The Federal Circuit Court recently issued penalties of $216,000 against two labour hire companies and two of their senior employees for sham contracting and the consequential underpayment of personal care workers.
The decision is another example of the Fair Work Ombudsman demanding greater accountability of individuals and corporations involved in contraventions of the Fair Work Act 2009 (Cth).
Fair Work Ombudsman v Care Providers Pty Ltd & Ors  FCCA 3771
Easttrac Pty Ltd provided personal care workers, and Klemtrac Pty Ltd provided domestic assistants, to Care Providers Pty Ltd. The workers were engaged by Easttrac and Klemtrac as independent contractors and were provided to Care Providers to perform in‑home personal and domestic care for Care Providers' clients. These roles included cleaning and assisting elderly and disabled persons by cooking, shopping and driving them to appointments.
This case centred on the agreements between Easttrac and its workers, Ms Augier and Ms Dolphin and agreements between Klemtrac and its workers, Ms Allen and Ms Hoffman. The case against Care Providers was abandoned once it was established that it was not the employer.
The workers provided evidence including:
- they would have liked to have been engaged as employees but were not given the option;
- the underpayment caused them to go without food, petrol, utilities and other household items and they had not been able to provide themselves adequate superannuation;
- they found the process of managing their business affairs onerous, stressful and complex because of their lack of experience and inability to pay for professional advice; and
- in some periods they were required to work 7 days per week.
Easttrac and Klemtrac admitted to contravening the Act and the Social, Community, Home Care and Disability Services Industry Award 2010. Both companies engaged in sham contracting by incorrectly representing the four workers as independent contractors instead of employees and as a result, they were found to have contravened the Act, the Award and the National Employment Standards.
In relation to the Award, the companies failed to make or record the part time work agreements and failed to pay allowances, superannuation, in full for rostered hours and cancelled shifts, penalty rates, overtime rates and public holiday rates. In relation to the Act and the NES the companies failed to pay personal leave, made unlawful deductions for public liability insurance and personal accident insurance and failed to keep records or provide pay slips.
The Court established that the decision to engage the workers as independent contractors was a "single strategic decision taken in October 2014", made on advice of the group's accountant and tax advisor who set up the new company structure. Judge Heffernan concluded this decision was implemented to cut costs and provide the companies with a competitive advantage in the industry.
Easttrac and Klemtrac's senior decision makers were also personally responsible for the breaches due to their involvement in the contraventions.
Mr Peter Wallis' role as a senior employee meant he was "responsible for the engagement and overall management of the workers" engaged by both corporations. Mr Leo Welch was the sole director of Klemtrac and later the sole director of Easttrac. Accordingly, he was required to ensure that both corporations were meeting their legal requirements. Mr Welch was also responsible for the engagement of workers and was the person who approved the terms of the Independent Contractor Agreements.
Both Mr Welch and Mr Wallis admitted to being reckless in their commission of the contraventions through their conduct and representations. The Fair Work Ombudsman ultimately did not seek a declaration that Mr Welch and Mr Wallis' conduct was deliberate. The Federal Circuit Court remarked that "It was extremely reckless to embark on such a course on the advice of an accountant without making further enquiries".
In determining penalties, the Court took into account the "extreme recklessness" of the respondents and the need for an "element of general deterrence". It balanced these factors against the conclusion that there was no deliberate contravention of the law, that the respondents had not previously committed contraventions under the Act, their co-operation, remorse and their corrective action in a timely manner, and decided to order penalties of 30% of the maximum penalty available. In addition, in light of the respondents' admissions, contrition, co-operation and remorse, it applied a 30% discount.
This resulted in pecuniary penalties for Easttrac of $125,874, for Klemtrac of $77,112, for Mr Wallis of $5,783.40 and for Mr Welch of $7,711.20.
Lessons for employers
This case is another example of the Ombudsman and the Court taking a tough stance on careless sham contracting due to its serious consequences on the livelihood of workers. Although the amounts owing to the employees in this case may not have been substantial, the contraventions had a significant impact on these low paid employees and caused them financial stress and worry and the Court took that factor into consideration.
It is important to remember that employers, directors, managers, and human resource personnel can be personally responsible for their employer's contravention of the Act via accessorial liability. For this reason, you should always seek legal advice before implementing an independent contractor arrangement. As Anthony Massaro commented to The Age last year: if your business model depends on the provision of personal services by contractors, you need to be very careful about how you set it up.