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Pendlebury Workplace Law is a specialist workplace relations and employment law legal practice based in Sydney.

Federal Court Decision on Labour Hire Sham Contracting Arrangement – Avoiding Employer Obligations

Farm Workers

Farm Workers not contractors

The Federal Court has found that shifting seasonal workers to a new employer after they had worked 40 hours a week constituted a “sham” contracting arrangement with the purpose of avoiding paying overtime.

Her Honour, Justice Collier held that a Queensland fruit farm owned by a family trust was in fact the employer of the workers for the entire period, rather than the two (2) labour hire companies that appeared on the workers’ payslips after they had completed their ordinary hours.

Eastern Colour Pty Ltd ran the family trust, with the parents of the farming family its sole directors and shareholders.

The sole director and shareholder of each of the two (2) additional companies; SB Employments and NB Employments, were the sons.

Eastern Colour Pty Ltd gave evidence that it was not economically viable to pay overtime, and that after seeking advice, it set up “internal” labour hire arrangements.

Justice Collier accepted evidence from Eastern Colour Pty Ltd that there were low profit margins in the industry, that the major supermarkets set the price for the farm’s produce, and that many of those performing seasonal work wanted as many hours as possible.  However, her Honour stated, “these facts do not detract from the legal position under the Act, which this Court is required to apply”.

The Office of the Fair Work Ombudsman (’the FWO’) launched the prosecution on behalf of four (4) former casual workers after it investigated their complaints from 2008.  The FWO found that Eastern Colour Pty Ltd was the “true employer.”

Justice Collier agreed with this finding and noted:

  • The workers considered that it was the sons’ parents who were “the bosses,” and who could hire and fire, and “this did actually appear to be a correct perception“;
  • The workers believed they were working for Eastern Colour Pty Ltd.  Those working on the farm wore shirts bearing the name Eastern Colour, while the only applicable WHS guidelines were in the name of Eastern Colour;
  • The workers performed the work on a farm owned by Eastern Colour Pty Ltd by packing fruit in boxes labelled as “produced by Eastern Colour“;
  • The workers had limited knowledge of SB Employments or NB Employments other than as entities whose name appeared on their pay slips;
  • There was no practical difference in the workers’ work environment or practice after an employee had worked 40 hours;
  • The workers were not aware that they worked up to 40 hours for one company and any additional hours for another, despite the parents’ evidence that they informed them of the arrangement;
  • The sons had no involvement in employing staff;
  • The “clear fact that SB and NB existed only to provide services to [Eastern Colour]“; and
  • Apart from time sheets and pay slips, the “absence of any contract of employment between either SB or NB, and the relevant employees“.

Justice Collier noted that Eastern Colour Pty Ltd repeatedly gave evidence that no farms paid overtime rates to their harvesting and packing staff.

Justice Collier further noted that while “this may have been the practice, it is very clear that [the company] was aware of the legal obligation on employers to pay overtime once an employee had worked 40 hours. Indeed, it was for this very reason that SB and NB were created – namely to be entities who could be the nominal employers of employees on the farm to obviate the legal requirements of Eastern Colour as employer to pay overtime for more than 40 hours work… That the directors of SB and NB were the children of [the parents] simply supports the inference that SB and NB functioned in the context of the family business.

Her Honour found that it was clear that all three (3) companies “aided and abetted the contravention, and/or were knowingly concerned in the contravention“, which was underpaying the workers (under the former Workplace Relations Act 1996).

Justice Collier asked the parties to make submissions on the FWO’s call for penalties.

[Fair Work Ombudsman -v– Eastern Colour Pty Ltd (No 2) [2014] FCA 55 (11 February 2014)]

Employer’s Lesson:

It is apparent that creating a labour hire arrangement to avoid paying employee entitlements is no protection from a prosecution of ‘sham’ contracting, despite what the industry standard or practice may be.

I hear companies say to me, ‘but I know that other companies are doing this’…. That maybe so, however, as Justice Collier has stated clearly in this decision:

these facts do not detract from the legal position under the Act, which this Court is required to apply”.

As always, please do not hesitate to contact me to discuss.

Brooke Pendlebury
Wednesday, June 11, 2014
Entitlements, News