$197,000 Penalty for Sham Contracting Involving Disabled Workers

The Federal Court has ordered a company to pay $197,000 in penalties for sham contracting, concerning workers with disability.

Under the Fair Work Act 2009 (Cth), a business or individual cannot represent to a worker that they are an independent contractor, or convince an employee to become an independent contractor – when they are actually an employee and/or are performing the same or similar work as they were prior. This is known as ‘sham contracting’.

In a recent case, a company (Doll House) notified three employees with a disability that they would be converted to independent contractors, would need to provide ABNs and submit invoices in order to be paid. The workers were threatened to be terminated if they did not sign the new ‘contractor agreement’ they were presented with. Upon receiving a request, the Fair Work Ombudsman (FWO) commenced an investigation whereby it was uncovered that the workers had not been paid in full during their employment.

While Doll House rectified the underpayments, it disregarded the notice from the FWO requiring it to provide specific records and documents related to the workers’ terms of engagement and duties performed. This prompted the FWO to commence litigation.

Findings

It was found by the Federal Court that the contract the employees signed was a sham. The workers were, in fact, employees rather than contractors. Essentially the terms of the contract showed that the workers owed obligations to Doll House consistent with ongoing employment, performed the same tasks as before, were paid hourly, worked under Doll House’s strict control with no flexibility, and could not delegate their duties or work to other parties.

The Court also noted that some of the workers signed the agreement under a significant power imbalance. These workers, having felt there was ‘no alternative’, signed the contract to retain their jobs and receive payment.

As such, the Court ordered the substantial penalty of $197,000 to ensure both general and specific deterrence. This is despite the contraventions taking place over a relatively short period of time (less than a year). In doing do, the Court emphasised that it will not tolerate employers taking advantage of their power, especially over those with disability, as well as failing to cooperate with the FWO.

Learnings For Employers

This case highlights the severity of misclassifying workers as independent contractors when they are, in fact, employees, as it can lead to significant legal and financial repercussions. It also demonstrates that failing to cooperate or comply with the FWO can significantly increase such repercussions.

If you have any queries about sham contracting, please do not hesitate to contact HR Legal.

Case Reference: Fair Work Ombudsman v Doll House Training Pty Ltd (No 2) [2024] FCA 811