificial. Where such arrangements are real, no employment relationship is created between the natural person and the end-user. Where such arrangements are artificial, the “external form, appearance or presentation of the relations between the parties cloak or conceal either an underlying employment relationship or the identity of the true employer”.   Quest at [137]. This is commonly referred to as disguised employment.

Determining whether an arrangement is real or artificial requires a “focus on the real substance, practical reality or true nature of the relationship in question”. Quest at [142]. Ultimately, the search for the reality or truth of what has been agreed, is a search for the common intention of the parties.  Quest at [150]. The common intention must be determined objectively by reference to what a reasonable person would have understood the parties to mean and requires consideration not only of what is recorded on the face of a contract, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction. Quest at [150]. It is necessary to ensure that the conclusion reached “coheres with applicable principles of contract law”. Quest at [143]. By way of example, that means parties to a written agreement will be held to the obligations which they have assumed by that agreement unless there is a proper basis to depart from the terms of the written agreement. Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at 483-4

In some circumstances, the disparity between what is presented on the face of the contractual documents and the reality of what has truly been agreed is explained by the existence of a sham or a pretence. Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at 483-4 A sham at common law is an agreement or a term of the agreement that is not intended by the parties to have substantive, as opposed to apparent, legal effect and which is the product of the common intention of the parties to deliberately deceive third parties.  Quest at [144]. A sham is difficult to establish in the context of employment relationships because the alleged employee is “usually either ignorant of the deceit or a victim of it”, in which case there will be no common intention of the parties to deceive others. Quest at [145].

In other cases, the disparity between what is recorded on the face of the contractual documents and what is demonstrated to have occurred by reference to the subsequent conduct of the parties may be explained by the existence of an implied contract of employment between the worker and the end-user. Quest at [145]. In the context of triangular contracting arrangements, the parties may demonstrate, by their conduct, that an initial contract made between the worker and an intermediary company was ineffective or inoperative and the existence of a contract of employment between the worker and the end-user is to be implied from their conduct. Quest at [149].

In the event that an implied contract is found and there is a question as to the proper characterisation of the contractual relationship, a “multi–factorial assessment is required in evaluating whether a person providing personal services is an employee or alternatively an independent contractor”.  Quest at [176].”

Turner v Australia Post (2016) FWC 801 delivered 2 March 2016 per Saunders C