In a recent case, the Fair Work Ombudsman (FWO) prosecuted Doll House Training (DHT) for alleged sham contracting between 27 August 2020 and 28 October 2020. The Federal Court of Australia ruled that DHT had engaged in sham contracting during this period and imposed pecuniary penalties of $197,000, to be paid within 28 days.
Case Overview
Between 27 August 2020 and 28 October 2020, Ms. Rachel Murray, Ms. Jasmine David, and Ms. Diana Wickett (the Workers) performed work for DHT. DHT specialise in research into robotics, coding, and artificial intelligence for applications in the health and wellness industry.
The court found that DHT’s sole director, secretary, and shareholder—deemed the company’s operating mind—was responsible for directing the hiring of employees and engaging independent contractors. DHT’s operations manager handled the day-to-day business, including supervising employees and allocating work.
On 6 August 2020, the operations manager expressed a desire to engage Ms. David and Ms. Wickett for 12 hours per week. Employment offers were communicated and accepted on the same day. In mid-August 2020, the operations manager offered Ms. Murray employment, which she also accepted.
From August until early October 2020, each Worker worked 12 hours per week. On 7 October 2020, DHT informed the Workers they would be converted to independent contractors and required them to provide an Australian Business Number (ABN) for payment. On 13 October 2020, DHT sent each Worker an independent contractor agreement, with terms nearly identical to their previous employment duties.
Between 23 and 28 October 2020, the FWO received assistance requests from the Workers regarding unpaid work and the unsigned Agreements. Following FWO intervention, some payments were made to the Workers. On 23 December 2020, the FWO issued DHT a notice to produce documents, which was not complied with, leading to FWO initiating proceedings on 31 May 2021.
Court Findings and Penalties
The FWO alleged that DHT:
- Failed to pay the Workers in full, at least monthly.
- Misrepresented the nature of the engagement as contracting rather than employment.
- Threatened to dismiss the Workers to re-engage them as independent contractors.
- Failed to comply with an FWO notice to produce documents.
Justice Goodman found:
- DHT breached section 323(1) of the Fair Work Act 2009 (Cth) (FW Act) by not paying the Workers for work performed at least monthly.
- By requiring Workers to become contractors and provide ABNs for payment, DHT breached section 357 of the FW Act by misrepresenting an employment relationship as a contracting relationship.
- DHT’s actions contravened section 358 of the FW Act by dismissing Workers to re-engage them as contractors.
- DHT violated section 712(3) of the FW Act by not complying with the notice to produce.
Justice Goodman ordered penalties totaling $197,000 for eight contraventions.
Lessons from the Case
The deciding factors for the penalties included the ‘clear power imbalance’ for the Workers who signed the Agreements and the contract terms indicating employment rather than contracting. This case underscores the necessity of obtaining legal advice before presenting independent contractor agreements, especially to former employees.
Since these breaches in 2020, the maximum penalties for such breaches have increased from $66,000 to $99,000 per breach for non-serious contraventions. Previously, the ‘recklessness test’ could be used to defend against sham contracting allegations, claiming a lack of knowledge or recklessness. However, from 27 February 2024, the defence has shifted to one of reasonableness. Now, employers must reasonably believe the relationship is an independent contractor arrangement, considering the employer’s enterprise size, nature, and whether proper advice was sought.
Best Practices for Engaging Contractors
- Seek Legal Advice: Always seek advice from an employment lawyer on the proposed terms of engagement before hiring an independent contractor, especially if there was a previous employment relationship.
- Draft Clear Agreements: Ensure that an independent contractor agreement is drafted by a lawyer. The terms should be explicitly carried out according to the written agreement to avoid exposure to sham contracting claims.
- Consistent Implementation: Ensure that the terms of the contractor agreement are consistently implemented and adhered to in practice.
By adhering to these best practices, businesses can avoid the pitfalls of sham contracting and ensure compliance with employment laws.
Written by Michelle Chadburn, Special Counsel, NB Employment Law