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$60k fine for sham contracting arrangement

AREEA examines a decision where the former operators of a Perth accommodation facility were fined almost $60,000 for a sham contracting arrangement that was the subject of a successful High Court appeal by the Fair Work Ombudsman.

The finalisation of the long-running dispute is the result of legal action commenced in 2011 by the workplace watchdog.

Quest South Perth Holdings Pty Ltd (Quest), which formerly operated a Quest apartment complex in South Perth, was penalised $54,450 and the company’s former manager fined $4290.

In December 2015, AREEA reported that the High Court unanimously upheld the appeal brought forward by the Fair Work Ombudsman, ruling that Quest South Perth Holdings’ conduct contravened sham contracting laws and had engaged in a “triangular contracting” arrangement.

The High Court ruled that Quest South Perth Holdings Pty Ltd, breached s 357(1) of the Fair Work Act 2009 (Cth), which prohibits the representation that an employment arrangement, is an independent contractor arrangement.

“The Full Court held that s 357(1) would only be contravened by an employer’s representation to an employee which mischaracterised the contract of employment that existed between the employee and the employer as a contract for services made between the employee and the employer, not between the employee and a third party,” a High Court judgement summary explained.

The case was referred back to the Federal Court after the High Court overruled the Full Federal Court’s decision that Quest and its manager had not contravened the sham contracting provisions.

This month’s penalty decision was the culmination of these proceedings which were initiated by the Fair Work Ombudsman back in 2011.


The Fair Work Ombudsman claimed that Quest South Perth Holdings contravened the sham arrangement provisions of workplace laws in 2009 when it purported to convert three employees – two housekeepers and a receptionist – at Quest on Arlington into independent contractors.

Quest South Perth Holdings dismissed the workers and immediately re-hired the two housekeepers as purported independent contractors to perform the same duties. The receptionist was not re-hired after Quest dismissed her.

The Fair Work Ombudsman alleged the purported contracting arrangement was a sham and the correct relationship for the three workers was as employees.

The dismissal of the Fair Work Ombudsman’s original legal action in 2011, led to the watchdog lodging an appeal with the High Court.


Quest was fined a total of $58,740.

In determining the penalty to apply, Justice Gilmour found that the contraventions were the result of “Quest’s strategy and desire to engage the employees as independent contractors so their rights and entitlements would not be protected by industrial relations legislation”.

“The FWO submits correctly, in my opinion, that the impact of sham contracting contraventions is that workers believe that they are deprived from the wide ranging entitlements afforded to employees, including minimum rates of pay, annual leave, personal leave, long service leave, parental leave, superannuation, workers compensation, notice upon termination of employment and eligibility to access other protections such as unfair dismissal applications, general protections applications or an application for an order to stop bullying,” Justice Gilmour said.

He noted Quest’s contraventions involved “deliberate and conscious acts designed to circumvent industrial relations legislation and the protections they provide” and found that the impact on the three workers was significant.

Justice Gilmour found that the conversion of the receptionist “was implemented with the specific intent to allow Quest to terminate her employment without risk of unfair dismissal and to remove her other entitlements”.

In determining the quantum of penalties, Justice Gilmour found that as the conduct considered to be sham contracting effected two individuals, the determination of the penalty should be based on two distinct courses of action.

He also found there was a need to impose penalties that helped to maintain a level playing field for employers with respect to wage costs and deterred others from similar conduct.

Quest was fined a total of $33,000 for two breaches of s357(1) of the Fair Work Act, by Federal Court Justice John Gilmour, who said it misrepresented the true nature of the employment relationship when it converted two housekeepers onto independent contracts.

The manager, who, it was found, was intimately involved in constructing the arrangement which were found to constitute sham contracting arrangements was fined $4290.

For breaching s358 of the Fair Work Act, Quest was also fined $21,450 for threatening to terminate the employment of a receptionist if she refused to agree to convert to the independent contracting relationship.


The decision highlights the importance identifying the true nature of a relationship to determine the terms and conditions that apply to it.

It also sends a message that the Fair Work Ombudsman will pursue recourse where it considers that a party has entered into arrangements with the specific intent of denying employment entitlements. In this particular case, persons who had previously been employed in a genuine employment relationship were converted to an arrangement that amounted to sham contracting.

Not only companies but managers directly involved in the offending conduct will be pursued.

Management and recruitment personnel need to be adequately trained in the differences between employees and contractors. Where there is any doubt as to what the relationship is, specific professional advice should be sought.

AREEA is the resource industry’s specialist for all workplace relations matters, including employment contracts. For information about this case or similar matters  speak with an AREEA consultant today.

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