Sham contracting occurs when an employer attempts to disguise an employment relationship as an independent contracting relationship, thereby avoiding obligatory rates of pay and other entitlements. This gives the employer an unfair competitive advantage.

The operational intervention began in April in response to intelligence from various sources and concerns raised by key stakeholders, including employee and employer groups and members of parliament.

The report states that a number of trading enterprises engaged contractors who should more properly have been classified as employees.

While Fair Work inspectors found that most of these arrangements were not deliberate, they did identify a number of employers whom they believe knowingly or recklessly misrepresented the employment relationship to their workers as one of independent contracting.

Legal action is being considered in some instances.

The Fair Work Ombudsman found misclassification of employees in each of the three industries that were investigated, but does not believe the problem is confined to these industries alone. 

Misclassification can lead to a contravention of the National Employment Standards (NES), minimum wage orders and terms of a Modern Award or Enterprise Agreement.

It can also result in contraventions of employer obligations to provide employee records and pay slips and may expose employers to back-payment of outstanding entitlements.

The report calls for employers to exercise a greater degree of care over their contracted labour arrangements.

A number of employers had received advice from accountants on how to structure their operations. It appeared the legality or appropriateness of the arrangements under relevant workplace laws was often not considered.

In the case of Fair Work Ombudsman v Centennial Financial Services Pty Ltd & Ors a company was found to have breached various sections of the then Workplace Relations Act 1996 (repealed and eventually replaced by the Fair Work Act 2009).  The breaches included setting up sham arrangements and not paying statutory entitlements to employees.

The court proceedings named the sole director of the company as a defendant along with the Human Resources Manager who was not a director of the company.

The HR Manager submitted to the Court that he:“had merely been following the instructions of [the director] and had not had any input into the decisions which gave rise to the contraventions.”  He submitted that his position as the human resources manager was “a mere title” and that he had no authority beyond what was approved by the director

.”However, in considering all the facts, the Court held that the HR Manager had knowledge of the essential facts of the breaches by the company and was knowingly concerned in and participated in the breaches.”

In the second judgment, the Court noted that the events:

“had a chilling effect on his career in human resources and that he has seen a significant decline in his income which would tend to increase the impact on him of any financial penalties imposed in these proceedings.…..The total penalty is $3,750.  I am satisfied that these are just and appropriate amounts as aggregate figures.”

This decision by the Court is a reminder that Managers not just Directors of companies should ensure that the work they undertake complies with the relevant legislative requirements and they do not merely “follow instructions from the Company Directors”.

If you own or manage a “small business”, the new rules could very well affect you.

As of 1 January 2011, only businesses that employ fewer than 15 employees – by simple headcount – qualify as a small business when an employee makes an unfair dismissal claim.

Before the change, a small business was one that employed fewer than 15 full-time equivalent employees.

This is a very important distinction, especially if you employ a number of part-time staff, encourage job sharing and provide flexible working arrangements. Your employees may do the work of fewer than 15 full-time equivalent staff, but in themselves add up to more than 15 people.If this situation applies to your business, you will find that you’re no longer eligible for the special unfair dismissal arrangements that apply to small businesses.

These special arrangements include a minimum employment period of 12 months before employees can make an unfair dismissal claim, and a simple Fair Dismissal Code to help employers ensure dismissals are not unfair.

* The landmark High Court decision in Kirk v WorkCover NSW & Ors will have dramatic repercussions for occupational health and safety prosecutions in New South Wales and across Australia.
* The Decision is likely to be welcomed by employers and expected to change both the way WorkCover NSW will prosecute breaches of the Occupational Health and Safety Act 2000 (NSW) (Act) and the way the legislation is interpreted by not just the NSW Industrial Court, but courts across Australia hearing safety matters.

Facts of the case

Kirk Holdings Pty Limited was the owner of a farm near Picton, New South Wales. Mr Kirk was a director of the Company but had no farming experience and left the day-to-day management of the farm to Mr Graham Palmer. Mr Palmer had over 20 years experience as a farmer and had a large property of his own.

On 28 March 2001, Mr Palmer was killed whilst driving an All Terrain Vehicle (ATV) owned by the Company. Rather than using an established road, Mr Palmer had directed the ATV down the side of hill causing the ATV to overturn.

The Company and Mr Kirk were charged with breaches of the Occupational Health and Safety Act 1983 (NSW) (Act) (the predecessor legislation to the current act), for failing to ensure the health and safety of the farm’s employees.

In an interview on ABC radio, Mr Kirk explained that the initial decisions of the NSW Industrial Court mean that the prosecution did not have to show what Mr Kirk could have done to prevent the accident. The fact that a fatal accident occurred meant that he was guilty of a criminal offence with no right of appeal.

The decision

The High Court held that, the legislation requires the charges to identify the measures which should have been taken by the defendants to obviate an identifiable risk. This requires the statement of the charge to be more specific than simply stating for example, that the defendant “failed to ensure the health and safety of employees.”

The High Court said that “It must specifically consider what constituted the risk and what particular measures should have been taken by the employer to address or obviate that risk.”

Whilst Justice Heydon agreed with the majority’s decision in substance, he provided his own further reasons for his decision and was highly critical of the approach taken by both the Industrial Court and WorkCover NSW.

Justice Heydon felt that the prosecutions against Mr Kirk and the Company should never have been instituted. The accident occurred in circumstances where Mr Palmer, a man of optimum skill and experience, had been inexplicably reckless. It was therefore absurd to prosecute the owner of a farm on the basis that he failed to ensure the health and safety of his employee.

Further he thought the emphasis placed on Mr Kirk’s failure to supervise his employees on a daily basis was astonishing. He held that to require farm owners that do not live on or near their properties to supervise their staff on a daily basis is an obligation that in many instances will be impossible for farm owners to comply with these requirements. This will have significance on the emphasis placed on issues of supervision and reliance placed upon known expertise in future OHS prosecutions

Impact for future OH&S prosecutions

The decision is likely to have four main impacts for the conduct of future OH&S prosecutions.

1. Most importantly, the decision does not mean that the level of safety that must be provided by employers has in any way been diminished. It will be more important than ever for employers to implement comprehensive safety systems. Employers will now be able to rely on the quality of their systems to assist them in successfully defending any prosecutions.
2. Prosecutors will be more specific when drafting the particulars of any charge, ensuring that each particular specifically identifies a measure that should have been taken by an employer to obviate an identifiable risk. This will enable defendants to make a more informed decision as to whether to defend a prosecution. It is to be expected that the form of charges will be more regularly challenged unless the Prosecutors around Australia comply with what the High Court has said in Kirk.
3. Defendants may be more successful in proving one of the defences as they will only be required to prove that it was not reasonably practicable for the employer to adopt the measures listed in the particulars of the charge.
4. The decision will also have a significant impact on the way the industrial courts across Australia interpret the duties placed on employers by the various OH&S acts and what acts or omissions will constitute breaches of those duties.

As a part of the budget previews last week the minister of superannuation made the following announcement (I have edited out the bits where he praises his government and criticises the previous one):

The Rudd Government will provide funding of $16 million over three years to set up an optional superannuation clearing house facility to cut the red tape burden on businesses across Australia, Senator the Hon Nick Sherry, Minister for Superannuation and Corporate Law, said today.

“With the introduction of super fund choice, businesses can be required to make compulsory superannuation contributions into numerous funds, potentially imposing a significant burden of paperwork and time, especially on small businesses.

Where employees can choose their own superannuation fund from the many hundreds available, an employer may be required to pay superannuation into a large number of different funds, a process that can be highly onerous.

A superannuation clearing house will allow an employer to pay their contributions to a single location. The clearing house will then distribute them to the relevant superannuation funds as selected by their employees.

“The optional clearing house facility will manage employers’ obligations under Superannuation Choice, including the time consuming task of checking details entered on the Choice form and distribution of contributions to the nominated funds,” Minister Sherry said.

“For small businesses we’re not just reducing red tape but we’re also making sure that no new costs are imposed as the clearing house facility will be offered free of charge to businesses with less than 20 employees,” said Minister Sherry.

Businesses that use the clearing house facility will have their legal obligation to make superannuation contributions discharged when payment of the correct amount is made to the clearing house. The facility will be available from 1 July 2009.

The Government will consult with industry prior to implementing this measure.