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Sham contracting and the exploitation of vulnerable workers have been hot topics recently following a series of high profile cases including the likes of 7Eleven, Baiada Poultry and Quest Serviced Apartments. The Fair Work Ombudsman (FWO) continues its crusade, investigating and litigating claims related to worker exploitation in supply chain arrangements.

In a recent decision of the Federal Court, the FWO secured more than $220,000 in compensation for employees and more than $440,000 in penalties against a company that engaged in a calculated sham contracting scheme.

In Fair Work Ombudsman v Grouped Property Services Pty Ltd (No 2) [2017] FCA 557, Justice Katzmann ordered that cleaning service provider, Grouped Property Services Pty Ltd (GPS) and two of its directors (one former director and one current director) compensate employees for underpaid entitlements and pay penalties for a range of contraventions of the Fair Work Act 2009 (Cth) (FW Act).

The decision as to penalties and compensation followed an earlier decision on liability, handed down in August last year, in which Justice Katzmann found that GPS had concocted a sham contracting scheme in an attempt to avoid its obligations as an employer. GPS denied that any of the employees were actually its employees and maintained that they were either sub-contractors or employees of a labour hire business called National Contractors Pty Ltd (National Contractors).

National Contractors was a company owned and operated by the same family members as those operating GPS. Justice Katzmann found that National Contractors was not an independent business, but was actually an instrument of GPS, used in its sham contracting scheme to distance GPS from the employment relationship.

In reaching her conclusion that the employees in questions were actually employees of GPS and not independent contractors or employees of National Contractors, Justice Katzmann looked at the nature of the employees’ relationship with GPS. Some of the relevant factors in her conclusion were:

• Some employees wore a uniform with the GPS logo;
• GPS directed the employees in how and where to work;
• The employees could not delegate their work to others;
• All equipment used by the employees was supplied by GPS;
• None of the employees were running a business of their own; and
• GPS held itself out to be the employer of the cleaners it supplied to clients and made direct statements that it did not sub-contract work to other parties so as to maintain a high standard.

Justice Katzmann was scathing in her assessment of GPS and its directors, calling the actions of one of the directors “reprehensible” and describing the treatment of some employees as “slaves.”

The significant penalties handed down in this case are a lesson to employers about the seriousness of offenses under the FW Act and the position of the courts when it comes to sham contracting arrangements and vulnerable workers.

As was the case with GPS, some employers mistakenly believe that if they label their employees “independent contractors”, they can pay whatever rates they see fit and avoid having to pay the wages and entitlements owed to employees under the FW Act and other workplace instruments. This is the most basic form of sham contracting.

Sham contracting is illegal and not tolerated by the FWO or the courts and, when investigated, employers can expect to face not only employment entitlement claims but also penalties for a wide range of FW Act contraventions, such as failing to comply with employment record keeping obligations and failing to comply with the terms of a modern award.

If genuinely in doubt as to whether the relationship with a worker is one of employee/employer or contractor/principal, employers should seek legal advice about the totality of the relationship. Correctly engaging workers can save employers a lot of money, frustration and bad press in the long term.