Director incurs significant fine following sham contracting practices

This month’s update sees sham contracting back in the spotlight, with Judge Cameron of the Federal Circuit Court delivering an interesting decision in relation to a fundraising company’s use of sham contracting arrangements.

Background

In this case the employer provided fundraising services to charitable organisations and other not-for-profits (‘Fundraising Company’).  The worker who was the subject of this matter, was a young overseas worker from the UK who had come to Australia on a working holiday visa.

Interestingly, the company who was the Respondent in this matter was not the company that directly engaged the worker as a contractor, but rather the entity that engaged the worker was a shareholder of the Fundraising Company (‘Shareholding Company’).  In effect, the Shareholding Company provided labour to the Fundraising Company – it did not operate a business of its own and was reliant on the Fundraising Company for funds.

In this case the Director of the Fundraising Company was also a Respondent as he was considered the ‘controlling mind’ of both the Fundraising Company and the Shareholding Company.

The Fundraising Company entered into agreements with not-for-profits to supply fundraising services for payment.  Basically they would supply fundraisers, monitor their performance and conduct and provide training to the fundraisers.  The Fundraising Company also entered into an agreement with another company (‘Administration Company’) which provided administration and payment services to the workers engaged by the Shareholding Company.  The Administration Company was required to:

• obtain and maintain insurance for the workers;
• deduct from payments owing to workers amounts relating to PAYG, public liability insurance and fees;
• create invoices for the workers; and
• make the payments to the workers.

The worker in this case was interviewed by the Director’s brother, who worked for the Fundraising Company.  He was offered a position as a fundraiser and he accepted that offer.  The following day, the worker was provided with training and at the end of the training he received a ‘Services Agreement’ and instructions document setting out what he needed to do to be paid, including instructions on registering for an ABN and registering with the Administration Company.  He also received an ÁBN Registration Guide and a PMA Contractor Registration Guide.

Basically the worker’s job was to attend various shopping centres and street locations and undertake fundraising activities.

Agreed Facts

There was an Agreed Statement of Facts in this matter.  It was agreed by the parties:

• that the Director’s brother regularly contacted the worker to provide directions and instructions and to check on his whereabouts and progress; and
• directed him to work set hours on Monday to Friday.

It was noted that the worker was paid $50 per day plus commission, less deductions for PAYG tax, public liability insurance and fees.  This increased to $67 per hour when he became Team Leader.

The parties also agreed, via the Agreed Statement of Facts that the worker was in fact an employee, and not an independent contractor due to the following factors:

• the worker had had no sales experience. The Fundraising Company provided the worker with sales training – so the worker was not coming to the arrangement with a specialised skill set, which is an indicator of a true contracting arrangement;
• the worker had to attend the premises at the commencement of each working day to be directed by the Fundraising Company to attend work at certain shopping centres or other locations;
• he was required to wear specified clothing and apparel which identified him with the relevant charity;
• he was required to work set hours;
• he was subject to day to day direction, supervision and control by the Fundraising Company;
• the agreements with the clients placed responsibility on the Fundraising Company to manage the conduct and performance of the worker;
• he was provided with an iPad to assist in his duties;
• as a team leader, he issued directions to team members and was required to report to the Fundraising Company and complete weekly team sheets;
• he was paid on a weekly basis;
• he did not have choice in the payment arrangements entered into;
• he did not create invoices;
• he did not have the discretion to delegate the work he performed; and
• he did not work or provide his labour or services to any other person or entity;
• he was not operating his own business.

There was a dispute as to whether the Fundraising Company or the Shareholding Company was the employer of worker, but Judge Cameron resolved that dispute, determining that the Fundraising Company was the employer.  Among other reasons, Judge Cameron noted that it was clear that the Shareholding Company was not carrying on a business of its own, and it only obtained income from the Fundraising Company.  His Honour also noted that the Shareholding Company did not exercise any control over the worker.

It was agreed by the parties that the Fundraising Company represented to the worker that the worker was an independent contractor and that by those representations, where the work was truly that of an employee, the Fundraising Company had engaged in sham contracting.

Findings

As a result of the agreement regarding the sham contracting arrangement, Judge Cameron made the following determinations:

• That in terms of minimum wages, the worker (now determined to be an employee) had been underpaid $5,092.66 as the Fundraising Company had failed to pay him the relevant minimum wage; and
• That the worker was a casual employee, and therefore he had been underpaid $2,760.74 as he had not received the relevant casual loading.

The Fundraising Company was also found to have breached the Fair Work Act 2009, by unreasonably requiring the worker to spend part of the amounts paid to him for insurance fees to the Administration Company.

There were also findings made against the Fundraising Company for failing to keep proper employee records.

The Director of the Fundraising Company admitted that he was accessorily liable for each of the Fundraising Company’s offences.

Penalties imposed

In addition to being ordered to repay the worker those amounts determined to have been underpaid, which it did prior to the hearing, Judge Cameron considered the civil penalties to be imposed on the Respondents.

One of the significant factors in determining the penalties to be imposed was that the Fundraising Company had previously engaged in similar conduct.  In that particular case, the Fundraising Company had admitted to treating employees as independent contractors in very similar circumstances to this case.  This was a significant factor in determining the extent of the penalty.  This was particularly significant where Judge Cameron was required to consider the deliberateness of the breaches.  On this issue, Judge Cameron stated:

“By the time [the worker] started work, [the Fundraising Company] had been involved in the [previous] proceeding for some time and would have been aware of the likely consequences under the FW Act of confusing employees with contractors. [The Fundraising Company] must be taken to have been aware of the risk it was running if the arrangement it used was unsuccessful in making [the worker] an independent contractor. Significantly, no evidence was adduced by the respondents to suggest that [the Fundraising Company] did not know and was not reckless as to whether [the worker’s] contract was a contract of employment rather than a contract for services.”

Ultimately, Judge Cameron imposed a civil penalty of $100,000 on the Fundraising Company, which took into account a 15% deduction for the Respondents’ co-operation in the Fair Work Ombudsman’s investigation into the matter.  There was also a further deduction as His Honour determined that the final penalty of approximately $121,000 was excessive in the circumstances.  Judge Cameron then went on to impose $24,276 on the Director for his accessorial liability, again including a 15% discount for his co-operation.

Lessons from this case

This case is a reminder of the perils of misrepresenting employment as an independent contracting arrangement.  This case gives a very good description of the kind of factors that ended up weighing against the Fundraising Company and which led the parties to agree that the relationship between the Fundraising Company and the worker was actually one of employment.  Some of those key factors are:

• The worker was subject to day to day direction, supervision and control by the Fundraising Company;
• He was unable to delegate his duties;
• He did not work for others; and
• He was clearly not performing work for his own business.

Business owners should be particularly careful where they are engaging in independent contracting arrangements.  There are many pieces of legislation that operate to protect individuals in these arrangements (including the sham contracting provisions), and the avenues of claim for individuals in these arrangements are many.  In all independent contracting situations we recommend that our advice be sought before engaging in such arrangements.